| BLACKBOARD INC Item 1A Risk Factors |
| Delays in completing our proposed merger with WebCT could result in significant delays, distraction of management, disruption of our business and legal and other expenses, and could compromise our ability to realize the expected benefits of our proposed merger with WebCT; if we are not able to consummate the merger, we may be obligated to pay WebCT dlra15 million in liquidated damages |
| If we face any delays in completing the merger with WebCT, our business may suffer adverse consequences |
| Due to uncertainty about the merger, our existing and potential customers may delay or defer their purchasing decisions |
| In addition, customers and prospective customers could choose not to purchase products from us or to reduce or eliminate the licensing of our current products |
| In addition, current and prospective employees could experience uncertainty about their future roles within the combined company |
| This uncertainty may adversely affect our ability to attract and retain key personnel |
| Difficulties with respect to existing and potential customers and employees could disrupt our business and distract our management |
| Pursuant to the agreement and plan of merger with WebCT, if we cannot consummate the merger as a result of our breach or as a result of a final non-appealable order by a court or government agency, or if we elect not to close the merger for any reason other than a breach by WebCT, then we would be obligated to pay WebCT liquidated damages of dlra15 million |
| Our proposed merger with WebCT and any other future business combinations and acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention |
| During the course of our history, we have acquired several businesses, and a key element of our growth strategy is to pursue additional acquisitions in the future |
| Any acquisition could be expensive, disrupt our ongoing business and distract our management and employees |
| We may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may not be able to make these acquisitions on acceptable terms or at all |
| If we make an acquisition, we could have difficulty integrating the acquired technology, employees or operations |
| In addition, the key personnel of the acquired company may decide not to work for us |
| Acquisitions also involve the risk of potential unknown liabilities associated with the acquired business |
| As a result of these risks, we may not be able to achieve the expected benefits of any acquisition, including the WebCT merger |
| If we are unsuccessful in completing or integrating acquisitions that we may pursue in the future, we would be required to reevaluate our growth strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete and integrate the acquisitions |
| The successful integration of WebCT will require, among other things, integration of WebCT’s operations, products, policies and personnel with our business |
| We may not achieve successful integration in a timely manner, or at all, and we may not realize the anticipated benefits and synergies of the merger to the extent, or in the timeframe, anticipated |
| We will also face challenges inherent in efficiently managing an increased number of employees and products, including the need to develop appropriate systems, policies, benefits and compliance programs |
| The inability to manage the increased size and complexity of the combined company effectively could have a material adverse effect on our business after the merger |
| Future business combinations, including the WebCT merger, could involve the acquisition of significant tangible and intangible assets |
| We currently record in our statements of operations ongoing amortization of intangible assets acquired in connection with our historic acquisitions, and may need to recognize similar charges in connection with the WebCT merger and possibly any future acquisitions |
| In addition, we may need to record write-downs from future impairments of identified tangible and intangible assets and goodwill |
| These accounting charges would reduce any future reported earnings, or increase a reported loss |
| In addition, we will require substantially all our available cash to pay the purchase price for the WebCT merger and will require additional funds to be obtained pursuant to the dlra80dtta0 million senior secured credit facilities commitment letter with Credit Suisse |
| In future acquisitions, we could also incur debt to pay for acquisitions, or issue additional equity securities as consideration, which could cause our stockholders to suffer significant dilution |
| 10 _________________________________________________________________ [66]Table of Contents Our ability to utilize, if any, net operating loss carryforwards acquired through the WebCT merger, or possibly any future acquisitions, may be significantly limited or unusable by us under Section 382 or other sections of the Internal Revenue Code |
| We will incur a significant amount of debt to finance the WebCT merger, which could which constrict our liquidity, result in substantial cash outflows, and adversely affect our financial health and ability to obtain financing in the future |
| In connection with the WebCT merger, we have entered into a dlra80dtta0 million senior secured credit facilities commitment letter with Credit Suisse, pursuant to which Credit Suisse would provide a dlra70dtta0 million senior secured term loan facility repayable over six years and a dlra10dtta0 million senior secured revolving credit facility due and payable in full at the end of five years |
| This debt may impair our ability to obtain future additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes, and a substantial portion of our cash flows from operations may be dedicated to the debt repayment, thereby reducing the funds available to us for other purposes and could make us more vulnerable to industry downturns and competitive pressures |
