| DIGITAL INSIGHT CORP ITEM 1A RISK FACTORS You should carefully consider the following risk factors in your evaluation of us |
| Our business and results of operations could be seriously harmed by any of the following risks |
| The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment |
| Fluctuations of our operating results could cause our stock price to fluctuate |
| Our operating results may fluctuate significantly in the future based upon a number of factors, many of which are not within our control |
| We base our operating expenses on anticipated revenue growth and many of our operating expenses are relatively fixed in the short-term |
| Our revenue model is based largely on recurring revenues, billed monthly, predominately derived from growth in end users and transaction volume within a monthly billing period |
| The number of total end users accessing our systems is affected by many factors, several of which are beyond our control, including the number of new user registrations, end user turnover, loss of customers, and general consumer trends |
| We may expend funds and management resources to increase end user 10 ______________________________________________________________________ [35]Table of Contents penetration and still fail to achieve the targeted growth objectives |
| Accordingly, our results of operations for a particular period may be adversely affected if fluctuating growth in end users causes revenues and operating results to be lower than expectations of market analysts or investors |
| If this were to occur, the price of our common stock would likely decrease |
| Our operating results may also fluctuate in the future due to a variety of other factors, including: • the overall level of demand for Internet banking services by consumers and businesses and the demand for our products, product enhancements and services in particular; • loss of significant customers due to non-renewals of the service contracts, acquisition of customers by non-customer financial institutions, customer insolvencies and other reasons; • consolidation among core data processing vendors, which may affect our reseller and revenue-sharing agreements with certain core processor organizations or reduce the likelihood of extending our agreements at expiration; • actions taken by our competitors, including the introduction of new products or changes in their pricing models; • spending patterns and budgetary resources of financial institutions and their end user customers; • the timing of upgrades to our computer hardware infrastructure; • the timing of customer product implementations or our failure to timely complete scheduled product implementations; • delays in the product development schedule of one or more of our new products or services; • a negative outcome in any significant legal proceeding or prolonged litigation; • the adoption of new accounting standards; • governmental actions affecting Internet operations or content; and • general economic trends and the impact of external factor or events, such as war or acts of terrorism |
| If we are unable to implement appropriate systems, procedures and controls, we may not be able to successfully offer our services and grow our business |
| Our ability to successfully offer our products and services and to grow our business requires an effective planning and management process |
| We updated our operations and financial systems, procedures and controls following our prior acquisitions |
| Our systems, however, will continue to require additional modifications and improvements to respond to current and future changes in our business |
| If we cannot grow our business, and manage that growth effectively, or if we fail to implement in a timely and cost-effective manner appropriate internal systems, procedures, controls and necessary modifications and improvements to these systems, our business will suffer |
| For example, our billing system must keep pace with our business and be able to interoperate with our contract database and production database |
| Security breaches could damage our reputation and business |
| Our products and networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems |
| We transmit confidential financial information in providing our services |
| Users of Internet banking and other electronic commerce services are concerned about the security of transmissions over public networks |
| Therefore, it is critical that our facilities and infrastructure remain secure and be perceived by the marketplace as secure |
| A material security breach affecting us or one of our key vendors could damage our reputation, deter financial institutions from purchasing our products, deter their end user customers from using our products, or 11 ______________________________________________________________________ [36]Table of Contents result in liability to us |
| Further, any material security breach affecting our competitors could affect the marketplace’s perception of Internet banking in general and have the same adverse effects |
| Concerns over security and the privacy of end users have intensified both within and outside of the US, and may inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions |
| Any well-publicized compromise of security or a widespread epidemic involving identity theft could deter people from using the Internet or using it to conduct transactions that involve transmitting confidential information |
| We may need to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by breaches |
| Although we intend to continue to implement state-of-the-art security measures and upgrade our products to address these issues, persons may be able to circumvent the measures that we implement in the future |
| Eliminating computer viruses and alleviating other security problems may result in interruptions, delays or cessation of service to users accessing web sites that deliver our services, any of which could harm our business |
| Any failure in our disaster recovery or emergency fail-over procedures could cause interruption in our system and loss of customers |
| Most of our communications and network equipment related to our Internet banking operation is currently located in our main data center in Westlake Village, California |
| We also maintain a backup data center in Norcross, Georgia for the Westlake Village data center |
| We maintain these two data centers in a manner that will continue to provide system redundancy, fail-over from the Westlake facility to the Norcross facility and emergency backup capabilities |
| While the architecture of the two systems is largely integrated, the process of failing over to a recovery site currently involves some manual intervention, and there is some attendant delay and loss of use of non-key features and functionality |
| In addition, we may experience problems during the recovery or fail-over process that could cause system failures and decreased levels of service |
| Although we perform testing on a periodic basis to ensure that recovery mechanisms perform as planned, unexpected failure of any of these mechanisms may prevent a successful recovery |
