| PROGRESS SOFTWARE CORP /MA Item 1A Risk Factors We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control |
| The following discussion highlights some of these risks |
| Our revenue and quarterly results may fluctuate, which could adversely affect our stock price |
| We have experienced, and may in the future experience, significant fluctuations in our quarterly operating results that may be caused by many factors |
| These factors include: • changes in demand for our products; • introduction, enhancement or announcement of products by us or our competitors; • market acceptance of our new products; • the growth rates of certain market segments in which we compete; • size and timing of significant orders; • budgeting cycles of customers; • mix of distribution channels; • mix of products and services sold; • mix of international and North American revenues; • fluctuations in currency exchange rates; • changes in the level of operating expenses; • changes in our sales incentive plans; • completion or announcement of acquisitions by us or competitors; • customer order deferrals in anticipation of new products announced by us or our competitors; and • general economic conditions in regions in which we conduct business |
| Revenue forecasting is uncertain, in large part, because we generally ship our products shortly after receipt of orders |
| Most of our expenses are relatively fixed, including costs of personnel and facilities, and are not easily reduced |
| Thus, an unexpected reduction in our revenue, or failure to achieve the anticipated rate of growth, would have a material adverse effect on our profitability |
| If our operating results do not meet our publicly stated guidance, if any, or the expectations of investors, our stock price may decline |
| Our international operations expose us to additional risks, and changes in global economic and political conditions could adversely affect our international operations, our revenue and our net income |
| We typically 12 _________________________________________________________________ [62]Table of Contents generate between 55prca and 60prca of our total revenue from sales outside of North America |
| Political instability, oil price shocks and armed conflict in various regions of the world can lead to economic uncertainty and may adversely influence our business |
| If customers’ buying patterns, such as decision-making processes, timing of expected deliveries and timing of new projects, unfavorably change due to economic or political conditions, there will be a material adverse effect on our business, financial condition and operating results |
| Other potential risks inherent in our international business include: • longer payment cycles; • greater difficulties in accounts receivable collection; • unexpected changes in regulatory requirements; • export restrictions, tariffs and other trade barriers; • difficulties in staffing and managing foreign operations; • political instability; • reduced protection for intellectual property rights in some countries; • seasonal reductions in business activity during the summer months in Europe and certain other parts of the world; • economic instability in emerging markets; and • potentially adverse tax consequences |
| Any one or more of such factors could have a material adverse effect on our international operations, and, consequently, on our business, financial condition and operating results |
| Fluctuations in foreign currency exchange rates could have an adverse impact on our financial condition and results of operations |
| Because a majority of our total revenue is derived from international operations that are primarily conducted in foreign currencies, changes in the value of these foreign currencies relative to the US dollar may affect our results of operations and financial position |
| In the first six months of fiscal 2005, as well as in fiscal years 2002 through 2004, the weakening of the US dollar against most major currencies, primarily the euro and the British pound, positively affected our results |
| However, the US dollar strengthened against most major currencies in the last six months of fiscal 2005 to approximate levels from one year earlier, and further unfavorable changes in foreign currency exchange rates may occur |
| We seek to reduce our exposure to fluctuations in foreign currency exchange rates by entering into foreign exchange option and forward contracts to hedge certain transactions of selected foreign currencies (mainly in Europe and Asia Pacific) |
| There can be no assurance that our currency hedging transactions will be effective in reducing the effect on us of fluctuations in foreign currency exchange rates |
| Further, if for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, our business could be adversely affected |
| Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could be harmed |
| Ongoing enhancements to our product sets will be required to enable us to maintain our competitive position |
| There can be no assurance that we will be successful in developing and marketing enhancements to our products on a timely basis, or that the enhancements will adequately address the changing needs of the marketplace |
| Overlaying the risks associated with our existing products and enhancements are ongoing technological developments and rapid changes in customer requirements |
| Our future success will depend upon our ability to develop and introduce in a timely manner new products that take advantage of technological advances and respond to new customer requirements |
| The development of new products is increasingly complex and uncertain, which increases the risk of delays |
| There can be no assurance that we will be successful in developing new products incorporating new technology on a timely basis, or that our new products will adequately address the changing needs of the marketplace |
| Failure to develop new products and product enhancements that meet market needs in a timely manner could have a material adverse effect on our business, financial condition and operating results |
| We are substantially dependent on our core product, Progress OpenEdge |
| We derive a significant portion of our revenue from software license and maintenance revenue attributable to our core product line, Progress OpenEdge, and other products that complement OpenEdge and are generally licensed only in conjunction with OpenEdge |
| Accordingly, our future results depend on continued market acceptance of OpenEdge and any factor adversely affecting the market for OpenEdge could have a material adverse effect on our business, financial condition and operating results |
| 13 _________________________________________________________________ [63]Table of Contents Higher costs associated with some of our newer products could adversely affect our operating margins |
| Some of our newer products, such as the Sonic and Real Time product sets, require a higher level of development, distribution and support expenditures, on a percentage of revenue basis, than the OpenEdge or DataDirect product lines |
| If revenue generated from these products becomes a greater percentage of our total revenue and if the expenses associated with these products do not decrease on a percentage of revenue basis, then our operating margins will be adversely affected |
| We may make acquisitions or investments in new businesses, products or technologies that involve additional risks, which could disrupt our business or harm our financial condition or results of operations |
| As part of our business strategy, we have made, and expect to continue to make, acquisitions of businesses or investments in companies that offer complementary products, services and technologies, such as the acquisitions of DataDirect and Persistence in fiscal 2004, Apama and EasyAsk in fiscal 2005 and our recently completed acquisitions of Actional Corporation and NEON Systems, Inc |
