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Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “could”, “would”, “might”, “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, beliefs, plans, projections, objections, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed herein and in the notes to our financial statements for the year ended June 30, 2007, certain sections of which are incorporated herein by reference as set forth in Items 7 and 8 of this report. The actual results that we achieve may differ materially from any forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. You should carefully review Part I Item 1A “Risk Factors” and other documents we file from time to time with the Securities and Exchange Commission. A number of factors may materially affect our business, financial condition, operating results and prospects. These factors include, but are not limited to, those set forth in part I Item 1A “Risk Factors” and elsewhere in this report. Any one of these factors may cause our actual results to differ materially from recent results or from our anticipated future results. You should not rely too heavily on the forward-looking statements contained in this Annual Report on Form 10-K, because these forward-looking statements are relevant only as of the date they were made.
| Item 1. | Business |
Overview
Open Text Corporation was incorporated on June 26, 1991 pursuant to articles of incorporation under the Business Corporations Act (Ontario) and continued under the Canada Business Corporations Act on December 29, 2005. We amended our articles on August 1, 1995 and November 16, 1995, respectively, and filed articles of amalgamation on June 30, 1992, December 29, 1995, July 1, 1997, July 1, 1998, July 1, 2000, July 1, 2002, July 1, 2003, July 1, 2004 and July 1, 2005. References herein to the “Company”, “Open Text”, “we” or “us” refer to Open Text Corporation and its subsidiaries. Our current principal office is at 275 Frank Tompa Drive, Waterloo, Ontario, Canada N2L 0A1, and our telephone number at that location is (519) 888-7111. Our internet address is www.opentext.com. Throughout this Annual Report on Form 10-K: (i) the term “Fiscal 2007” means our fiscal year beginning on July 1, 2006 and ending on June 30, 2007; (ii) the term “Fiscal 2006” means our fiscal year beginning on July 1, 2005 and ending on June 30, 2006; and (iii) the term “Fiscal 2005” means our fiscal year beginning July 1, 2004 and ending on June 30, 2005. Unless otherwise indicated, all amounts included in this Annual Report on Form 10-K are expressed in U.S. dollars.
Access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished to the United States Securities and Exchange Commission (the “SEC”) may be obtained through the Investor Relations section of our website at www.opentext.com as soon as reasonably practical after we electronically file or furnish these reports. We do not charge for access to and viewing of these reports. Information on our Investor Relations page and our website is not part of this Annual Report on Form 10-K or any other securities filings of ours unless specifically incorporated herein by reference. In addition, our filings with the SEC may be accessed through the SEC’s Electronic Data Gathering, Analysis and Retrieval system at www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.
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We review and evaluate our operations, strategy and finances by operating segment, as that term is defined in Statement of Financial Accounting Standards No. 131. Our operations fall into one dominant industry segment, being enterprise content management software. As a result, the components of our business are divided among geographic and not operational lines. Our major geographic segments are North America and Europe.
With respect to the information provided in this Item 1 on Form 10-K, there are no material differences between our two geographical segments or between any of our geographical segments and Open Text as a whole. Thus, unless otherwise indicated, the information presented in this Item 1 on Form 10-K reflects material details regarding the business of Open Text as a whole, unified entity. This treatment is consistent with the fact that enterprise content management software is Open Text’s one dominant business segment.
For information regarding the financial performance and the results of operation of our geographic segments for each of the years in the three year period ended June 30, 2007, see Note 12 “Segment Information” in the Notes to Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K.
The Company
We are the largest independent company providing Enterprise Content Management (“ECM”) software solutions, and as a result, we are a market leader in the ECM marketplace. Our products help our customers manage their critical business content from start to finish. We have specific products designed to assist companies with the management of their content revisions, approvals to archiving, and compliance with relevant regulatory requirements. Since the products and services we provide to our customers help to solve their content management challenges, we often use the term “solution” when we refer to either the products or services we provide to our customers. Our primary ECM solution, Livelink, enables corporations to manage traditional forms of content such as images, office documents, graphics and drawings, as well as to manage electronic content including web pages, email and video. Our solutions aim to allow users to gain access to view and manage all information related to a transaction or business process, without having to switch from one application to another.
ECM Software Solutions
Our ECM software solutions are tailored to address specific business problems or focus on vertical industries. Our ECM software solutions are focused in two general areas: (i) Business Applications and (ii) Vertical Industry.
Business Applications
Our business solutions are designed to meet both the regulatory compliance goals and the return on investment (“ROI”) goals of our customers, by resolving specific ECM challenges faced by the following functional areas: (i) research and development; (ii) finance; (iii) information systems and technology; and (iv) marketing and sales. We provide targeted business solutions for a variety of markets, many of which require compliance with increasingly stringent standards and regulations. Our ECM software solutions for business applications include:
Compliance and Governance
Our Solutions for Compliance and Governance offer a wide range of functionalities to fulfill legislative requirements. The solutions assist with: (i) enhancing business processes to generate faster time to market; (ii) complying with government regulations; and (iii) managing risk. With our solutions, customers can capture, classify, and manage large volumes of electronic data and documents—assisting with compliance to all regulatory requirements.
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Email Management
Our Solutions for Email Management are intended to allow customers to reduce the cost of overburdened email servers and help the organization mitigate its compliance and litigation risks associated with email content. Among other features, our email management solutions can assess, identify, and manage business content stored in email records in accordance with governmental regulations and with internal policies.
Corporate Services
Across most organizations, standard administrative services and functions support core business processes. The implementation of electronic workflow and documents can serve as an important factor in ensuring the success of an organization. Open Text Solutions for Corporate Services helps customers meet business goals through the management of processes such as: (i) environment, health and safety operations; (ii) facilities management; (iii) fleet and equipment management; (iv) legal support; (v) performance monitoring; (vi) quality control; (vii) travel management; and (ix) human resources.