| A natural disaster, such as a fire, an earthquake or a flood, at any of our data centers could result in failures or interruptions in providing our products and services to our customers |
| Although we maintain and regularly test an uninterruptible power supply system for our critical systems in all of our data centers, there is no assurance that this system, consisting of a backup battery and a diesel generator, will function properly, or at all, in case of a power loss |
| In addition to a potential loss of power, our systems are vulnerable to operational failures, telecommunications failures and similar events |
| We have contracted to provide a certain level of service to our customers and, consequently, an unexpected interruption of our system has in the past caused, and in the future could cause, us to refund fees to some of our customers to compensate for decreased levels of service |
| Even with our disaster recovery plan and the integration of our two main facilities, we could experience a failure or interruption in our systems that could lead to loss of data or the inability to provide services to our customers |
| If we do not retain our customers or they do not successfully market our products, we will not be able to increase our revenues |
| We also depend on our financial institution clients to market and promote our products to their end user customers |
| Neither we nor our financial institution customers may be successful in marketing our current or future Internet banking products and services |
| Moreover, financial institutions generally agree to use our products and services pursuant to contracts with durations that range from three to five years |
| Upon expiration, these contracts may be discontinued and we may lose customers as a result |
| We lose customers every quarter for a variety of reasons, and continually seek to replace these and add new customers |
| Unless our Internet banking products and services are successfully deployed and marketed by a significant number of financial institutions and achieve widespread market acceptance by their end user customers for a significant period of time, we will not be able to achieve our business objectives and increase our revenues |
| 12 ______________________________________________________________________ [37]Table of Contents We depend on the efficient operation of the Internet, other networks and systems of third parties; if they do not operate efficiently, we will not be able to effectively provide our products and services |
| We depend on the efficient operation of network connections from our financial institution clients, their data processing vendors and other third-party vendors such as bill payment providers |
| Further, portions of our revenue are dependent on continued usage by end users of Internet banking services and their connections to the Internet |
| Each of these connections, in turn, depends on the secure and efficient operation of web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or have experienced outages |
| In addition, the majority of our services depend on real-time connections to the systems of financial institutions, data processing vendors and bill payment providers |
| Any operational problems or outages in these systems would cause us to be unable to provide a real-time connection to these systems and we would be unable to process transactions for end users, resulting in decreased revenues |
| In addition, any system delays, failures or loss of data, whatever the cause, could reduce customer and end user satisfaction with our products and services and harm our revenues |
| If we are unable to rapidly integrate third-party software, we may not be able to deliver service to our clients on a timely basis, resulting in lost revenues and potential liability |
| As part of our strategy to provide integrated services, we integrate software applications from a variety of third party vendors on to product platform and resell them |
| If we are unable to implement and integrate this software in a fully functional manner for our clients, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of services |
| Software often contains errors or defects, particularly when first introduced or when new versions or enhancements are released |
| Despite internal testing and testing by current and potential vendors, our current and future solutions may contain serious defects due to third-party software or software we develop or customize for clients |
| Serious defects or errors could result in liability for damages, lost revenues or a delay in implementation of our solutions |
| Our past and potential future acquisitions involve risks to our business and financial results |
| We have acquired various businesses over the last several years and may acquire complementary technologies or businesses in the future |
| We closed our acquisitions of nFront Inc |
| on February 10, 2000; 1View Network Corporation, or 1View, on June 21, 2000; AnyTime Access, Inc, or ATA, on July 31, 2000; Virtual Financial Services, Inc, or ViFi, on January 28, 2002; and Magnet on November 25, 2003 |
| Acquisitions may not perform as we expect and may involve large one-time write-offs, including goodwill impairment charges, and amortization expenses related to intangible assets |
| In this regard, any of these factors could adversely affect our operating results or stock price |
| Acquisitions involve numerous risks, including, but not limited to: • difficulties in assimilating the operations, products, technology, information systems and personnel of the acquired company with our operations; • diverting our management’s attention from other business concerns; • impairing relationships with our employees, affiliates, strategic marketing alliances and third-party vendors; • the inability to maintain uniform standards, controls, procedures and policies; • loss of acquired customers and strategic partners beyond projected thresholds; • entering markets and adopting business models in which we have no direct prior experience; and • losing key employees of the acquired company |
| Some or all of these risks could result in a material adverse effect on our business, financial condition and operating results |
| In addition, we cannot assure you that we will be able to identify suitable acquisition 13 ______________________________________________________________________ [38]Table of Contents candidates that are available for sale at reasonable prices |
| We may elect to finance future acquisitions with debt financing, which would create debt service requirements, or through the issuance of additional common or preferred stock, which could result in dilution to our stockholders |
| We cannot assure you that we will be able to arrange adequate financing, if required, for any acquisitions on acceptable terms |
| We depend on cooperation from data processing vendors for financial institutions, including vendors that have resisted efforts in the past to allow the integration of our products and services with their systems |