| in the first quarter of fiscal 2006 |
| Such acquisitions or investments involve a number of risks, including the risks of assimilating the operations and personnel of acquired companies, realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential product disruptions associated with the sale of the acquired company’s products |
| These factors could have a material adverse effect on our business, financial condition and operating results |
| Consideration paid for any future acquisitions could include our stock |
| As a result, future acquisitions could cause dilution to existing shareholders and to earnings per share |
| We recognize a substantial portion of our revenue from sales made through third parties, including our application partners and OEMs, and adverse developments in the businesses of these third parties or in our relationships with them could harm our revenues and results of operations |
| Our future results also depend upon our continued successful distribution of our products through our application partner and OEM channels |
| Application partners utilize our technology to create their applications and resell our products along with their own applications |
| OEMs embed our products within their software products or technology devices |
| The activities of these third parties are not within our direct control |
| Our failure to manage our relationships with these third parties effectively could impair the effectiveness of our sales, marketing and support activities |
| A reduction in the sales efforts, technical capabilities or financial viability of these parties, a misalignment of interest between us and them, or a termination of our relationship with a major application partner or OEM could have a negative effect on our sales and financial results |
| Any adverse effect on the application partners’ or OEMs’ businesses related to competition, pricing and other factors could also have a material adverse effect on our business, financial condition and operating results |
| The market for enterprise integration and messaging products and services in which our Sonic Software subsidiary participates is rapidly evolving and highly competitive, and failure of our Sonic ESB and other enterprise infrastructure products to achieve and maintain market acceptance could harm our business |
| We are currently developing and enhancing the Sonic product set and other related new products and services |
| The market for enterprise application integration, Web services, messaging products and other Internet business-to-business products is highly competitive |
| Many potential customers have made significant investments in proprietary or internally developed systems and would incur significant costs in switching to the Sonic product set or other third-party products |
| Global e-commerce and online exchange of information on the Internet and other similar open wide area networks continue to evolve |
| If our Sonic products are not successful in penetrating these evolving markets, our results of operations will be adversely affected |
| The software industry in which we participate is intensely competitive, and our inability to compete effectively would harm our business |
| We experience significant competition from a variety of sources with respect to the marketing and distribution of our products |
| Many of our competitors have greater financial, marketing or technical resources than we do and may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than we can |
| Increased competition could make it more difficult for us to maintain our market presence or lead to downward pricing pressure |
| The marketplace for new products is intensely competitive and characterized by low barriers to entry |
| As a result, new competitors possessing technological, marketing or other competitive advantages may emerge and rapidly acquire market share |
| 14 _________________________________________________________________ [64]Table of Contents In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to deliver products that better address the needs of our prospective customers |
| Current and potential competitors also may be more successful than we are in having their products or technologies widely accepted |
| There can be no assurance that we will be able to compete successfully against current and future competitors, and our failure to do so could have a material adverse effect upon our business, prospects, financial condition and operating results |
| We rely on the experience and expertise of our skilled employees, and must continue to attract and retain qualified technical, marketing and managerial personnel in order to succeed |
| Our future success will depend in large part upon our ability to attract and retain highly skilled technical, managerial and marketing personnel |
| There is significant competition for such personnel in the software industry |
| There can be no assurance that we will continue to be successful in attracting and retaining the personnel we require to develop new and enhanced products and to continue to grow and operate profitably |
| Our success is dependent upon our proprietary software technology, and our inability to protect it would harm our business |
| We rely principally on a combination of contract provisions and copyright, trademark, patent and trade secret laws to protect our proprietary technology |
| Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary |
| Policing unauthorized use of our products is difficult |
| There can be no assurance that the steps we take to protect our proprietary rights will be adequate to prevent misappropriation of our technology or that others will not independently develop similar technology |
| We could be subject to claims that we infringe intellectual property rights of others, or incur substantial cost in protecting our own technology, either of which could harm our business, financial condition or results of operations |
| Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement |
| Although we believe that our products and technology do not infringe on any existing proprietary rights of others, there can be no assurance that third parties will not assert infringement claims in the future or that any such claims will not be successful |
| Such litigation could result in substantial costs and diversion of resources, whether or not we ultimately prevail on the merits |
| Such litigation could also lead to our being prohibited from selling one or more of our products, cause reluctance by potential customers to purchase our products, or result in liability to our customers and could have a material adverse effect on our business, financial condition and operating results |
| We utilize certain technology which we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions |
| There can be no assurance that this technology, or functionally similar technology, will continue to be available on commercially reasonable terms in the future, or at all |
| The loss of any significant third-party technology license could cause delays in our ability to deliver our products or services until equivalent technology is developed internally or equivalent third-party technology, if available, is identified, licensed and integrated |
| Our common stock price may continue to be volatile, which could result in losses for investors |
| The market price of our common stock, like that of other technology companies, is highly volatile and is subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates by securities analysts or other events or factors |
| Our stock price may also be affected by broader market trends unrelated to our performance |