| BOTTOMLINE TECHNOLOGIES INC /DE/ Item 1A Risk Factors |
| Investing in our common stock involves a high degree of risk |
| You should carefully consider the risks and uncertainties described below before making an investment decision involving our common stock |
| The risks and 9 ______________________________________________________________________ [32]Table of Contents uncertainties described below are not the only ones facing our company |
| Additional risks and uncertainties may also impair our business operations |
| If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer |
| In that case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock |
| Our common stock has experienced and may continue to undergo extreme market price and volume fluctuations Stock markets in general, and The NASDAQ Global Market in particular, have experienced extreme price and volume fluctuations, particularly in recent years |
| Broad market fluctuations of this type may adversely affect the market price of our common stock |
| The stock prices for many companies in the technology sector have experienced wide fluctuations that often have been unrelated to their operating performance |
| The market price of our common stock has experienced and may continue to undergo extreme fluctuations due to a variety of factors, including: • changes in or our failure to meet analysts’ or investors’ estimates or expectations; • general and industry-specific business, economic and market conditions; • actual or anticipated fluctuations in operating results, including those arising as a result of any impairment of goodwill or other intangible assets related to past or future acquisitions; • the impact on operating results of the significant expense associated with share based payments (stock compensation expense) under SFAS 123R, the provisions of which we adopted on July 1, 2005; • public announcements concerning us, including announcements of litigation, our competitors or our industry; • introductions of new products or services or announcements of significant contracts by us or our competitors; • acquisitions, strategic partnerships, joint ventures, or capital commitments by us or our competitors; • adverse developments in patent or other proprietary rights; and • announcements of technological innovations by our competitors |
| Our future financial results will be impacted by our success in moving components of our business to a subscription-based revenue model A substantial portion of our historic revenues and profitability are generated from software license revenues |
| We are currently transforming some, and may in the future transform other, portions of our business to a subscription-based revenue model which we believe has certain advantages over a perpetual license model, including better predictability of revenue |
| Our recent acquisitions of Visibillity and Tranmit are aligned toward, and will be operated principally under, a subscription-based revenue model |
| Over time, we expect that more of our licensed software products that were historically sold only on a perpetual license basis will be offered for sale on a subscription basis |
| A subscription-based revenue model results in substantially less up-front revenue than a perpetual license model |
| Additionally, there can be no assurance that our customers, or the markets in which we compete, will respond favorably to our approach |
| To the extent that our software license revenues were to decline significantly in any period, or if we did not receive general marketplace acceptance of a subscription-based approach, our financial results could be materially and adversely affected |
| The demand for our BACSTEL-IP product in the UK, which during 2005 generated significant software license revenue growth, has declined as the technology adoption date has passed In 2005, we experienced strong market demand in the UK for our software products that address the new standard for electronic payments in the UK called BACSTEL-IP Under the existing regulatory requirements, UK businesses had until the end of December 2005 to be in compliance with this standard |
| 10 ______________________________________________________________________ [33]Table of Contents We have introduced new products to the UK market which are intended to capitalize on the customer relationships we established during the BACSTEL-IP initiative |
| In addition, we offer the BACSTEL-IP solution on a subscription basis to a portion of our customers, which we expect will generate ongoing recurring revenues |
| The payment market in Europe is continuing to evolve with new payment regulations and payment types, both currently proposed and expected in the future, for which we have introduced and anticipate continuing to introduce new products |
| However, the combination of new product sales, recurring subscription revenues, sales of new products targeting new payment regulations and standards or growth in our other revenue streams may not be sufficient to offset the revenue from our BACSTEL-IP software products, in which case our operating results and stock price could be materially and adversely affected |
| Integration of acquisitions could interrupt our business and our financial condition could be harmed We have made several recent acquisitions of companies, including our acquisition of HMSL during fiscal 2005 and our acquisitions of Visibillity and Tranmit during fiscal 2006 |
| We may in the future continue to acquire, or make investments in, other businesses, products or technologies |
| Any acquisition or strategic investment we have made in the past or may make in the future may entail numerous risks, including the following: • difficulties integrating acquired operations, personnel, technologies or products; • inadequacy of existing operating, financial and management information systems to support the combined organization or new operations; • write-offs related to impairment of goodwill and other intangible assets; • entrance into markets in which we have no or limited prior experience or knowledge; • diversion of management’s focus from our core business concerns; • dilution to existing stockholders and earnings per share; • incurrence of substantial debt; and • exposure to litigation from third parties, including claims related to intellectual property or other assets acquired or liabilities assumed |
| Any such difficulties encountered as a result of any merger, acquisition or strategic investment could have a material adverse effect on our business, operating results and financial condition |