| Any failure by us to satisfy our obligations with respect to these debt obligations would constitute a default under the credit facilities |
| Providing enterprise software applications to the education industry is an emerging and uncertain business; if the market for our products fails to develop, we will not be able to grow our business |
| Our success will depend on our ability to generate revenues by providing enterprise software applications and services to colleges, universities, schools and other education providers |
| This market has only recently developed and the viability and profitability of this market is unproven |
| Our ability to grow our business will be compromised if we do not develop and market products and services that achieve broad market acceptance with our current and potential clients and their students and employees |
| The use of online education, transactional or content management software applications and services in the education industry may not become widespread and our products and services may not achieve commercial success |
| Even if potential clients decide to implement products of this type, they may still choose to design, develop or manage all or a part of their system internally |
| Given our clients’ relatively early adoption of enterprise software applications aimed at the education industry, they are likely to be less risk-averse than most colleges, universities, schools and other education providers |
| Accordingly, the rate at which we have been able to establish relationships with our clients in the past may not be indicative of the rate at which we will be able to establish additional client relationships in the future |
| Most of our clients use our products to facilitate online education, which is a relatively new field; if online education does not continue to develop and gain acceptance, demand for our products could suffer |
| Our success will depend in part upon the continued adoption by our clients and potential clients of online education initiatives |
| Some academics and educators are opposed to online education in principle and have expressed concerns regarding the perceived loss of control over the education process that can result from offering courses online |
| Some of these critics, particularly college and university professors, have the capacity to influence the market for online education, and their opposition could reduce the demand for our products and services |
| In addition, the growth and development of the market for online education may prompt some members of the academic community to advocate more stringent protection of intellectual property associated with course content, which may impose additional burdens on clients and potential clients offering online education |
| This could require us to modify our products, or could cause these clients and potential clients to abandon their online education initiatives |
| 11 _________________________________________________________________ [67]Table of Contents We face intense and growing competition, which could result in price reductions, reduced operating margins and loss of market share |
| We operate in highly competitive markets and generally encounter intense competition to win contracts |
| If we are unable to successfully compete for new business and license renewals, our revenue growth and operating margins may decline |
| The markets for online education, transactional, portal and content management products are intensely competitive and rapidly changing, and barriers to entry in these markets are relatively low |
| With the introduction of new technologies and market entrants, we expect competition to intensify in the future |
| Some of our principal competitors offer their products at a lower price, which has resulted in pricing pressures |
| Such pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance |
| Our primary competitors for the Blackboard Academic Suite are companies and open source solutions that provide course management systems, such as WebCT, eCollege |
| ; learning content management systems, such as HarvestRoad Ltd |
| and Concord USA, Inc |
| ; and education enterprise information portal technologies, such as SunGard SCT Inc, an operating unit of SunGard Data Systems Inc |
| We also face competition from clients and potential clients who develop their own applications internally, large diversified software vendors who offer products in numerous markets including the education market and other open source software applications |
| Our primary competitors for the Blackboard Commerce Suite are companies that provide university transaction systems, such as The CBORD Group, Inc, as well as off-campus merchant relationship programs |
| We may also face competition from potential competitors that are substantially larger than we are and have significantly greater financial, technical and marketing resources, and established, extensive direct and indirect channels of distribution |
| As a result, they may be able to respond more quickly to new or emerging technologies and changes in client requirements, or to devote greater resources to the development, promotion and sale of their products than we can |
| In addition, current and potential competitors have established or may establish cooperative relationships among themselves or prospective clients |
| Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share to our detriment |
| If potential clients or competitors use open source software to develop products that are competitive with our products and services, we may face decreased demand and pressure to reduce the prices for our products |
