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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
MARCH 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
1-15681
webMethods, Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization) |
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54-1807654
(I.R.S. Employer
Identification No.) |
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3877 Fairfax Ridge Road, South Tower, Fairfax, Virginia
(Address of Principal Executive Offices) |
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22030
(Zip Code) |
Registrant’s telephone number, including area
code: (703) 460-2500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
Yes x No o
As of September 30, 2004, there were 53,101,682 shares of
the registrant’s Common Stock outstanding. The aggregate
market value of such shares held by non-affiliates of the
registrant, based upon the closing sale price ($5.32) of such
shares on the Nasdaq National Market for such date, was
approximately $226,314,700. Shares of the registrant’s
Common Stock held by each executive officer and director of the
registrant, and by each entity publicly reporting that it owns
5% or more of the outstanding shares of the registrant’s
Common Stock, have been excluded, as such persons may be deemed
to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.
As of June 10, 2005, there were outstanding 53,371,621
shares of the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be used in
connection with the registrant’s 2005 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this Form 10-K to the extent stated. That Proxy Statement
will be filed within 120 days of registrant’s fiscal
year ended March 31, 2005.
WEBMETHODS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2005
TABLE OF CONTENTS
PART I
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Examples of
forward-looking statements include, but are not limited to,
(i) projections of revenue, costs or expense, margins,
income or loss, earnings or loss per share, capital
expenditures, cash requirements or other financial items,
sufficiency of working capital and projections regarding the
market for webMethods’ software and services,
(ii) statements of the plans, objectives or expectations of
webMethods, Inc. or its management, including the development or
enhancement of software, development and continuation of
strategic partnerships and alliances, contributions to
webMethods’ revenue by its business partners,
implementation and effect of sales and marketing initiatives by
webMethods, financial results of webMethods, Inc. and its
subsidiaries, financial results within geographic or specific
vertical markets and the allocation of resources to those
markets, predictions of the timing and type of customer or
market reaction to sales and marketing initiatives, the ability
to control expenses, anticipated cost savings or expense
reduction strategies, future hiring, webMethods’ business
strategy and the execution on it and actions by customers and
competitors, (iii) statements of future economic
performance or economic conditions, the continuation of patterns
identified as trends or seasonal occurrences or the impact of
recent or anticipated changes in accounting standards and
(iv) assumptions underlying any of the foregoing. In some
instances, forward-looking statements can be identified by the
use of the words “believes,” “anticipates,”
“plans,” “expects,” “intends,”
“may,” “will,” “should,”
“estimates,” “predicts,”
“continue,” the negative thereof or similar
expressions. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, our
expectations reflected in the forward-looking statements could
prove to be incorrect, and actual results could differ
materially from those indicated by the forward-looking
statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are
subject to risks and uncertainties, including (but not limited
to) those discussed in this Item 1 under the caption
“Factors That May Affect Future Operating Results.”
Achieving the future results or accomplishments described or
projected in forward-looking statements depends upon events or
developments that are often beyond our ability to control. All
forward-looking statements and all reasons why actual results
may differ that are included in this report are made as of the
date of this report, and webMethods disclaims any obligation to
publicly update or revise such forward-looking statements or
reasons why actual results may differ.
OVERVIEW
webMethods is a leading provider of business integration and
optimization software. Our solutions enable organizations to
deliver strategic applications to the business faster while
allowing them to understand what is happening with their
business in real-time and to predict what can be expected to
happen. webMethods calls this Business Process
Productivitytm.
We use the term “Business Process Productivity” to
describe the desire of organizations to increase the efficiency
of their activities, improve the ability of the enterprise to
adapt to changing market conditions, and create competitive
advantage through a focus on the business processes that run
their organizations. We believe that our primary offering, the
webMethods
Fabrictm
product suite, is the only business integration and optimization
suite on the market developed specifically to address the
diverse and comprehensive requirements to achieve business
process productivity.
webMethods Fabric gives customers the ability to integrate,
assemble, and optimize their mission critical business
processes. webMethods Fabric does this by helping organizations
link their enterprise software applications and databases,
connect electronically with their trading partners, automate and
optimize the business processes that span these systems and
interfaces, and implement software
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applications that provide people with the information and
capabilities necessary to run the business more effectively.