| Our products involve integration with products and systems developed by data processing vendors that serve financial institutions |
| If any of our products fail to be supported by financial institutions’ data processing vendors, we would have to redesign our products to suit these financial institutions |
| We cannot assure that any redesign could be accomplished in a cost-effective or timely manner |
| We rely on these vendors to jointly develop technology with us and to disclose source code specifications to enable our products to integrate effectively with their products and systems |
| In the past, some vendors have resisted integrating our products or have caused delays or other disruptions in the implementation process |
| Several of these data processing vendors offer or are planning to offer Internet banking products and services that are directly competitive with our products and services |
| In addition, financial institutions’ data processing vendors may develop new products and systems that are incompatible with our products |
| Our failure to integrate our products effectively with financial institutions’ data processing vendors could result in higher implementation costs or the loss of current and potential customers |
| Competition could reduce or eliminate demand or result in lower prices for our products and services |
| The market for Internet banking services is highly competitive and fragmented with many providers |
| We face competition from two main areas: other companies similar to us with outsourced Internet banking offerings, and vendors of data processing services to financial institutions |
| Also, vendors that primarily target the largest financial institutions occasionally compete in our target market |
| Some of our current and potential competitors have longer operating histories and may be in a better position to produce and market their services due to their greater financial, technical, marketing and other resources, as well as their significantly greater name recognition and larger installed bases of customers |
| In addition, many of our competitors have well-established relationships with our current and potential financial institution customers and data processing vendors and have extensive knowledge of our industry |
| We may not be able to compete successfully against our current or future competitors and, accordingly, we cannot be certain that we will be able to expand the number of our customers and end users, retain our current customers or third-party service providers, or maintain our current pricing levels for our products and services |
| In particular, as we negotiate the renewal of long-term service contracts with current customers, we may be subject to competitive pressures and other factors that may require concessions on pricing and other material contract terms to induce the customer to remain with us |
| We could be subject to potential liability claims related to use of our products and services |
| Financial institutions use our products and services to provide Internet banking services to their customers |
| Any errors, defects or other performance problems in our products and services could result in financial or other damages to these financial institutions for which we may be liable |
| Moreover, we may be liable for transactions executed using Internet services based on our products and services even if the errors, defects or other problems are unrelated to our products and services |
| A claim brought against us, even if not successful, would likely be time consuming, result in costly litigation, and could seriously harm our business and reputation |
| Our stock price is volatile, which could cause you to lose some or all of your investment |
| The market price of our common stock has fluctuated significantly in the past and could fluctuate in the future in response to the following particular factors: 14 ______________________________________________________________________ [39]Table of Contents • actual or anticipated variations in operating results; • announcements by us or our competitors of new products, significant contracts, acquisitions or relationships; • additions or departures of key personnel; • changes in estimates or ratings of securities analysts; • future equity or debt offerings or acquisitions or our announcements of these transactions; and • economic well-being of financial institutions |
| Our stock price could also be impacted by shares purchased by us through our stock repurchase program or shares sold by our executive officers upon the exercise of vested options and restricted stock |
| In addition, in recent years, the stock market in general, and the Nasdaq National Market and the securities of technology companies in particular, have experienced extreme price and volume fluctuations |
| These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies |
| These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results |
| The lengthy sales cycles of our business banking products may cause our business banking revenues and operating results to be unpredictable and to vary significantly from period to period |
| The sale and implementation of our business banking products and services for large financial institutions are often subject to delays because of our customers’ internal budgets and procedures for approving large capital expenditures and deploying new technologies |
| The time elapsed between the date of initial contact with a potential customer and the execution of a contract typically ranges from six to twelve months |
| In addition, our prospective customers’ decision-making processes require us to provide a significant amount of information to them regarding the use and benefits of our business banking products |
| We may expend substantial management resources and fail to make the sale |
| These delays have adversely affected sales of our business banking products for large financial institutions |
| Any future delays in closing orders or implementation of products or services can cause our operating results to fall short of anticipated levels for any quarter |
| If we estimate incorrectly the time required to complete our business banking projects, we will lose money on fixed-price contracts |
| A majority of our professional services contracts for business banking are fixed-price contracts, rather than contracts in which the client pays us on a time and materials basis |
| We must estimate the number of hours and the materials required before entering into a fixed-price contract |
| Our future success will depend on our ability to continue to set rates and fees accurately and to maintain targeted rates of employee utilization and project quality |
| If we fail to accurately estimate the time and the resources required for a project, any required increase in the time and resources to complete the project could cause our profits to decline |
| Our business banking and consumer lending business results could suffer if we lose key customers or fail to add additional customers |