| The growing acceptance and prevalence of open source software may make it easier for competitors or potential competitors to develop software applications that compete with our products, or for clients and potential clients to internally develop software applications that they would otherwise have licensed from us |
| One of the aspects of open source software is that it can be modified or used to develop new software that competes with proprietary software applications, such as ours |
| Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies |
| As open source offerings become more prevalent, customers may defer or forego purchases of our products which could reduce our sales and lengthen the sales cycle for our products or result in the loss of current clients to open source solutions |
| These risks may be heightened by our proposed merger with WebCT If we are unable to differentiate our products from competitive products based on open source software, demand for our products and services may decline and we may face pressure to reduce the prices of our products |
| Because most of our licenses are renewable on an annual basis, a reduction in our license renewal rate could significantly reduce our revenues |
| Our clients have no obligation to renew their licenses for our products after the expiration of the initial license period, which is typically one year, and some clients have elected not to do so |
| Although we have experienced favorable license renewal 12 _________________________________________________________________ [68]Table of Contents rates in recent periods, we have limited historical data with respect to rates of renewals, so we cannot accurately predict future renewal rates |
| Our license renewal rates may decline or fluctuate as a result of a number of factors, including client dissatisfaction with our products and services, our failure to update our products to maintain their attractiveness in the market or budgetary constraints or changes in budget priorities faced by our clients |
| If our product development efforts, including our recently announced development effort codenamed Caliper, are delayed, fail to develop a product that gains market acceptance or fail to develop a marketable product at all, our financial results could suffer |
| We may experience difficulties that could delay or prevent the successful development, introduction and sale of new products under development, such as our recently announced development effort codenamed Caliper |
| If introduced for sale, the new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance, which could cause our financial results to suffer |
| In addition, during the development period for the new products, our customers may defer or forego purchases of our products and services |
| Because we generally recognize revenues ratably over the term of our contract with a client, downturns or upturns in sales will not be fully reflected in our operating results until future periods |
| We recognize most of our revenues from clients monthly over the terms of their agreements, which are typically 12 months, although terms can range from one month to 48 months |
| As a result, much of the revenue we report in each quarter is attributable to agreements entered into during previous quarters |
| Consequently, a decline in sales, client renewals, or market acceptance of our products in any one quarter will not necessarily be fully reflected in the revenues in that quarter, and will negatively affect our revenues and profitability in future quarters |
| This ratable revenue recognition also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new clients must be recognized over the applicable agreement term |
| Our operating margins may suffer if our professional services revenues increase in proportion to total revenues because our professional services revenues have lower gross margins |
| Because our professional services revenues typically have lower gross margins than our product revenues, an increase in the percentage of total revenues represented by professional services revenues could have a detrimental impact on our overall gross margins, and could adversely affect our operating results |
| In addition, we sometimes subcontract professional services to third parties, which further reduces our gross margins on these professional services |
| If our products contain errors or if new product releases are delayed, we could lose new sales and be subject to significant liability claims |
| Because our software products are complex, they may contain undetected errors or defects, known as bugs |
| Bugs can be detected at any point in a product’s life cycle, but are more common when a new product is introduced or when new versions are released |
| In the past, we have encountered product development delays and defects in our products |
| We would expect that, despite our testing, errors will be found in new products and product enhancements in the future |
| Significant errors in our products could lead to: • delays in or loss of market acceptance of our products; • diversion of our resources; • a lower rate of license renewals or upgrades; • injury to our reputation; and • increased service expenses or payment of damages |
| 13 _________________________________________________________________ [69]Table of Contents Because our clients use our products to store and retrieve critical information, we may be subject to significant liability claims if our products do not work properly |
| We cannot be certain that the limitations of liability set forth in our licenses and agreements would be enforceable or would otherwise protect us from liability for damages |
| A material liability claim against us, regardless of its merit or its outcome, could result in substantial costs, significantly harm our business reputation and divert management’s attention from our operations |