Information Systems and Technology (“IT”)
Our IT solutions can help reduce costs in our customers’ IT departments through the development of efficient IT consolidation methods. Our ECM Solutions for IT help to deactivate legacy applications, as well as to reduce operating costs through data archiving services provided by either SAP AG (“SAP”) or Siebel Systems (“Siebel”), a division of Oracle Corporation (“Oracle”). Our solutions are designed to fit in an existing IT landscape by supporting many operating systems as well as databases and storage hardware. Our solutions streamline processes that include: (i) information lifecycle management; (ii) IT consolidation; (iii) IT operations; and (iv) SAP support.
Manufacturing and Operations
Our Solutions for Manufacturing and Operations can help customers improve the quality of their products, reduce product lifecycles, enforce standards, comply with regulations and decrease operational costs. These solutions address processes that include: (i) environment, health and safety operations; (ii) facilities management; (iii) fleet and equipment management; (iv) performance monitoring; (v) quality management; and (vi) product lifecycle management.
Vertical Industry
Our business solutions are also designed to meet regulatory compliance goals and the ROI goals of our customers, by resolving broad ECM challenges faced in particular industries. Many of these industries operate under strict government or industry regulation or require the dedication of considerable resources in the fulfillment of compliance functions.
Government
Our Solutions for Government are intended to provide government organizations with a fully-compliant framework that helps their agencies design Internet-based solutions to manage information and exchange knowledge. Through a focus on reducing or eliminating paper-based processes, our ECM solutions provide document and records management, secure project collaboration as well as workflow, search, and scheduling functionality for organizations in public services.
Legal
Open Text Solutions for Legal provide law firms with an integrated product offering developed specifically to support the business practices of law firms and to meet their proactive compliance needs
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throughout the lifecycle of the client engagement, from intake through to final disposition. Our software solutions provides an easy and efficient way to create, access, share, store, retrieve and retain critical information throughout the law firm.
Pharmaceutical and Life Sciences
Generally, pharmaceutical and life sciences companies operate in a highly-regulated environment with long product lifecycles. Their operations tend to be both data and document intensive. Our Solutions for Pharmaceutical and Life Sciences are aimed at supporting critical ECM processes in which the management of paper and electronic records and documents, in a manner which emulates best practices in compliance, is essential. Customers can choose from a variety of interfaces such as email, web browsers and office and specialty applications, and this flexibility allows users to work in the environment most natural to them.
Financial Services
Our Solutions for Financial Services are intended to: (i) enhance collaboration; (ii) ensure that customers minimize risk due to litigation or the failure to comply with industry standards or government regulations; and (iii) enable financial services organizations to foster a culture that facilitates the flow of knowledge and information throughout an organization in a compliant manner. Customers in numerous segments of the financial services industry including: (i) banking, (ii) securities sales and trading, and (iii) wealth management, have used our solutions.
Energy
Our Solutions for Energy are designed to meet the ECM requirements of the oil and gas, petrochemical, nuclear generation and electricity generation and transmission industries by facilitating the acquisition, discussion, revision and re-distribution of critical information.
Media
Open Text Solutions for Media can help customers to efficiently and economically manage the production, brand management, and distribution of rich media assets. Our Solutions for Media are designed to manage the explosive growth of digital content produced, shared, and distributed throughout the world.
Manufacturing and Production
Our Solutions for Manufacturing can accelerate critical information flow and reduce time to market for manufacturing companies. Our solutions aim to secure, age and archive information, thus allowing functional business units such as research, development, legal, finance and marketing to more easily retrieve and utilize data. This ability to retrieve and utilize data allows manufacturing companies to develop a best practices methodology to conduct their business through an understanding of lessons learned from past experiences. Thus, our Solutions for Manufacturing allow our customers to retain and harness key pieces of information that are essential to the successful development of future products and markets.
The Value Proposition of Our ECM Software Solutions
As demonstrated above, our overall value proposition is anchored in three main areas:
| 1. | Assure regulatory compliance by defining, securing, and controlling the process by which content can be managed as business records under appropriate policies for retention and destruction. |
| 2. | Maximize our customers’ ROI by maximizing their current investment in technology platforms. For instance, our software is compatible with many familiar software platforms, such as those provided by Microsoft Corporation (“Microsoft”), SAP and Oracle. |
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| 3. | Rationalize information to and from the customer’s enterprise applications to enhance operational efficiencies, reduce costs, and improve performance. |
Connectivity Solutions
For many IT professionals, integrating heterogeneous legacy environments with modern Microsoft Windows (“Windows”) desktops represents a technical and financial puzzle. As a result, we also provide connectivity solutions to help our customers respond to this challenge. Open Text’s Hummingbird Connectivity Solutions offer a suite of technology solutions that help organizations meet the challenges of integrating heterogeneous legacy environments with modern Windows desktops. Our Hummingbird Connectivity Solutions are multi-platform and provide software support for enterprise desktops on various Windows platforms including Windows NT, Windows 98, Windows ME, Windows 2000, Windows XP, Windows 2003 and Windows Vista. The Hummingbird Connectivity Solutions features a robust and complete security set across all of its components, which helps organizations meet their security and compliance objectives.
Our Recent Acquisitions
Our competitive position in the marketplace requires us to maintain a complex and evolving array of technologies, products, services and capabilities. The combination of technological complexity and rapid change within our industry makes it difficult for a single company to provide all of the technological solutions that its customers request. In light of the continually evolving marketplace in which we operate, and as part of our operations, we regularly evaluate various acquisition opportunities within the ECM marketplace and elsewhere in the high technology industry. If we determine that a potential acquisition opportunity is in the best interest of our shareholders, we will conduct negotiations with the relevant entity or entities to discuss the possibility of a merger, acquisition or other mutually beneficial combination of operations. Successful negotiations lead to an agreement to enter into a merger, acquisition or combination transaction, and eventually to a completed transaction that improves our ability to compete in our chosen industry.