| Our business banking and consumer lending businesses derive a significant portion of their revenues from a limited number of customers in each period |
| Accordingly, for each business segment, if an existing contract expires or is cancelled and we fail to replace the contract with new business, revenues for the segment would be adversely affected |
| Our lending division has been adversely affected by customer losses in the past, which has led to a decrease in the number of loan applications processed and corresponding revenues |
| We expect that a limited number of customers will continue to account for a substantial portion of our business banking revenues and consumer lending revenues in each quarter for the foreseeable future |
| 15 ______________________________________________________________________ [40]Table of Contents Our consumer lending operation could be adversely impacted by a downturn in the economy and by seasonal demand |
| A softening of demand for our outsourced solutions caused by a weakening of the economy generally may result in decreased revenues or lower growth rates |
| Also, the lending industry is also generally subject to seasonal trends affecting loan demand |
| Government regulation of our business could cause us to incur significant expenses, and failure to comply with certain regulations, if adopted, could make our business less efficient or impossible |
| The financial services industry is subject to extensive and complex federal and state regulation |
| Financial institutions such as commercial banks, savings and loans associations, savings banks, and credit unions operate under high levels of government supervision |
| Our customers must ensure that our services and related products work within the extensive and evolving regulatory requirements applicable to them |
| Neither federal depository institution regulators nor other federal regulators of financial services require us to obtain any licenses |
| We are examined by the Federal Financial Institution Examination Council under the Information Technology guidelines |
| Although we believe we are not subject to direct supervision by federal and state banking agencies relating to other regulations, we have from time to time agreed to examinations of our business and operations by these agencies |
| These regulators have broad supervisory authority to remedy any shortcomings identified in any such examination which could lead to changes in our business |
| Federal, state or foreign authorities could also adopt laws, rules or regulations relating to the financial services industry that affect our business, such as requiring us or our customers to comply with data, record keeping and processing, and other requirements |
| It is possible that laws and regulations may be enacted or modified with respect to the Internet, covering issues such as end user privacy, pricing, content, characteristics, taxation and quality of services and products |
| If enacted or deemed applicable to us, these laws, rules or regulations could be imposed on our activities or our business, thereby rendering our business or operations more costly, burdensome, less efficient or impossible, and requiring us to modify our current or future products or services |
| We may be found to infringe proprietary rights of others, which could harm our business |
| We are subject to the risk of claims and litigation alleging infringement of the intellectual property rights of others |
| Third parties may assert infringement claims in the future with respect to our current or future products, or those of our key vendors |
| Any assertion of such claims, regardless of its merit, could require us to pay damages or settlement amounts and could require us to develop non-infringing technology, pay for a license for the technology that is the subject of the asserted infringement, or contract with a vendor that has non-infringing technology |
| For example, we have in the past received notices claiming infringement of intellectual property rights related to our Internet banking application |
| Any litigation or potential litigation could result in product delays, increased costs, or both |
| In addition, the cost of litigation and the resulting distraction of our management resources could adversely affect our operating results |
| We also cannot assure that any licenses for technology necessary for our business will be available or that, if available, these licenses can be obtained on commercially reasonable terms |
| Consolidation of the banking and financial services industry could cause our revenues to fall |
| Consolidation of the banking and financial services industry could result in a smaller market for our products and services |
| A variety of factors could cause our customers to reassess their purchase or potential purchase of our products and could result in termination of services by existing customers |
| Although our contracts typically provide for an early termination fee, the loss of customers may negatively impact our operating results in future periods |
| After consolidation, banks and other financial institutions may experience a 16 ______________________________________________________________________ [41]Table of Contents realignment of management responsibilities and a reexamination of strategic and purchasing decisions |
| We may lose relationships with key constituencies within our customers’ organizations due to budget cuts, layoffs, or other disruptions following a consolidation |
| In addition, consolidation may result in a change in the technological infrastructure of the combined entity |
| Our products and services may not integrate with this new technological infrastructure |
| The acquiring institution may also have its own in-house system or outsource to competitors |
| Our charter and bylaws and Delaware law contain provisions which could discourage a takeover |
| Provisions of our charter and bylaws may make it more difficult for a third party to acquire, or may discourage a third party from attempting to acquire, control of us, even if doing so would be beneficial to our stockholders |
| These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock |
| These provisions include: • division of the board of directors into three separate classes; • elimination of cumulative voting in the election of directors; • prohibitions on our stockholders from acting by written consent and calling special meetings; • procedures for advance notification of stockholder nominations and proposals; and • the ability of the board of directors to alter key provisions of our bylaws without stockholder approval |
| In addition, our board of directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders |
| The issuance of preferred stock, while providing flexibility in connection with possible financings or acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock |
| We are also subject to Section 203 of the Delaware General Corporation Law, which, subject to exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder |
| The preceding provisions of our charter and bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management |