| The length and unpredictability of the sales cycle for our software could delay new sales and cause our revenues and cash flows for any given quarter to fail to meet our projections or market expectations |
| The sales cycle between our initial contact with a potential client and the signing of a license with that client typically ranges from 6 to 15 months |
| A delay in or failure to complete license transactions could harm our business and financial results, and could cause our financial results to vary significantly from quarter to quarter |
| Our sales cycle varies widely, reflecting differences in our potential clients’ decision-making processes, procurement requirements and budget cycles, and is subject to significant risks over which we have little or no control, including: • clients’ budgetary constraints and priorities; • the timing of our clients’ budget cycles; • the need by some clients for lengthy evaluations that often include both their administrators and faculties; and • the length and timing of clients’ approval processes Potential clients typically conduct extensive and lengthy evaluations before committing to our products and services and generally require us to expend substantial time, effort and money educating them as to the value of our offerings |
| Our sales cycle with international postsecondary education providers and US K-12 schools may be longer than our historic US postsecondary sales cycle, which could cause us to incur greater costs and could reduce our operating margins |
| As we target more of our sales efforts at international postsecondary education providers and US K-12 schools, we could face greater costs, longer sales cycles and less predictability in completing some of our sales, which may harm our business |
| In both of these markets, a potential client’s decision to use our products and services may be a decision involving multiple institutions and, if so, these types of sales would require us to provide greater levels of education to prospective clients regarding the use and benefits of our products and services |
| In addition, we expect that potential clients in both of these markets may demand more customization, integration services and features |
| As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual sales, thereby increasing the costs and time required to complete sales and diverting sales and professional services resources to a smaller number of international and US K-12 transactions |
| We may have exposure to greater than anticipated tax liabilities |
| We are subject to income taxes and other taxes in a variety of jurisdictions and are subject to review by both domestic and foreign taxation authorities |
| The determination of our provision for income taxes and other tax liabilities requires significant judgment |
| Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made |
| 14 _________________________________________________________________ [70]Table of Contents Our ability to utilize our net operating loss carryforwards may be limited |
| Our federal net operating loss carryforwards are subject to limitations on how much may be utilized on an annual basis |
| The use of the net operating loss carryforwards may have additional limitations resulting from certain future ownership changes or other factors under Section 382 of the Internal Revenue Code |
| If our net operating loss carryforwards are further limited, and we have taxable income which exceeds the available net operating loss carryforwards for that period, we would incur an income tax liability even though net operating loss carryforwards may be available in future years prior to their expiration, and our future cash flow, financial position and financial results may be negatively impacted |
| Our future success depends on our ability to continue to retain and attract qualified employees |
| Our future success depends upon the continued service of our key management, technical, sales and other critical personnel |
| Whether we are able to execute effectively on our business strategy will depend in large part on how well key management and other personnel perform in their positions and are integrated within our company |
| Key personnel have left our company over the years, and there may be additional departures of key personnel from time to time |
| In addition, as we seek to expand our global organization, the hiring of qualified sales, technical and support personnel has been difficult due to the limited number of qualified professionals |
| Failure to attract, integrate and retain key personnel would result in disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives and the results of our operations |
| If we do not maintain the compatibility of our products with third-party applications that our clients use in conjunction with our products, demand for our products could decline |
| Our software applications can be used with a variety of third-party applications used by our clients to extend the functionality of our products, which we believe contributes to the attractiveness of our products in the market |
| If we are not able to maintain the compatibility of our products with third-party applications, demand for our products could decline and we could lose sales |
| We may desire in the future to make our products compatible with new or existing third-party applications that achieve popularity within the education marketplace, and these third-party applications may not be compatible with our designs |
| Any failure on our part to modify our applications to ensure compatibility with such third-party applications would reduce demand for our products and services |
| If we are unable to protect our proprietary technology and other rights, it will reduce our ability to compete for business |
