| CARREKER CORP Item 1A Risk Factors |
| Forward Looking Statements Statements in this Report and the Annual Report to the Stockholders that are not purely historical facts including statements about our expected future financial position, sales, results of operations, cash flows or backlog as well as other statements including words such as "e anticipate, "e "e believe, "e "e plan, "e "e estimate, "e "e expect, "e "e intend, "e "e should, "e "e could, "e "e goal, "e "e target, "e "e designated, "e "e on track, "e "e comfortable with, "e "e optimistic "e and other similar expressions, constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended |
| Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward looking statements due to a number of factors, including, without limitation, those set forth below and elsewhere in this Report |
| Readers are cautioned not to place undue reliance on forward looking statements, for no assurances can be given with respect to any forward looking statements |
| In addition to the other information in this Report, the following factors, which may affect our current position and future prospects, should be considered carefully in evaluating us and an investment in our common stock |
| Business Risks We desire to take advantage of the "e safe harbor "e provisions of the Private Securities Litigation Reform Act of 1995 |
| Many of the following important factors discussed below have been discussed in our prior filings with the Securities and Exchange Commission |
| In addition to the other information in this report, readers should carefully consider that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual consolidated results of operations for the fiscal year ending January 31, 2007 (and the individual fiscal quarters therein) and beyond, to differ materially from those expressed in any forward-looking statements made by us, or on our behalf |
| Risks Related to Our Business Our performance depends on the banking industry, and any change in the banking industryapstas demand for our solutions could reduce our revenues and have a material adverse effect on our business |
| We derive substantially all of our revenues from solutions provided to banks and other participants in the banking industry |
| Accordingly, our future success significantly depends upon this industryapstas continued demand for our solutions |
| We believe that an important factor in our growth has been substantial changes in the banking industry in recent years, as manifested by continuing consolidation, regulatory change, technological innovation, the emergence of the Internet and other trends |
| If this environment of change were to slow, we could experience reduced demand for our solutions |
| In addition, the banking industry is sensitive to changes in economic conditions and is highly susceptible to unforeseen events, such as domestic or foreign political instability, recession, inflation or other adverse occurrences that may result in a significant decline in the utilization of bank services |
| Furthermore, due to concerns regarding data security and other factors, banks have been and may in the future be slow to adopt electronic solutions, which can adversely affect the demand for our solutions |
| Any event that results in decreased consumer or corporate use of bank services, or increased pressures on banks towards the in-house development and implementation of revenue enhancement or cost reduction measures, could have a material adverse effect on our business, financial condition and results of operations |
| 15 _________________________________________________________________ Our future success depends on our ability to develop and license new technologies and services to meet the changing needs of our current and future customers, and our inability to introduce new solutions could negatively impact our ability to do business and maintain our financial condition |
| We regularly undertake new projects and initiatives in order to meet the changing needs of our customers |
| In so doing, we invest substantial resources with no assurance of their ultimate success |
| We believe our future success will depend, in part, upon our ability to: • enhance our existing solutions; • design and introduce new solutions that address the increasingly sophisticated and varied needs of our current and prospective customers; • develop leading technology; • respond to technological advances and emerging industry standards on a timely and cost-effective basis; and • leverage existing customer relationships and the content knowledge we have developed as a by-product of our current legacy position to formulate and influence thought leadership in the Payments business |
| There can be no assurance that future advances in technology will be beneficial to, or compatible with, our business or that we will be able to incorporate such advances into our business |
| In addition, keeping abreast of technological advances in our business may require substantial expenditures and lead-time |
| There can be no assurance that we will be successful in using new technologies, adapting our solutions to emerging industry standards or developing, introducing and marketing solution enhancements or new solutions, or that we will not experience difficulties that could delay or prevent the successful development, introduction or marketing of these solutions |
| If we incur increased costs or are unable, for technical or other reasons, to develop and introduce new solutions or enhancements of existing solutions in a timely manner in response to changing market conditions or customer requirements, our business, financial condition and results of operations could be materially and adversely affected |