In Fiscal 2007, we continued to invest in expanding and improving our ECM solutions by acquiring:
| • | Hummingbird Ltd (“Hummingbird”), a Toronto based global provider of ECM solutions, in October 2006; and |
| • | Momentum Systems Inc. (“Momentum”), a Virginia based company, which has been serving the government sector for over 12 years, in March 2007. |
Partner Program
We partner with prominent organizations in enterprise software and hardware in an effort to enhance the value of our ECM solutions and the investments our customers have made in their existing systems.
We are involved with three categories of partnerships and alliances, along with three levels of participation available in each category.
1. Services Partners are primarily system integrators and consulting and outsourcing firms. Their expertise may include: strategy, design, implementation, change management, project management, customization and specific vertical market and domain expertise. Service partners are able to combine their vision and their expertise with our products and services to deliver high-value customer solutions.
2. Solution Partners deliver comprehensive, repeatable solutions utilizing our products and services that target a specific business unit or vertical industry. Their expertise may include: vertical domain expertise, systems integration, and application development.
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3. Technology Partners are vendors whose software and/or hardware offerings both complement and extend the value of our product offerings. These partners offer our customers best-of-breed technology components, which can be seamlessly integrated with our products and services. Their expertise may include: (i) hardware and software components, (ii) database management systems, and (iii) specific application environments.
Open Text and Microsoft Corporation
Our strategic alliance with Microsoft offers improved integration between our ECM solutions and Microsoft’s desktop and server products, such as Microsoft “Share Point”. Our solutions increasingly rely on Microsoft Outlook as a ubiquitous user interface for accessing content in context. The integration of our solutions with Microsoft Outlook allows our customer to automatically extract information from enterprise resource planning, customer relationship management, ECM and other enterprise applications when such customer opens any piece of email. This context allows knowledge workers to make decisions and take actions, all through the familiar Microsoft Outlook interface. In addition to email, Microsoft SharePoint provides functionality for team collaboration and document sharing. We offer solutions that allow our customers to realize SharePoint’s ease of use, while seamlessly tying into established retention policies for enterprise content in areas such as archiving and records retention. In addition, we have expanded our support for the latest Microsoft database technology to help our customers manage and retrieve information stored on their servers.
Open Text and Oracle Corporation
This partnership extends our recently-launched enterprise solutions framework, and builds upon the decade-long database integration relationship between us and Oracle. The partnership with Oracle allows us to focus on building content-enabled solutions that solve complex, industry-specific problems. We build comprehensive solutions directly on the Oracle Content Database infrastructure using new Oracle Fusion technology. Our alliance with Oracle enables our customers to fortify their existing investments in accounts payable invoice processing, and report and output management solutions from Oracle. We provide a comprehensive portfolio of solutions that enhance Oracle applications such as PeopleSoft Enterprise, JD Edwards EnterpriseOne, JD Edwards World, Oracle E-Business Suite, and Siebel.
Open Text and SAP AG
We have shared two decades of partnership and co-development with SAP. Our solutions help customers improve the way they manage content from SAP systems in order to improve efficiency in key processes, manage compliance and reduce costs. Our targeted solutions let customers create, access, manage and securely archive all content for SAP systems, including data and documents. In addition, our solutions for SAP allow customers to address stringent requirements for risk reduction, operational efficiency and information technology consolidation. Our SAP solutions embrace the SAP environment including SAPGUI, Portal and Netweaver.
In May 2007, we announced a joint worldwide offering with SAP to help companies efficiently manage the growing amount of data and documents crucial to effective business operations. Using our Livelink ECM solutions, SAP will resell applications marketed under the names “SAP Archiving by Open Text” and “SAP Document Access by Open Text.” The archiving and document access applications are targeted toward the financial services industry as well as toward public sector organizations, healthcare companies and other service organizations.
Service Partners
Service partners include System Integrators and Consultants in particular industry segments that have specific named accounts which complement the efforts of our direct sales force. Our service partners often have domain expertise in application or industry segments, proven methodologies in specific market segments, the ability to provide business and/or technology consulting along with application development, work closely with internal direct sales and consulting services and offer rates aligned with our professional services rates.
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We have three levels of Service Partners. The “Select level” is our entry level which includes partners who are interested in integrating with our solutions or developing new applications based on our family of products. Select partners receive base-level support and partner-specific communications. The “Premier level” consists of customers that are actively reselling or co-selling their solutions with us. Premier partners receive a high level of support from us in return for a strong commitment to working with us in many areas. The “Platinum level” is our highest level of partnership. Partners at this level make significant commitments to their partnership with us by collaborating with all operational groups within our company to develop, sell, and service solutions based on the Open Text family of products. Platinum partners receive dedicated account management.
Solution Partners
Solution Partners have the proven ability to automate and re-engineer complex business processes that include vertical domain expertise, systems integration, and application development. Their service offerings often include implementation, consulting, customization, integration, training, and support. Solution Partners provide the subject matter and vertical application expertise that adds measurable value to a customer’s investment in one of our solutions, delivering high-value, and comprehensive, repeatable solutions.
Our partners can be any of the three types of partners listed above: Select, Premier or Platinum.
Competition
The market for our products is highly competitive and competition will continue to intensify as the ECM markets consolidate. We compete with a large number of ECM providers, management companies, web content management businesses, as well as management, workflow, document imaging and electronic document management companies. International Business Machines Corporation (“IBM”) is the largest company that competes directly with us in the ECM market. On October 12, 2006, IBM acquired FileNet Corporation (“FileNet”), a leading provider of business process and content management solutions. This acquisition of FileNet made IBM a more significant competitor for our business. Another significant competitor is EMC Corporation (“EMC”), a large storage technology company. On December 19, 2003, EMC acquired Documentum, Inc. (“Documentum”), a competitor to us in the content management market. As a result of the Documentum acquisition, EMC became a more significant competitor through its ability to offer both content management and storage management capabilities. In addition to the competition posed by both IBM and EMC, numerous smaller software vendors also compete in each product area. We also face competition from systems integrators who configure hardware and software into customized systems.