| As a result of our acquisitions, we could be subject to significant future write-offs with respect to intangible assets, which may adversely affect our future operating results We review our intangible assets, including goodwill, periodically for impairment |
| At June 30, 2006, the carrying value of our goodwill and our other intangible assets was dlra41dtta2 million and dlra19dtta9 million, respectively |
| While we reviewed our goodwill and intangible assets during our fourth quarter of fiscal year 2006 and concluded that there was no impairment, we could be subject to future impairment charges with respect to these intangible assets, or intangible assets arising as a result of additional acquisitions in future periods |
| Our fixed costs may lead to operating results below analyst or investor expectations if our revenues are below anticipated levels, which could adversely affect the market price of our common stock A significant percentage of our expenses, particularly personnel and facilities costs, are relatively fixed and based in part on anticipated revenue levels |
| In recent years we have experienced slowing growth rates with certain of our licensed software products, and in 2006 we experienced a decrease in software license revenues as a result of the BACSTEL-IP initiative having ended in the UK A decline in revenues without a corresponding 11 ______________________________________________________________________ [34]Table of Contents and timely slowdown in expense growth could negatively affect our business |
| Significant revenue shortfalls in any quarter may cause significant declines in operating results since we may be unable to reduce spending in a timely manner |
| Quarterly or annual operating results that are below the expectations of public market analysts could adversely affect the market price of our common stock |
| Factors that could cause fluctuations in our operating results include the following: • economic conditions, which may affect our customers’ and potential customers’ budgets for information technology expenditures; • the timing of orders and longer sales cycles; • the timing of product implementations, which are highly dependent on customers’ resources and discretion; • the incurrence of costs relating to the integration of software products and operations in connection with acquisitions of technologies or businesses; and • the timing and market acceptance of new products or product enhancements by either us or our competitors |
| Because of these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful |
| Our mix of products and services could have a significant effect on our financial condition, results of operations and the market price of our common stock The gross margins for our products and services vary considerably |
| Our software revenues generally yield significantly higher gross margins than do our service, maintenance, and equipment and supplies revenue streams |
| In recent fiscal years we experienced a decrease in our software license fees, particularly in the US, and during 2006 we experienced a decrease in software license revenues as the BACSTEL-IP initiative in the UK had ended |
| If software license fees continue to decline, or if the mix of our products and services in any given period does not match our expectations, our results of operations and the market price of our common stock could be significantly affected |
| We face risks associated with our international operations that could harm our financial condition and results of operations A significant percentage of our revenues have been generated by our international operations, and our future growth rates and success are in part dependent on our continued growth and success in international markets |
| We currently have operations in the US, UK and Australia |
| As is the case with most international operations, the success and profitability of these operations are subject to numerous risks and uncertainties that include, in addition to the risks our business as a whole faces, the following: • difficulties and costs of staffing and managing foreign operations; • differing regulatory and industry standards and certification requirements; • the complexities of foreign tax jurisdictions; • reduced protection for intellectual property rights in some countries; • currency exchange rate fluctuations; and • import or export licensing requirements |
| 12 ______________________________________________________________________ [35]Table of Contents A significant percentage of our revenues to date have come from our payment management offerings and our performance will depend on continued market acceptance of these solutions A significant percentage of our revenues to date have come from the license and maintenance of our payment management offerings and sales of associated products and services |
| Any significant reduction in demand for our payment management offerings could have a material adverse effect on our business, operating results and financial condition |
| Our future performance could depend on the following factors: • continued market acceptance of our payment management offerings as part of our overall purchase to pay solution; • prospective customers’ dependence upon enterprises seeking to enhance their payment functions to integrate electronic payment capabilities; • our ability to introduce enhancements to meet the market’s evolving needs for secure payments and cash management solutions; and • continued acceptance of desktop and enterprise software, and laser check printing solutions |
| Our future financial results will depend on our ability to manage growth effectively In the past, rapid growth has strained our managerial and other resources |
| If rapid growth resumes, our ability to manage that growth will depend in part on our ability to continue to enhance our operating, financial and management information systems |
| We cannot assure you that our personnel, systems and controls will be adequate to support future growth |
| If we are unable to manage growth effectively, the quality of our services, our ability to retain key personnel and our business, operating results and financial condition could be materially adversely affected |
| We face significant competition in our targeted markets, including competition from companies with significantly greater resources In recent years we have encountered increasing competition in our targeted markets |
| We compete with a wide range of companies, ranging from small start-up enterprises with limited resources, which compete principally on the basis of technology features or specific customer relationships, to large companies, which can leverage significant customer bases and financial resources |