| Our inability to respond to a decline in check volumes and to respond to rapid technological change or changes in industry standards could reduce our revenues and have a material adverse effect on our business |
| We have in the past derived a significant portion of our revenues from check related products and services |
| A decline in check volumes could have a material adverse effect on our business |
| If banks and merchants decide to use pricing incentives to further stimulate a decline in check usage, this decline in usage could accelerate |
| Our future success depends on our ability to leverage existing competencies to support emerging payments types, and to define and develop new solutions addressing those payment types |
| If we are unable to capitalize on these competencies to generate new revenues to offset any loss of revenues arising as a result of a decline in check usage or other changes in technology or industry standards, then our business could be adversely affected |
| Our quarterly operating results fluctuate and may not accurately predict our future performance |
| Additionally, 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 experienced a decline in revenues with certain of our licensed software products and consulting offerings |
| A decline in revenues 16 _________________________________________________________________ without a corresponding and timely reduction in expenses would 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 |
| Our quarterly results of operations have varied significantly and probably will continue to do so in the future as a result of a variety of factors, many of which are outside our control |
| These factors include: • timing of contract execution and longer sales cycles; • revenue recognition and our mix of revenues derived from consulting, license, maintenance and services; • economic conditions and customer budget cycles; • customer project priorities; and • the timing and market acceptance of new products or product enhancements by either us or our competitors |
| As a result of these factors, our quarterly revenues and operating results are difficult to forecast |
| It is possible that our future quarterly results of operations from time to time will not meet the expectations of securities analysts or investors, which could have a material adverse effect on the market price of our common stock |
| Our mix of products and services could have a significant effect on our results of operations and the market price of our common stock |
| The gross margins for our products and services vary considerably |
| If our mix of 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 |
| Although a material portion of our revenue comes from annually renewable maintenance agreements, we do not typically enter into long-term agreements with our customers, which makes it more difficult to plan and efficiently allocate our resources, and any deferral, modification or cancellation of a customer project can adversely affect our operating results |
| We typically provide services to customers on a project-by-project basis without long-term agreements |
| When a customer defers, modifies or cancels a project, we must be able to rapidly re-deploy our personnel to other projects in order to minimize the under-utilization of our personnel and the resulting adverse impact on operating results |
| In addition, our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of projects in progress |
| As a result, any delay, modification or cancellation of a customer project, or any disruption of our business relationships with any of our significant customers or with a number of smaller customers could have a material adverse effect on our business, financial condition and results of operations |
| Additionally, if we do not successfully renew our maintenance agreements with our software customers, our business may be adversely affected |
| If a substantial number of our software customers declined to renew these agreements, our revenues and profits would be materially adversely affected, especially within the GPT business segment |
| Our future success significantly depends on the experience of our key personnel, and the loss of any one of them could impair our ability to do business |
| Our future success depends, in significant part, upon the continued services of John D Carreker, Jr, our Chairman of the Board and Chief Executive Officer, as well as other executive officers and key personnel |
| Carreker or one or more of our other executive 17 _________________________________________________________________ officers or key employees could have a material adverse effect on our business, financial condition and results of operations, and there can be no assurance that we will be able to retain our executive officers or key personnel |
| We do not maintain key-man life insurance covering any of our executive officers or other key personnel |
| We may be unable to fully benefit from our strategic alliances and acquisitions, which could negatively affect our business and hinder our ability to realize expected benefits |
| We regularly evaluate opportunities and may enter into strategic alliances, or make acquisitions of other businesses, product or technologies |
| Risks inherent in alliances may include, among others: • substantial investment of our resources in the alliance; • inability to realize the intended benefits of an alliance; • increased reliance on third parties; • increased payment of third party licensing fees or royalties for the incorporation of third party technology into our solutions; and • inadvertent transfer of our proprietary technology to strategic "e partners "e |