Large infrastructure vendors such as Oracle and Microsoft have developed products, or plan to offer products, in the content management market. Other large infrastructure vendors may follow course. On December 14, 2006, Oracle completed its acquisition of Stellent Inc., a global provider of ECM software solutions. The acquisition of Stellent is expected to complement and broaden Oracle’s existing content management solutions portfolio.
Software vendors such as CA, Inc. and Symantec Corporation have approached the ECM market from their distinct, individual market segments, and each company may compete more intensely with us in the future. Additionally, new competitors or alliances among existing competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of ongoing software industry consolidation.
We believe that the principal competitive factors affecting the market for our software products and services include: (i) vendor and product reputation; (ii) product quality, performance and price; (iii) the availability of software products on multiple platforms; (iv) product scalability; (v) product integration with other enterprise applications; (vi) software functionality and features; (vii) software ease of use; and (viii) the quality of professional services, customer support services and training. We believe the relative importance of each of these factors depends upon the concerns and needs of each specific customer.
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Research and Development of Our ECM Solutions
The industry in which we compete is subject to rapid technological developments, evolving industry standards, changes in customer requirements and competitive new products and features. As a result, our success, in part, depends on our ability to continue to enhance our existing products in a timely and efficient manner and to develop and introduce new products that meet customer needs while reducing total cost of ownership. To achieve these objectives we have made and expect to continue to make substantial investments in research and development, through internal and third-party development activities, third-party licensing agreements and potentially through technology acquisitions. Our research and development expenses were approximately $79.1 million for Fiscal 2007, $58.5 million for Fiscal 2006, and $65.1 million for Fiscal 2005.
New Product Developments
In February, we hosted “Summit 2007”, which is the worldwide user conference for Hummingbird customers and partners. At this conference, we unveiled details of our next generation ECM offering, which we have named DMX. This product represents the convergence of Open Text and Hummingbird technologies. With DMX, Hummingbird customers will have the opportunity to take advantage of a wider variety of “Open Text” applications, while retaining the ability to maximize the values that they have invested in their Hummingbird enterprise deployments.
In April 2007, we hosted two “LiveLinkUp Europe” events, one in Munich and one in London. During these “LiveLinkUp Europe” events, we outlined our strategic vision for the ECM marketplace and demonstrated how the new, enhanced capabilities of Livelink ECM 10 will help customers achieve enterprise transparency, thus allowing them to use Livelink ECM 10 to further their business objectives.
Our records management offerings continue to drive our strategic relations and tight integration with partners, such as Microsoft, Oracle and SAP. The introduction of Livelink ECM™—Records Management for use with SAP® applications was one of our most significant developments during Fiscal 2007. Livelink ECM™—Records Management will be marketed and supported by SAP and by Open Text. U.S. federal government customers of SAP and Open Text will now have a fully integrated solution to help them implement comprehensive records management programs.
Intellectual Property Rights
Our success and ability to compete depend on our ability to develop and maintain our intellectual property and proprietary technology and to operate without infringing on the proprietary rights of others. Our software products are generally licensed to our customers on a non-exclusive basis for internal use in a customer’s organization. We also grant rights in our intellectual property to third parties that allow them to market certain of our products on a non-exclusive or limited-scope exclusive basis for a particular application of the product(s) or to a particular geographic area.
We rely on a combination of copyright, patent, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights. We have obtained or applied for trademark registration for most strategic product names in most major markets. As of June 30, 2007, we own five U.S. patents which expire between 2017 and 2025, one Canadian patent which expires in 2017 and six other foreign patents which expire between 2022 and 2024. In addition, we have 14 U.S. patent applications, four Canadian patent applications and nine other foreign patent applications. Some of these patents and patent applications have been filed in other jurisdictions.
Customers
No single customer has accounted for more than 10% of our revenue in Fiscal 2005, Fiscal 2006 or Fiscal 2007.
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Employees
As of June 30, 2007, we employed a total of 2,704 individuals. The composition of this employee base is approximately as follows: (i) 592 employees in sales and marketing, (ii) 679 employees in product development, (iii) 556 employees in professional services, (iv) 463 employees in customer support, and (v) 414 employees in general and administrative roles. We believe that relations with our employees are strong.
Financial Information With Respect to Our Geographical Segments
For information regarding the financial performance and the results of operation of our geographic segments for each of the years in the three year period ended June 30, 2007, see Note 12 “Segment Information” in the Notes to Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K.
| Item 1A. | Risk Factors |
Risk Factors
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this Annual Report on Form 10-K. The actual results that we achieve may differ materially from any forward-looking statements, which reflect management’s opinions only as of the date hereof. You should carefully review the following factors, as well as the other information set forth herein, when evaluating us and our business. If any of the following risks were to occur, our business, financial condition and results of operations would likely suffer. In that event, the trading price of our Common Shares would likely decline. Such risks are further discussed in the information we file with the SEC throughout the course of the year. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The risks and uncertainties described below are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies.
Our acquisition of Hummingbird may adversely affect our operations and finances in the short term
On October 2, 2006, we acquired all of the issued and outstanding common shares of Hummingbird. The Hummingbird shares were acquired for cash. To help pay for the Hummingbird acquisition, we needed to borrow the necessary funds from a syndicate of leading financial institutions. The interest costs associated with this credit facility will materially increase our operating expenses, which may materially and adversely affect our profitability as well as the price of our Common Shares. Our ability to pay interest and repay the principal for the indebtedness we incurred as a result of our acquisition of Hummingbird depends upon our ability to manage our business operations and the other factors discussed below in this Item 1A. The Hummingbird acquisition represents a significant and unique opportunity for our business. However, the size of the acquisition and the inevitable integration challenges that will result from the acquisition may divert management’s attention from the normal daily operations of our existing businesses, products and services. We cannot ensure that we will be successful in retaining key Hummingbird employees. In addition, our operations may be disrupted if we fail to adequately retain and motivate all of the employees of the newly merged entity.