| If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for our products |
| In addition, we may be unable to prevent the use of our products by persons who have not paid the required license fee, which could reduce our revenues |
| We rely on a combination of copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights |
| These protections may not be adequate to prevent our competitors from copying or reverse-engineering our products |
| Our competitors may independently develop technologies that are substantially equivalent or superior to our technology |
| To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements |
| These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information |
| The protective mechanisms we include in our products may not be sufficient to prevent unauthorized copying |
| Existing copyright laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop products similar to ours |
| In addition, the laws of some countries in which our products are or may be licensed do not protect our products and intellectual property rights to the same extent as do the laws of the United States |
| 15 _________________________________________________________________ [71]Table of Contents If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay significant royalties or enter into license agreements with third parties |
| A third party may assert that our technology violates its intellectual property rights |
| As the number of software products in our markets increases and the functionality of these products further overlap, we believe that infringement claims will become more common |
| Any claims, regardless of their merit, could: • be expensive and time consuming to defend; • force us to stop licensing our products that incorporate the challenged intellectual property; • require us to redesign our products and reimburse certain costs to our clients; • divert management’s attention and other company resources; and • require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all |
| Expansion of our business internationally will subject our business to additional economic and operational risks that could increase our costs and make it difficult for us to operate profitably |
| One of our key growth strategies is to pursue international expansion |
| Expansion of our international operations may require significant expenditure of financial and management resources and result in increased administrative and compliance costs |
| As a result of such expansion, we will be increasingly subject to the risks inherent in conducting business internationally, including: • foreign currency fluctuations, which could result in reduced revenues and increased operating expenses; • potentially longer payment and sales cycles; • difficulty in collecting accounts receivable; • the effect of applicable foreign tax structures, including tax rates that may be higher than tax rates in the United States or taxes that may be duplicative of those imposed in the United States; • tariffs and trade barriers; • general economic and political conditions in each country; • inadequate intellectual property protection in foreign countries; • uncertainty regarding liability for information retrieved and replicated in foreign countries; • the difficulties and increased expenses in complying with a variety of foreign laws, regulations and trade standards; and • unexpected changes in regulatory requirements |
| Unauthorized disclosure of data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation or cause us to lose clients |
| Maintaining the security of online education and transaction networks is an issue of critical importance for our clients because these activities involve the storage and transmission of proprietary and confidential client and student information, including personal student information and consumer financial data, such as credit card numbers, and this area is heavily regulated in many countries in which we operate, including the United States |
| Individuals and groups may develop and deploy viruses, worms and other malicious software programs that attack or attempt to infiltrate our products |
| If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted |
| Penetration of our network security could have a negative impact on our reputation and could lead our present and potential clients to choose competing offerings and result in regulatory action against us |
| Even if we do not encounter a security breach ourselves, a well-publicized breach of the consumer 16 _________________________________________________________________ [72]Table of Contents data security of any major consumer Web site could lead to a general public loss of confidence in the use of the Internet, which could significantly diminish the attractiveness of our products and services |
| Operational failures in our network infrastructure could disrupt our remote hosting service, could cause us to lose current hosting clients and sales to potential hosting clients and could result in increased expenses and reduced revenues |
| Unanticipated problems affecting our network systems could cause interruptions or delays in the delivery of the hosting service we provide to some of our clients |
| We provide remote hosting through computer hardware that is currently located in third-party co-location facilities in Virginia and The Netherlands |
| We do not control the operation of these co-location facilities |
| Lengthy interruptions in our hosting service could be caused by the occurrence of a natural disaster, power loss, vandalism or other telecommunications problems at the co-location facilities or if these co-location facilities were to close without adequate notice |