| Acquisitions involve numerous risks, including: • difficulties in identifying suitable acquisition candidates; • competition for acquisitions with other companies, many of which have substantially greater resources than we do; • failure to close after expending time and resources; • inability to obtain sufficient financing on acceptable terms to fund acquisitions; • requirement that the acquisition may be funded through additional debt obligations which therefore would increase interest expense; • volatility of stock price due to one-time charges to earnings; • difficulties in assimilating acquired operations and products into our business; • maintaining uniform standards, controls, procedures and policies; • potential loss of customers and strategic partners of acquired companies; • potential loss of key employees of acquired companies; • diversion of managementapstas attention from other business concerns; • amortization of acquired intangible assets; and • failure of acquired businesses, products or technologies to perform as expected or to achieve expected levels of revenues, profitability or productivity |
| There can be no assurance that we will be successful in identifying and entering into strategic alliances or making acquisitions, if at all, and any inability to do so could have a material adverse effect on our business, financial condition and results of operations |
| We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and our common stock |
| If the consideration for an acquisition transaction is paid in common stock, this could further dilute existing stockholders |
| Any impairment of a significant amount of goodwill or other assets resulting from an acquisition transaction could materially impact our operating results and financial condition |
| 18 _________________________________________________________________ Our focus on providing business process outsourcing, or BPO, with a significant offshore component subjects us to risks associated with new markets, new competition, cross border and geopolitical risks and a dependence on third party providers |
| Our BPO business model gives rise to numerous risks, particularly risks related to our dependence on third party providers operating in distant geographic regions and those associated with entering a new market with competitors who may have significantly more resources than we do |
| The success of our BPO model partially depends on the performance of our offshore third party service provider partnerapstas parent company with whom we have contracted to provide BPO services to our clients |
| In addition, we have to compete on the basis of a number of factors including the attractiveness and breadth of the business strategy and services that we offer, pricing, technological innovation, quality of service, ability to invest in or acquire assets of potential customers, and our scale in certain industries or geographic regions |
| Because some of these factors are outside of our control and because many of our competitors may have greater financial resources, larger customer bases, and larger technical, sales and marketing resources, we cannot be sure that we will compete successfully against them in the future |
| If we fail to compete successfully against our competitors with respect to these or other factors, our BPO business, financial condition, and results of operations could be materially and adversely affected |
| There is competition in our industry for qualified banking professionals and technical and managerial personnel, and our failure to attract and retain these people could affect our ability to respond to banking and technological change and to increase our revenues |
| Our future success depends upon our continuing ability to attract and retain highly qualified banking, technical and managerial personnel |
| Competition for such personnel has at times caused difficulties in attracting the desired number of such individuals |
| Further, our employees have left us to work in-house with our customers and with our competitors |
| There can be no assurance that we will be able to attract or retain a sufficient number of highly qualified employees or independent contractors in the future |
| If we are unable to attract personnel in key positions, our business, financial condition and results of operations could be materially and adversely affected |
| A small number of customers accounts for a substantial portion of our business, so the loss of any one of them could have an adverse impact on our business and financial condition |
| Our five largest customers accounted for approximately 36prca, 31prca and 28prca of total revenues during the fiscal years ended January 31, 2006, 2005 and 2004, respectively |
| Our significant customers have changed from period to period |
| However, a significant portion of our current revenues is derived from customers who were major customers in prior years, and we are therefore dependent to a significant degree on our ability to maintain our existing relationships with these customers |
| There can be no assurance that we will be successful in maintaining our existing customer relationships or in securing additional customers, and there can be no assurance that we can retain or increase the volume of business that we do with such customers |
| In particular, continuing consolidation within the banking industry may result in the loss of one or more significant customers and/or potential customers |
| Any failure by us to retain one or more of our large customers, maintain or increase the volume of business done for such customers or establish profitable relationships with additional customers could have a material adverse effect on our business, financial condition and results of operations |