Customer benefits include:
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eliminating significant costs from the organization’s
information technology environment, |
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automating and streamlining interactions with their customers
and suppliers, |
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becoming more competitive by capturing more market share in
terms of increased revenue from new and existing customers, |
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gaining more timely access to information to make better
decisions about the business, and |
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allowing staff to focus their attention on higher value business
activities. |
webMethods Fabric builds upon our history as a leader and
innovator in the business integration market. Introduced in
October 2004, the webMethods Fabric product suite unifies the
enterprise application integration (“EAI”) and
business-to-business (“B2B”) capabilities for which
webMethods is widely known, with our existing Business Process
Management (“BPM”) and workflow functionality and the
Business Activity Monitoring (“BAM”), portal, and Web
services technologies we acquired in October 2003. We believe
that by integrating these particular capabilities into a single
product suite, taking advantage of synergies between different
elements of the solution, and merging the products to provide a
seamless user experience, we have created a unique offering in
the marketplace. By combining best-of-breed capabilities into
one platform, we offer customers the ability to lower their
total cost of ownership and to streamline the overall
implementation process relative to using different stand-alone
software products.
webMethods Fabric is based on a Service-Oriented Architecture
(“SOA”) foundation. SOA enables organizations to
extend the value of their existing IT assets, transforming them
into reusable components that can be applied to new business
needs. Customers who want “true SOA” need the
infrastructure software to provide an integrated approach to the
creation, organization, management, and security of Web
services. webMethods Fabric incorporates an integrated registry
and management, as well as security, for Web services. Our
approach offers an alternative to custom software development,
helping our customers deliver software applications to the
business faster and with less risk, while real-time monitoring
and patent-pending analytics gives organizations the insight
necessary for achieving continuous process improvements in their
business.
In addition to our webMethods Fabric product suite, we have a
strategy to combine our software capabilities, professional
services, strategic partnerships, and domain expertise into
well-defined solutions that address specific horizontal and
vertical industry problems. Our first planned solutions are in
the areas of payment and lending processing in the financial
services industry, integration in the retail industry and
regulatory compliance requirements impacting many organizations.
We market and sell our products and solutions primarily to the
largest 2,000 corporations worldwide (the “Global
2000”) and major government agencies. In our fiscal year
ended March 31, 2005, we added approximately 145 new
customers, with no single customer accounting for more than 10%
of our revenue in any quarter of that fiscal year. As of
March 31, 2005, we had approximately 1,300 customers around
the world, distributed across our target verticals in
manufacturing, process industries (such as chemicals, oil and
gas, life sciences, metals, paper and plastics), financial
services, consumer goods manufacturing and retail, government
and telecommunications.
STRATEGY
Our goal is to be the provider of choice for business
integration and optimization solutions in our target industries
and markets, and to establish webMethods as the benchmark for
companies in our class.