| Although we have multiple transmission lines into the co-location facilities through two telecommunications service providers, we have experienced problems of this nature from time to time in the past, and we will continue to be exposed to the risk of network failures in the future |
| We currently do not have adequate computer hardware and systems to provide alternative service for most of our hosted clients in the event of an extended loss of service at the co-location facilities |
| Each Virginia co-location facility provides data backup redundancy for the other Virginia co-location facility, however, they are not equipped to provide full disaster recovery to all of our hosted clients |
| If there are operational failures in our network infrastructure that cause interruptions, slower response times, loss of data or extended loss of service for our remotely hosted clients, we may be required to issue credits or pay penalties, current hosting clients may terminate their contracts or elect not to renew them, and we may lose sales to potential hosting clients |
| We could lose revenues if there are changes in the spending policies or budget priorities for government funding of colleges, universities, schools and other education providers |
| Most of our clients and potential clients are colleges, universities, schools and other education providers who depend substantially on government funding |
| Accordingly, any general decrease, delay or change in federal, state or local funding for colleges, universities, schools and other education providers could cause our current and potential clients to reduce their purchases of our products and services, to exercise their right to terminate licenses, or to decide not to renew licenses, any of which could cause us to lose revenues |
| In addition, a specific reduction in governmental funding support for products such as ours would also cause us to lose revenues |
| US and foreign government regulation of the Internet could cause us to incur significant expenses, and failure to comply with applicable regulations could make our business less efficient or even impossible |
| The application of existing laws and regulations potentially applicable to the Internet, including regulations relating to issues such as privacy, defamation, pricing, advertising, taxation, consumer protection, content regulation, quality of products and services and intellectual property ownership and infringement, can be unclear |
| It is possible that US, state and foreign governments might attempt to regulate Internet transmissions or prosecute us for violations of their laws |
| In addition, these laws may be modified and new laws may be enacted in the future, which could increase the costs of regulatory compliance for us or force us to change our business practices |
| Any existing or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and dampen the growth in use of the Internet |
| Specific federal laws that could also have an impact on our business include the following: • The Children’s Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect personal information from children under the age of 13; and • The Family Educational Rights and Privacy Act imposes parental or student consent requirements for specified disclosures of student information, including online information |
| 17 _________________________________________________________________ [73]Table of Contents Our clients’ use of our software as their central platform for online education initiatives may make us subject to any such laws or regulations, which could impose significant additional costs on our business or subject us to additional liabilities |
| We may be subject to state and federal financial services regulation, and any violation of any present or future regulation could expose us to liability, force us to change our business practices or force us to stop selling or modify our products and services |
| Our transaction processing product and service offering could be subject to state and federal financial services regulation |
| The Blackboard Transaction System supports the creation and management of student debit accounts and the processing of payments against those accounts for both on-campus vendors and off-campus merchants |
| For example, one or more federal or state governmental agencies that regulate or monitor banks or other types of providers of electronic commerce services may conclude that we are engaged in banking or other financial services activities that are regulated by the Federal Reserve under the US Federal Electronic Funds Transfer Act or Regulation E thereunder or by state agencies under similar state statutes or regulations |
| Regulatory requirements may include, for example: • disclosure of consumer rights and our business policies and practices; • restrictions on uses and disclosures of customer information; • error resolution procedures; • limitations on consumers’ liability for unauthorized account activity; • data security requirements; • government registration; and • reporting and documentation requirements |
| A number of states have enacted legislation regulating check sellers, money transmitters or transaction settlement service providers as banks |
| If we were deemed to be in violation of any current or future regulations, we could be exposed to financial liability and adverse publicity or forced to change our business practices or stop selling some of our products and services |
| As a result, we could face significant legal fees, delays in extending our product and services offerings, and damage to our reputation that could harm our business and reduce demand for our products and services |
| Even if we are not required to change our business practices, we could be required to obtain licenses or regulatory approvals that could cause us to incur substantial costs |