| We face increased competition that could result in price reductions, fewer customer orders and loss of market share, any of which could materially and adversely affect our business |
| We compete with third party providers of services and software products to the banking industry that include consulting firms and software companies |
| Some of our competitors have significantly greater financial, technical, marketing and other resources than we do |
| Our competitors may be able to 19 _________________________________________________________________ respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than we can |
| Also, some of our current and potential competitors have greater name recognition and larger customer bases that such competitors could leverage to increase market share at our expense |
| We expect to face increased competition as other established and emerging companies enter the banking services market |
| Increased competition could result in price reductions, fewer customer orders and loss of market share, any of which could materially and adversely affect our business, financial condition and results of operations |
| There can be no assurance that we will be able to compete successfully against current or future competitors, and the failure to do so could have a material adverse effect upon our business, financial condition and results of operations |
| In addition to competing with a variety of third parties, we experience competition from our customers and potential customers |
| From time to time, these potential customers develop, implement and maintain their own services and applications for revenue enhancements, cost reductions and/or enhanced customer services, rather than purchasing services and related products from third parties |
| There can be no assurance that these customers or other potential customers will perceive sufficient value in our solutions to justify investing in them |
| In addition, customers or potential customers could enter into strategic relationships with one or more of our competitors to develop, market and sell competing services or products |
| Our inability to protect adequately our proprietary technology or to prevent its unauthorized use could divert our financial resources and cause significant expenditures, which could materially harm our business |
| Our success significantly depends upon our proprietary technology, intellectual property and information, including customer information |
| We rely upon a combination of patent, copyright, trademark and trade secret laws and confidentiality procedures to protect our proprietary technology and information |
| We have a number of issued patents and registered trademarks |
| We also limit customer use of our intellectual property by entering into license and other agreements which limit the customerapstas use of the intellectual property |
| There can be no assurance that the steps we have taken to protect our services and products are adequate to prevent misappropriation of our technology or that our competitors independently will not develop technologies that are substantially equivalent or superior to our technology |
| Furthermore, it is very difficult to police unauthorized use of our software due to the nature of software |
| Any such misappropriation of our proprietary technology or information or the development of competitive technologies could have a material adverse effect on our business, financial condition and results of operations |
| In addition, the laws of some countries in which our software is distributed do not protect our intellectual property rights to the same extent as the laws of the United States |
| For example, the laws of a number of foreign jurisdictions in which we license our software protect trademarks solely on the basis of the first to register |
| We currently do not possess any trademark registrations in foreign jurisdictions, although we do have copyright protection of our software under the provisions of various international conventions |
| Accordingly, intellectual property protection of our services and products may be ineffective in many foreign countries |
| In summary, there can be no assurance that the protection provided by the laws of the United States or such foreign jurisdictions will be sufficient to protect our proprietary technology or information |
| Infringement claims by third parties can subject us to substantial liability and expenses and can impair our ability to sell our solutions |
| We may need to litigate claims against third parties to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity |
| We may also be subject to claims from our customers for 20 _________________________________________________________________ indemnification against third party claims for infringement or other similar claims |
| We may be required to incur significant costs in reaching a resolution to the asserted claims, or any other claims that may be asserted against us |
| There can be no assurance that the resolution of a claim against us would not require us to pay damages or obtain a license to the third partyapstas intellectual property rights in order to continue licensing our software as currently offered or, if such a third party license is required, that it would be available on terms acceptable to us |
| There can also be no assurance that we will be successful in pursuing litigation to protect our intellectual property or trade secrets, or that we will be able to recover the legal costs associated with preserving our proprietary rights |
| The resolution of intellectual property claims may also divert our management resources |