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Our success depends on our relationships with strategic partners
We rely on close cooperation with partners for sales and product development as well as for the optimization of opportunities which arise in our competitive environment. If any of our partners should decide for any reason to terminate or reduce its cooperative efforts with us, our business, operating results, and financial condition may be adversely affected.
If we do not continue to develop new technologically advanced products, future revenues will be negatively affected
Our success depends upon our ability to design, develop, test, market, license and support new software products and enhancements of current products on a timely basis in response to both competitive threats and marketplace demands. In addition, new software products and enhancements must remain compatible with standard platforms and file formats. We continue to enhance the capability of our Livelink software to enable users to form workgroups and collaborate on private intranets as well as on the Internet. Often, we must integrate software licensed or acquired from third parties with our proprietary software to create or improve our products. These products are important to the success of our strategy. If we are unable to achieve a successful integration with third party software, we may not be successful in developing and marketing our new software products and enhancements. If we are unable to successfully integrate the technologies to develop new software products and enhancements to existing products, or to complete products currently under development which we license or acquire from third parties, our operating results will materially suffer. In addition, if the integrated or new products or enhancements do not achieve acceptance by the marketplace, our operating results will materially suffer. Also, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and, as a result, our business, as well as our ability to compete in the marketplace, would be materially harmed.
Our investment in our current research and development efforts may not provide a sufficient, timely return
The development of ECM software products is a costly, complex and time-consuming process, and the investment in ECM software product development often involves a long wait until a return is achieved on such an investment. We make and will continue to make significant investments in software research and development and related product opportunities. Investments in new technology and processes are inherently speculative. Commercial success depends on many factors including the degree of innovation of the products developed through our research and development efforts, sufficient support from our strategic partners, and effective distribution and marketing. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development. These expenditures may adversely affect our operating results if they are not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts in order to maintain our competitive position. However, significant revenue from new product and service investments may not be achieved for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced for our current or historical products and services.
If our products and services do not gain market acceptance, we may not be able to increase our revenues
We intend to pursue our strategy of growing the capabilities of our ECM software offerings through our proprietary research and the development of new product offerings. In response to customer requests, we continue: (i) to enhance Livelink and many of our optional components; and (ii) to set the standard for ECM capabilities. The primary market for our software and services is rapidly evolving which means that the level of acceptance of products and services that have been released recently or that are planned for future release by the marketplace is not certain. If the markets for our products and services fail to develop, develop more slowly than expected or become subject to intense competition, our business will suffer. As a result, we may be unable to: (i) successfully market our current products and services, (ii) develop new software products, services and
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enhancements to current products and services, (iii) complete customer installations on a timely basis, or (iv) complete products and services currently under development. If our products and services are not accepted by our customers or by other businesses in the marketplace, our business and operating results will be materially affected.
Current and future competitors could have a significant impact on our ability to generate future revenue and profits
The markets for our products are intensely competitive, and are subject to rapid technological change and other pressures created by changes in our industry. We expect competition to increase and intensify in the future as the pace of technological change and adaptation quickens and as additional companies enter into each of our markets. Numerous releases of competitive products have occurred in recent history and may be expected to continue in the near future. We may not be able to compete effectively with current competitors and potential entrants into our marketplace. We could lose market share if our current or prospective competitors introduce new competitive products, add new functionality to existing products, acquire competitive products, reduce prices or form strategic alliances with other companies. If other businesses were to engage in aggressive pricing policies with respect to competing products, or if the dynamics in our marketplace resulted in increasing bargaining power by the consumers of our products and services, we would need to lower the prices we charge for the products we offer. This could result in lower revenues or reduced margins, either of which may materially and adversely affect our business and operating results.
We are confronting two inexorable trends in our industry; the consolidation of our competitors and the commoditization of our products and services
EMC’s acquisition of Documentum in December 2003 and IBM’s acquisition of FileNet in October 2006 have changed the marketplace for our goods and services. As a result of these acquisitions, two comparable competitors to our company have been replaced by larger and better capitalized companies. In addition, other large corporations with considerable financial resources either have products that compete with the products we offer, or have the ability to encroach on our competitive position within our marketplace. These large, well-capitalized companies have the financial resources to engage in competition with our products and services on the basis of marketing, services or support. They also have the ability to introduce items that compete with our maturing products and services. The threat posed by larger competitors and the goods and services that these companies may be able to produce at a lower cost to our target customers may materially increase our expenses and reduce our revenues. Any material adverse effect on our revenue or cost structure may materially reduce the price of our Common Shares.
Acquisitions, investments, joint ventures and other business initiatives may negatively affect our operating results
We continue to seek out opportunities to acquire or invest in businesses, products and technologies that expand, complement or otherwise relate to our current business. We also consider from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. These activities create risks such as the need to integrate and manage the businesses and products acquired with our own business and products, additional demands on our management, resources, systems, procedures and controls, disruption of our ongoing business, and diversion of management’s attention from other business concerns. Moreover, these transactions could involve: (i) substantial investment of funds; (ii) substantial investment with respect to technology transfers; and (iii) the acquisition or disposition of product lines or businesses. Also, such activities could result in one-time charges and expenses and have the potential to either dilute the interests of existing shareholders or result in the assumption of debt. Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources of our company. Any such activity may not be successful in generating revenue, income or other returns to us, and the financial or other resources committed to such activities will not be available to us for
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other purposes. Our inability to address limited growth opportunities for products, as well our inability to address other risks associated with other acquisitions or investments in businesses, may negatively affect our operating results. In addition, impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings which, in turn, may have an adverse material affect on the price of our common shares.