| Given the size and nature of the markets we target, the implementation of our growth strategy and our success in competing for market share is dependent on our ability to grow our sales and marketing capabilities and maintain an appropriate level of financial resources |
| An increasing number of large and more complex customer contracts, or contracts that involve the delivery of services over contractually committed periods, generally delay the timing of our revenue recognition and in the short-term may adversely affect our operating results, financial condition and the market price of our stock Due to an increasing number of large and more complex customer contracts, we have experienced, and will likely continue to experience, delays in the timing of our revenue recognition |
| These large and complex customer contracts generally require significant implementation work, product customization and modification resulting in the recognition of revenue over the period of project completion, which normally spans several quarters |
| Additionally, a growing number of our products and services are sold on a hosted basis, which can involve contractually defined service periods |
| In such cases, revenue is typically recorded over the expected life of the customer relationship period, rather than at the outset of the arrangement, thus lengthening the period of revenue recognition |
| Delays in revenue recognition on these contracts could affect our operating results, financial condition and the market price of our common stock |
| 13 ______________________________________________________________________ [36]Table of Contents We depend on key employees who are skilled in e-commerce, payment, cash and document management and invoice presentment methodology and Internet and other technologies Our success depends upon the efforts and abilities of our executive officers and key technical employees who are skilled in e-commerce, payment methodology and regulation, and Internet, database and network technologies |
| The loss of one or more of these individuals could have a material adverse effect on our business |
| We currently do not maintain “key man” life insurance policies on any of our employees |
| While some of our executive officers have employment or retention agreements with us, the loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business, operating results and financial condition |
| We must attract and retain highly skilled personnel with knowledge in e-commerce, payment, cash and document management and invoice presentment methodology and Internet and other technologies We believe that our success is in part dependent upon our ability to attract, hire, train and retain highly skilled technical, sales and marketing, and support personnel, particularly with expertise in e-commerce, payment, cash management and invoice methodology and Internet and other technologies |
| Competition for qualified personnel is intense |
| As a result, we may experience increased compensation costs that may not be offset through either improved productivity or higher sales prices |
| There can be no assurance that we will be successful in attracting, recruiting or retaining existing personnel |
| Based on our experience, it takes an average of nine months for a salesperson to become fully productive |
| We cannot assure you that we will be successful in increasing the productivity of our sales personnel, and the failure to do so could have a material adverse effect on our business, operating results and financial condition |
| Increased competition may result in price reductions and decreased demand for our product solutions The markets in which we compete are intensely competitive and characterized by rapid technological change |
| Some competitors in our targeted markets have longer operating histories, significantly greater financial, technical, and marketing resources, greater brand recognition and a larger installed customer base than we do |
| We expect to face additional competition as other established and emerging companies enter the markets we address |
| In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships to expand their product offerings and to offer more comprehensive solutions |
| This growing competition may result in price reductions of our products and services, reduced revenues and gross margins and loss of market share, any one of which could have a material adverse effect on our business, operating results and financial condition |
| Our success depends on our ability to develop new and enhanced products, services and strategic partner relationships The markets in which we compete are subject to rapid technological change and our success is dependent on our ability to develop new and enhanced products, services and strategic partner relationships that meet evolving market needs |
| Trends that could have a critical impact on us include: • evolving industry standards, mandates and laws, such as those mandated by the National Automated Clearing House Association and the Association for Payment Clearing Services; • rapidly changing technology, which could cause our software to become suddenly outdated or could require us to make our products compatible with new database or network systems; • developments and changes relating to the Internet that we must address as we maintain existing products and introduce any new products; and • the loss of any of our key strategic partners who serve as a valuable network from which we can leverage industry expertise and respond to changing marketplace demands |
| 14 ______________________________________________________________________ [37]Table of Contents There can be no assurance that technological advances will not cause our technology to become obsolete or uneconomical |
| If we are unable to develop and introduce new products, or enhancements to existing products, in a timely and successful manner, our business, operating results and financial condition could be materially adversely affected |
| Similarly, if our new products did not receive general marketplace acceptance, or if the sales cycle of any of our new products significantly delayed the timing of revenue recognition, our results could be negatively affected |
| Our products could be subject to future legal or regulatory actions, which could have a material adverse effect on our operating results Our software products and hosted services offerings facilitate the transmission of business documents and information including, in some cases, confidential financial data related to payments, invoices and cash management |
| Our web-based software products, and certain of our hosted services offerings, transmit this data electronically |