| If we cannot adequately protect our proprietary rights, it could have a material adverse effect on our business, operating results and financial condition |
| We depend on third parties for some of our technology licenses, and if we cannot obtain satisfactory licenses our business could suffer |
| Some technology used in our current software and software in development includes technology licensed from third parties |
| These licenses generally require us to pay royalties and to fulfill confidentiality obligations |
| The termination of any such licenses, or the failure of the third party licensors to adequately maintain or update their products, could result in delays in our ability to implement solutions or in delays in the introduction of our new or enhanced solutions while we search for similar technology from alternative sources, if any, which could prove costly |
| Any need to implement alternative technology could prove to be very expensive for us, and any delay in solution implementation could result in a material adverse effect on the business, financial condition and results of our operations |
| It may also be necessary or desirable in the future to obtain additional licenses for use of third party products in our solutions, and there can be no assurance that we will be able to do so on commercially reasonable terms, if at all |
| We may face liability claims related to the use of our solutions and the defense of these claims could have a negative effect on our business, results of operations or financial condition |
| As a result of our suite of solutions that address critical functions of bank operations, we are exposed to possible liability claims from banks and their customers |
| Although we attempt to mitigate liability in our contracts and have not experienced any material liability claims to date, there can be no assurance that we will not become subject to such claims in the future |
| A liability claim against us could have a material adverse effect on our business, financial condition and results of operations |
| Our software and solutions may contain defects or errors, which could adversely affect our business and subject us to liability claims |
| Our solutions at times in the past have been, and in the future may be, incompatible with the operating environments of our customers or inappropriate to address their needs, resulting in additional costs being incurred by us in rendering services to our customers |
| Further, like other software products, our software occasionally has contained undetected errors, or "e bugs, "e which become apparent through use of the software |
| Because our new or enhanced software initially is installed at a limited number of sites and operated by a limited number of users, such errors and/or incompatibilities may not be detected for a number of months after delivery of the software |
| The foregoing errors in the past have resulted in the deployment of our personnel and funds to cure errors, occasionally resulting in cost overruns and delays in solutions development and enhancement |
| Moreover, solutions with substantial errors could be rejected by or result in damages to customers, which could have a material adverse effect on our business, financial condition and results of operations |
| There can be no assurance that errors or defects will not be discovered in the future, potentially causing delays in solution implementation or additional development costs such as requiring design modifications that could 21 _________________________________________________________________ adversely affect our business, financial condition and results of operations |
| Although remote, it is possible that errors or defects in our solutions could give rise to liability claims against us |
| Information and data security requirements placed upon us by our customers necessitates investment and improvement in our information technology infrastructure and processes and a failure to adequately protect such information could adversely affect our business |
| Our business requires the storage and transmission of sensitive business information of our customers |
| Significant capital and investment in other resources is required to protect against the threat of security breaches or computer viruses, or to alleviate problems caused by breaches or viruses |
| To the extent that our activities or the activities of our customers require the storage and transmission of confidential information, such as banking records or credit information, security breaches and viruses could expose us to claims, litigation or other possible liabilities |
| We face risks in connection with the expansion of our international operations, which could have a negative impact on our business, financial condition and results of operations |
| We provide solutions to banks outside the United States, and a key component of our growth strategy is to broaden our international operations |
| In addition, our business process outsourcing business segment involves a significant offshore component |
| Our international operations are subject to risks inherent in the conduct of international business, including unexpected changes in regulatory requirements, fluctuations in exchange rates and devaluations of foreign currencies, export license requirements, restrictions on the export of critical technology, difficulties in staffing international projects, longer accounts receivable cycles and difficulties in collecting payments |
| Some of our international sales are denominated in local currencies, and the impact of future exchange rate fluctuations on our financial condition and results of operations cannot be accurately predicted |