Businesses we acquire may have disclosure controls and procedures and internal controls over financial reporting that are weaker than or otherwise not in conformity with ours
We have a history of acquiring complementary businesses with varying levels of organizational size and complexity. Upon consummating an acquisition, we seek to implement our disclosure controls and procedures as well as our internal controls over financial reporting at the acquired company as promptly as possible. Depending upon the size and complexity of the business acquired, the implementation of our disclosure controls and procedures as well as the implementation of our internal controls over financial reporting at an acquired company may be a lengthy process. Typically, we conduct due diligence prior to consummating an acquisition; however, our integration efforts may periodically expose deficiencies in the disclosure controls and procedures as well as in internal controls over financial reporting of an acquired company. We expect that the process involved in completing the integration of our own disclosure controls and procedures as well as our own internal controls over financial reporting at an acquired business will sufficiently correct any identified deficiencies. However, if such deficiencies exist, we may not be in a position to comply with our periodic reporting requirements and, as a result, our business and financial condition may be materially harmed.
We must continue to manage our growth or our operating results could be adversely affected
Our markets have continued to evolve at a rapid pace. Moreover, we have grown significantly through acquisitions in the past and continue to review acquisition opportunities as a means of increasing the size and scope of our business. Finally, we have been subject to increased regulation, including various NASDAQ rules and Section 404 of the Sarbanes-Oxley Act, 2002, which has necessitated a significant use of our resources to comply with the increased level of regulation on a timely basis. Our growth, coupled with the rapid evolution of our markets and more stringent regulations, have placed, and will continue to place, significant strains on our administrative and operational resources and increased demands on our internal systems, procedures and controls. Our administrative infrastructure, systems, procedures and controls may not adequately support our operations or compliance with such regulations. In addition, our management may not be able to achieve the rapid, effective execution of the product and business initiatives necessary to successfully implement our operational and competitive strategy and to comply with all regulatory rules. If we are unable to manage growth effectively, or comply with such new regulations, our operating results will likely suffer. Our inability to manage growth or adapt to regulatory changes may also adversely affect our compliance with our periodic reporting requirements or listing standards, which could result in the delisting of our common shares from the NASDAQ stock market or in our failure to comply with the rules and the regulations of the SEC.
Recently enacted and proposed changes in securities laws and related regulations could result in increased costs to us
Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes- Oxley Act, 2002, and recent rules proposed and enacted by the SEC and NASDAQ, have materially increased our expenses as we respond to the these changes. In particular, compliance with the requirements of Section 404 of the Sarbanes—Oxley Act, 2002, has resulted in a higher level of internal costs and fees from our independent accounting firm and as well as from external consultants. These rules could also adversely affect our ability to obtain certain types of insurance at a reasonable cost, including director and officer liability insurance. As a result, we may be forced to accept reduced policy limits and coverage and/or incur substantially higher premiums and related costs to obtain the same or similar coverage. The increased difficulty to obtain affordable director and officer liability insurance could also make it more difficult for us to
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attract and retain qualified persons to serve: (i) on our Board of Directors; (ii) on committees of our Board of Directors; or (iii) as executive officers.
Changes in accounting may affect our reported earnings and operating income
Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business, such as revenue recognition for our products and services, accounting for investments, and treatment of goodwill or amortizable intangible assets, are highly complex and involve subjective judgments. Changes in these rules or their interpretation could significantly change our reported earnings and operating income and could add significant volatility to those measures, but may have no effect on our generation of cash flow from operations. See Note 2 in “Item 8. Financial Statements and Supplementary Data” and see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies and Estimates” each contained within this Annual Report on Form 10-K.
If we are not able to attract and retain top employees, our ability to compete may be harmed
Our performance is substantially dependent on the performance of our executive officers and key employees. The loss of the services of any of our executive officers or other key employees could significantly harm our business. We do not maintain “key person” life insurance policies on any of our employees. Our success is also highly dependent on our continuing ability to identify, hire, train, retain and motivate highly qualified management, technical, sales and marketing personnel. In particular, the recruitment of top research developers and experienced salespeople remains critical to our success. Competition for such people is intense, substantial and continuous, and we may not be able to attract, integrate or retain highly qualified technical, sales or managerial personnel in the future. In addition, in our effort to attract and retain critical personnel, we may experience increased compensation costs that are not offset by either improved productivity or higher prices for our products or services.
Our awards of stock options to employees may have an adverse impact on our operations
A portion of our total compensation program for our executive officers and key personnel includes the award of options to buy our Common Shares. If the price of our Common Shares performs poorly, such performance may adversely affect our ability to retain or attract critical personnel. In addition, any changes made to our stock option policies, or to any other of our compensation practices, which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and motivate existing personnel and recruit new personnel.
The length of our sales cycle can fluctuate significantly which could result in significant fluctuations in license revenue being recognized from quarter to quarter
The decision by a customer to purchase our products often involves a comprehensive implementation process across our customer’s network or networks. As a result, licenses of these products may entail a significant commitment of resources by prospective customers, accompanied by the attendant risks and delays frequently associated with significant expenditures and lengthy sales cycle and implementation procedures. Given the significant investment and commitment of resources required by an organization to implement our software, our sales cycle may be longer compared to companies in other industries. Over the past fiscal year, we have experienced a lengthening of our sales cycle as customers include more personnel in their decisions and focus on more enterprise-wide licensing deals. In an economic environment of reduced information technology spending, it may take several months, or even several quarters, for marketing opportunities to materialize. If a customer’s decision to license our software is delayed or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenue from these licenses would be delayed. Such delays could cause our revenues to be lower than expected in a particular period.