| While we believe that all of our product and service offerings comply with current regulatory and security requirements, there can be no assurance that future legal or regulatory actions will not impact our product and service offerings |
| To the extent that regulatory or legal developments mandate a change in any of our products or services, or alter the demand for or the competitive environment of our products and services, we might not be able to respond to such requirements in a timely or successful manner |
| If this were to occur, our business, operating results and financial condition could be materially adversely affected |
| Any unanticipated performance problems or bugs in our product offerings could have a material adverse effect on our future financial results If the products that we offer and continue to introduce do not sustain marketplace acceptance, our future financial results will be adversely affected |
| Since many of our software solutions are still in early stages of adoption and since most of our software products are continually being enhanced or further developed in response to general marketplace demands, any unanticipated performance problems or bugs that we have not been able to detect could result in additional development costs, diversion of technical and other resources from our other development efforts, negative publicity regarding us and our products, harm to our customer relationships and exposure to potential liability claims |
| In addition, if our products do not enjoy wide commercial success, our long-term business strategy will be adversely affected, which could have a material adverse effect on our business, operating results and financial condition |
| We could incur substantial costs resulting from warranty claims or product liability claims Our software license agreements typically contain provisions that afford customers a degree of warranty protection in the event that our software fails to conform to its written specifications |
| These agreements typically contain provisions intended to limit the nature and extent of our risk of warranty and product liability claims |
| There is a risk, however, that a court might interpret these terms in a limited way or could hold part or all of these terms to be unenforceable |
| Furthermore, some of our licenses with our customers are governed by non-US law, and there is a risk that foreign law might provide us less or different protection |
| While we maintain general liability insurance, including coverage for errors and omissions, we cannot be sure that our existing coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims |
| Although we have not experienced any material warranty or product liability claims to date, a warranty or product liability claim, whether or not meritorious, could result in substantial costs and a diversion of management’s attention and our resources, which could have an adverse effect on our business, operating results and financial condition |
| We could be adversely affected if we are unable to protect our proprietary technology and could be subject to litigation regarding our intellectual property rights, causing serious harm to our business We rely upon a combination of patent, copyright and trademark laws and non-disclosure and other intellectual property contractual arrangements to protect our proprietary rights |
| However, we cannot assure you 15 ______________________________________________________________________ [38]Table of Contents that our patents, pending applications for patents that may issue in the future, or other intellectual property will be of sufficient scope and strength to provide meaningful protection to our technology or any commercial advantage to us, or that the patents will not be challenged, invalidated or circumvented |
| We enter into agreements with our employees and customers that seek to limit and protect the distribution of proprietary information |
| Despite our efforts to safeguard and maintain our proprietary rights, there can be no assurance that such rights will remain protected or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights |
| In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights |
| We may be a party to litigation in the future to protect our intellectual property rights or as a result of an alleged infringement of the intellectual property rights of others |
| Any such claims, whether or not meritorious, could require us to spend significant sums in litigation, pay damages, delay product implementations, develop non-infringing intellectual property or acquire licenses to intellectual property that is the subject of the infringement claim |
| These claims could have a material adverse effect on our business, operating results and financial condition |
| We engage off-shore development resources which may not be successful and which may put our intellectual property at risk In order to optimize our research and development capabilities and to meet development timeframes, we contract with off-shore third party vendors in India and elsewhere for certain development activities |
| While our experience to date with these activities has been positive, there are a number of risks associated with off-shore development activities that include but are not limited to the following: • less efficient and less accurate communication and information flow as a consequence of time, distance and language barriers between our primary development organization and the off-shore resources, resulting in delays or deficiencies in development efforts; • disruption due to political or military conflicts around the world; • misappropriation of intellectual property from departing personnel, which we may not readily detect; • currency exchange rate fluctuations that could adversely impact the cost advantages intended from these agreements |
| To the extent that these or unforeseen risks occur, our operating results and financial condition could be adversely impacted |
| We may incur significant costs from class action litigation as a result of expected volatility in our common stock In the past, companies that have experienced market price volatility of their stock have been the targets of securities class action litigation |
| In August 2001, we were named as a party in one of the so-called “laddering” securities class action suits relating to the underwriting of our initial public offering |
| We could incur substantial costs and experience a diversion of our management’s attention and resources in connection with such litigation, which could have a material adverse effect on our business, financial condition and results of operations |