| There can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse effect on revenue from international sales and thus our business, financial condition and results of operations |
| Government regulation and legal uncertainties could force us to change our operations, which could have a material adverse effect on our ability to maintain our current business, and make our business more expensive to operate |
| Our primary customers are banks |
| Although the solutions that we currently offer have not been subject to any material, specific government regulation, the banking industry is regulated heavily, and we expect that such regulation will affect the relative demand for our solutions |
| While we are not directly subject to federal or state regulations specifically applicable to financial institutions, such as banks, thrifts and credit unions, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and various state regulatory authorities typically assert the right to observe the operations of companies to which certain functions of financial institutions (such as data processing) are outsourced |
| These regulators may from time to time also claim the right to observe the operations of companies like us that provide software to financial institutions |
| In addition, financial institutions with whom we do business may from time to time require, by contract or otherwise, that evaluations of our internal controls be performed by independent auditors or by the financial institutions themselves |
| There can be no assurance that federal, state or foreign governmental authorities will not adopt new statutes or regulations, and any adoption of new rules could require us to modify our current or future solutions or subject us to more direct supervision or examination |
| The adoption of laws or regulations affecting us or our customers &apos businesses could reduce our growth rate or could otherwise have a material adverse effect on our business, financial condition and results of operations |
| 22 _________________________________________________________________ Our intangible assets could become impaired and adversely affect our future results of operations and financial position |
| In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nodtta 142, Goodwill and Other Intangible Assets ( "e SFAS 142 "e ), effective for fiscal years beginning after December 15, 2001 |
| Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement |
| There can be no assurance that such tests will not result in a determination that these assets have been impaired |
| If at any time it is determined that an impairment has occurred, we will be required to reflect the impaired value as a charge resulting in a reduction in earnings in the quarter such impairment is identified and a corresponding reduction in our net asset value |
| We recorded a goodwill impairment charge of dlra46dtta0 million in the quarterly period ended January 31, 2003 |
| The fair values used in this evaluation were estimated based upon the consideration of a number of fair value estimation techniques, including a discounted cash flow analysis and consideration of the market price of our stock |
| Declines in market conditions, increases in interest rates and changes in projections with respect to the Global Payments Technologies reporting unit in which goodwill is allocated could result in additional impairment charges in the future |
| In addition to the Goodwill discussed above, we have other intangible assets which are currently being amortized |
| These intangible assets are as follows: • Capitalized Software—We capitalize the development costs of software, other than internal-use software, in accordance with Statement of Financial Accounting Standards Nodtta 86, "e Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed, "e ( "e SFAS 86 "e ) |
| Capitalized software that is recorded at January 31, 2006 was dlra2dtta8 million |
| • Acquired Developed Technology—Acquired developed technology includes purchased technology intangible assets associated with acquisitions |
| These purchased technology intangibles are initially recorded based on the fair value ascribed at the time of acquisition |
| The acquired developed technology that is recorded at January 31, 2006 was dlra5dtta3 million |
| • Customer Relationships—Customer relationships includes an intangible asset with a definite useful life |
| The customer relationship intangible that is recorded at January 31, 2006 was dlra1dtta9 million |
| Declines in either current or projected demand for our software product offerings could result in non-cash impairment charges in the future |
| The ultimate realization of revenue from contracted sales, potential sales, backlog and deferred revenues cannot be predicted with a high degree of accuracy |
| From time to time management provides information regarding our contracted sales, potential sales and our backlog for contracted services, contracted contingent services, contracted licenses and contracted maintenance |
| Management also provides our expectations with regard to the realization of revenue from such contracted sales, potential sales and backlog |
| These expectations can be influenced by many factors, some of which are beyond our control, and include but are not limited to the following: • Customer buying decisions and implementation timelines and schedules • Customer budget cycles and priorities • Our ability to develop new technologies and services in a timely manner • Customer acceptance of our new technologies or services 23 _________________________________________________________________ • Receipt of cash payment The ultimate resolution of the class action lawsuit may have a material adverse effect on our business |
| Although we have reached an agreement to settle the shareholder |