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Our international operations expose us to business risks that could cause our operating results to suffer
We intend to continue to make efforts to increase our international operations and anticipate that international sales will continue to account for a significant portion of our revenue. We have increased our presence in the European market, especially since our acquisition of IXOS Software AG (“IXOS”). These international operations are subject to certain risks and costs, including the difficulty and expense of administering business and compliance abroad, compliance with domestic and foreign laws (including without limitation domestic and international import and export laws and regulations), costs related to localizing products for foreign markets, and costs related to translating and distributing products in a timely manner. International operations also tend to be subject to a longer sales and collection cycle. In addition, regulatory limitations regarding the repatriation of earnings may adversely affect the transfer of cash earned from foreign operations. Significant international sales may also expose us to greater risk from political and economic instability, unexpected changes in Canadian, United States or other governmental policies concerning import and export of goods and technology, regulatory requirements, tariffs and other trade barriers. Additionally, international earnings may be subject to taxation by more than one jurisdiction, which may materially adversely affect our effective tax rate. Also, international expansion may be more difficult, time consuming, and costly. As a result, if revenues from international operations do not offset the expenses of establishing and maintaining foreign operations, our operating results will suffer. Moreover, in any given quarter, foreign exchange rates may adversely affect our revenue, earnings or other financial measures.
Our expenses may not match anticipated revenues
We incur operating expenses based upon anticipated revenue trends. Since a high percentage of these expenses are relatively fixed, a delay in recognizing revenue from transactions related to these expenses could cause significant variations in operating results from quarter to quarter and, as a result, such a delay could materially reduce operating income. If these expenses are not subsequently followed by revenues, our business, financial condition, or results of operations could be materially and adversely affected. In addition, in July 2005, we announced our 2006 restructuring initiative to restructure our operations with the intention of streamlining our operations. Subsequently, in October 2006 we announced our commitment to a separate restructuring initiative in response to the Hummingbird acquisition. We may incur costs associated with combining Hummingbird’s operations with our own operations beyond those costs contemplated in the Hummingbird restructuring initiative, which may be substantial. Some of these restructuring costs may have to be treated as expenses which would decrease our net income and earnings per share for the periods in which those adjustments are made. We will continue to evaluate our operations, and may propose future restructuring actions as a result of changes in the marketplace, including the exit from less profitable operations or the decision to terminate services which are not valued by our customers. Any failure to successfully execute these initiatives on a timely basis may have a material adverse impact on our operations.
Our products may contain defects that could harm our reputation, be costly to correct, delay revenues, and expose us to litigation
Our products are highly complex and sophisticated and, from time to time, may contain design defects or software errors that are difficult to detect and correct. Errors may be found in new software products or improvements to existing products after commencement of shipments to our customers. If these defects are discovered, we may not be able to successfully correct such errors in a timely manner. In addition, despite the extensive tests we conduct on all our products, we may not be able to fully simulate the environment in which our products will operate and, as a result, we may be unable to adequately detect the design defects or software errors which may become apparent only after the products are installed in an end-user’s network. The occurrence of errors and failures in our products could result in the delay or the denial of market acceptance of our products; alleviating such errors and failures may require us to make significant expenditure of our resources. The harm to our reputation resulting from product errors and failures may be materially damaging. Since we regularly provide a warranty with our products, the financial impact of fulfilling warranty obligations may be significant in the future. Our agreements with our strategic partners and end-users typically contain provisions designed to limit
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our exposure to claims. These agreements usually contain terms such as the exclusion of all implied warranties and the limitation of the availability of consequential or incidental damages. However, such provisions may not effectively protect us against claims and the attendant liabilities and costs associated with such claims. Although we maintain errors and omissions insurance coverage and comprehensive liability insurance coverage, such coverage may not be adequate to cover all such claims. Accordingly, any such claim could negatively affect our financial condition.
Failure to protect our intellectual property could harm our ability to compete effectively
We are highly dependent on our ability to protect our proprietary technology. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights. Although we hold certain patents and have other patents pending, our general strategy is to not seek patent protection. We intend to protect our rights vigorously; however, there can be no assurance that these measures will, in all cases, be successful. Enforcement of our intellectual property rights may be difficult, particularly in some nations outside of North America in which we seek to market our products. While U.S. and Canadian copyright laws, international conventions and international treaties may provide meaningful protection against unauthorized duplication of software, the laws of some foreign jurisdictions may not protect proprietary rights to the same extent as the laws of Canada or of the United States. The absence of harmonized intellectual property laws makes it more difficult to ensure consistent respect for our proprietary rights. Software piracy has been, and is expected to be, a persistent problem for the software industry, and piracy of our products represents a loss of revenue to us. Certain of our license arrangements have required us to make a limited confidential disclosure of portions of the source code for our products, or to place such source code into an escrow for the protection of another party. Despite the precautions we have taken, unauthorized third parties, including our competitors, may be able to: (i) copy certain portions of our products; or (ii) reverse engineer or obtain and use information that we regard as proprietary. Also, our competitors could independently develop technologies that are perceived to be substantially equivalent or superior to our technologies. Our competitive position may be adversely affected by our possible inability to effectively protect our intellectual property.
Other companies may claim that we infringe their intellectual property, which could materially increase costs and materially harm our ability to generate future revenue and profits
Claims of infringement are becoming increasingly common as the software industry develops and as related legal protections, including patents, are applied to software products. Although we do not believe that our products infringe on the rights of third-parties, third-parties may assert infringement claims against us in the future. Although most of our technology is proprietary in nature, we do include certain third party software in our products. In these cases, this software is licensed from the entity holding our intellectual property rights. Although we believe that we have secured proper licenses for all third-party software that is integrated into our products, third parties may assert infringement claims against us in the future. Any such assertion may result in litigation or may require us to obtain a license for the intellectual property rights of third-parties. Such licenses may not be available, or they may not be available on reasonable terms. In addition, such litigation could be disruptive to our ability to generate revenue and may result in significantly increased costs as a result of our defense against those claims or our attempt to license the patents or rework our products to ensure they comply with judicial decisions. Any of the foregoing could have a significant adverse impact on our ability to generate future revenue and profits.
The loss of licenses to use third party software or the lack of support or enhancement of such software could adversely affect our business
We currently depend upon a limited number of third-party software products. If such software products were not available, we may experience delays or increased costs in the development of licenses for our products. For a limited number of product modules, we rely on software products that we license from third-parties,
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including software that is integrated with internally developed software and which is used in our products to perform key functions. These third-party software licenses may not continue to be available to us on commercially reasonable terms, and the related software may not continue to be appropriately supported, maintained, or enhanced by the licensors. The loss by us of the license to use, or the inability by licensors to support, maintain, and enhance any of such software, could result in increased costs or in delays or reductions in product shipments until equivalent software is developed or licensed and integrated with internally developed software. Such increased costs or delays or reductions in product shipments could adversely affect our business.
A reduction in the number or sales efforts by distributors could materially impact our revenues
A significant portion of our revenue is derived from the license of our products through third parties. Our success will depend, in part, upon our ability to maintain access to existing channels of distribution and to gain access to new channels if and when they develop. We may not be able to retain a sufficient number of our existing distributors or develop a sufficient number of future distributors. Distributors may also give higher priority to the sale of products other than ours (which could include competitors’ products) or may not devote sufficient resources to marketing our products. The performance of third party distributors is largely outside of our control and we are unable to predict the extent to which these distributors will be successful in marketing and licensing our products. A reduction in sales efforts, a decline in the number of distributors, or a decision by our distributors to discontinue the sale of our products could materially reduce revenue.
Our products rely on the stability of infrastructure software that, if not stable, could negatively impact the effectiveness of our products, resulting in harm to our reputation and business
Our developments of Internet and intranet applications depend and will depend on the stability, functionality and scalability of the infrastructure software of the underlying intranet, such as the infrastructure software produced by Sun Microsystems, Inc., Hewlett-Packard Company, Oracle, Microsoft and others. If weaknesses in such infrastructure software exist, we may not be able to correct or compensate for such weaknesses. If we are unable to address weaknesses resulting from problems in the infrastructure software such that our products do not meet customer needs or expectations, our reputation, and consequently, our business may be significantly harmed.
Business disruptions may adversely affect our operations
Our business and operations are highly automated and a disruption or failure of our systems may delay our ability to complete sales and to provide services. A major disaster or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations. This possible disruption may materially and adversely affect our future operating results.
Our quarterly revenues and operating results are likely to fluctuate which could materially impact the price of our Common Shares
We experience, and we are likely to continue to experience, significant fluctuations in quarterly revenues and operating results caused by many factors, including:
| • | Changes in the demand for our products and for the products of our competitors; |
| • | The introduction or enhancement of products by us and by our competitors; |
| • | Market acceptance of enhancements or products; |
| • | Delays in the introduction of products or enhancements by us or by our competitors; |
| • | Customer order deferrals in anticipation of upgrades and new products; |
| • | Changes in the lengths of sales cycles; |
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| • | Changes in our pricing policies or those of our competitors; |
| • | Delays in product installation with customers; |
| • | The mix of distribution channels through which products are licensed; |
| • | The mix of products and services sold; |
| • | The mix of international and North American revenues; |
| • | Foreign currency exchange rates; |
| • | Acquisitions; |
| • | The timing of restructuring charges taken in connection with any completed acquisition; |
| • | General economic and business conditions; and |
| • | General political developments, such as international trade policies and the war on terrorism. |
A general weakening of the global economy, or economic or business uncertainty created by North American or international political developments, could cancel or delay customer purchases. A cancellation or deferral of even a small number of licenses or delays in the installation of our products could have a material adverse effect on our operations in any particular quarter. As a result of the timing of product introductions and the rapid evolution of our business as well as of the markets we serve, we cannot predict whether seasonal patterns experienced in the past will continue. For these reasons, you should not rely upon period-to-period comparisons of our financial results to forecast future performance. Our quarterly revenue and operating results may vary significantly and this possible variance could materially reduce the market price of our Common Shares.
The volatility of our stock price could lead to losses by shareholders
The market price of our Common Shares has been subject to wide fluctuations. Such fluctuations in market price may continue in response to: (i) quarterly variations in operating results; (ii) announcements of technological innovations or new products that are relevant to our industry; (iii) changes in financial estimates by securities analysts; or (iv) other events or factors. In addition, financial markets experience significant price and volume fluctuations that particularly affect the market prices of equity securities of many technology companies. These fluctuations have often resulted from the failure of such companies to meet market expectations in a particular quarter, and thus such fluctuations may or may not be related to the underlying operating performance of such companies. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our Common Shares. Occasionally, periods of volatility in the market price of a company’s securities may lead to the institution of securities class action litigation against a company. Due to the volatility of our stock price, we may be the target of such securities litigation in the future. Such legal action could result in substantial costs to defend our interests and a diversion of management’s attention and resources, each of which would have a material adverse effect on our business and operating results.
We may become involved in litigation that may materially adversely affect us
From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operations or financial condition.
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We may have exposure to greater than anticipated tax liabilities
We are subject to income and other taxes in a variety of jurisdictions and our tax structure is subject to review by both domestic and foreign taxation authorities. The determination of our worldwide provision for income taxes and of other tax liabilities requires significant judgment. Although we believe our estimates are reasonable, the ultimate outcome with respect to the taxes we owe may differ from the amounts recorded in our financial statements, and this difference may materially affect our financial results in the period or periods for which such determination is made.
| Item 1B. | Unresolved Staff Comments |
None.