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We believe that our strategy enables us to achieve these
objectives. The key elements of this strategy include the
following:
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Focus on Customer Success. A core part of our strategy is
to ensure that customers are successful with our solutions. We
invest in resources and programs to improve our customers’
success by reducing the time needed to deploy our software,
minimizing long-term cost of ownership, and maximizing their
return on investment for their integration projects. We attempt
to accomplish this by working closely with customers to
understand their business needs, timelines, and associated
project risks, and supporting them to ensure they achieve their
goals. As a measure of success, we track the number of customer
projects that go into production. Ensuring that our customers
successfully implement our software in a timely manner enables
them to achieve a greater return on their investment and, in
many cases, encourages them to purchase additional software for
other projects. We believe that having satisfied customers who
are willing to serve as references for prospective customers in
our sales efforts is a significant competitive advantage. |
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Extend the Value of Integration Solutions to Business
Users. The role of integration software and solutions has
historically been viewed as technical in nature and the
principal domain of Information Technology personnel. However,
through our investments and innovation in BPM and BAM, we are
increasingly able to demonstrate and deliver value that directly
touches business users within the enterprise. Through our
integration and BPM capabilities, we are able to not only link
systems together, but transparently integrate the human
workflows involved in the business processes that span these
systems. BAM provides real-time visibility into these business
processes, giving users the ability to track key performance
indicators of their business, as well as to anticipate
exceptions requiring their attention. Together, BPM and BAM
support a continuous process improvement cycle, with BPM
providing the means to maximize process efficiencies and BAM
providing the feedback necessary to enhance an
organization’s processes. We believe that our BPM and BAM
capabilities differentiate webMethods and provide us with
important new selling opportunities with new and existing
customers. |
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Value Based Selling. In order to successfully market and
sell software and service solutions to global organizations, we
have implemented a value based sales methodology that focuses on
the measurement and attainment of the business value being
created by our solutions. This methodology allows us to work
with our customers and prospects during the early stages of the
sales cycle to identify the projects that would provide the most
payback, or return on investment, to the individual lines of
business. We then involve the business users in defining the
ways the identified business process is to be improved or
optimized. We often conduct a proof of concept, which allows the
business owner to experience the proposed solution. This sales
methodology enables us to build the business case or value to be
attained from our proposed solution. Our Professional Services
organization then provides an implementation plan targeted at
the achievement of this value. This methodology allows our
customers to understand the various cost components of the
proposed solutions and the anticipated value they can receive by
deploying it. |
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Provide the Most Compelling Solution. We believe that we
offer one of the broadest and most comprehensive business
integration solutions currently available on the market. We have
used a strategy of internal product development complemented
with strategic technology acquisitions to round out our
offerings. Furthermore, our approach has been to integrate our
various product capabilities into a single, unified platform. We
believe that while each one of our products individually brings
value and shows technical leadership, it is the combination of
these capabilities in one solution that differentiates us from
our competition. |
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Continued Leadership in Web Services and Service-Oriented
Architecture. We believe that Web services will play an
increasingly important role in integration solutions, and that
support for related standards and SOA is an important
requirement for success. webMethods was an early pioneer in the
use of SOA for integration, as evidenced by our proposal to the
World Wide Web Consortium (“W3C”) in 1997 to
standardize the way that applications interact across the
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service-oriented and XML-based protocols. We believe that we
have successfully built upon this heritage with our continued
involvement in various Web services standards bodies, our
acquisition in October 2003 of a unique Web services management
framework developed by The Mind Electric, and ongoing product
innovation in the area of Web services quality-of-service
monitoring. webMethods has been recognized as a leader in Web
services by industry analysts, and we currently serve on the
Board of Directors of the Web Services Interoperability
organization (“WS-I”). |
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Partner with Major Systems Integrators. We continue to
expand and strengthen our alliances with major system
integrators to increase our sales and services leverage. We have
established a series of formal alliance relationships with major
system integrators such as Accenture, Atos Origin, BearingPoint,
Capgemini, CGI-AMS, Computer Sciences Corporation
(“CSC”), Crowe Chizek, Deloitte, Electronic Data
Systems Corporation (“EDS”), Hewlett-Packard
(“HP”) and Tata Consulting Services (“TCS”).
Many of these partners have established formal webMethods
practices, increasing the number of webMethods-trained resources
available to assist our customers in their implementations of
our solutions. As a result of this expanded knowledge-base, as
well as implementation successes on which the systems integrator
partner and webMethods have worked jointly, these alliances form
a virtual extension of our direct sales force. This results in
the third-party introduction and subsequent endorsement of
webMethods’ solutions in opportunities of which we may not
otherwise be aware, or with customers or prospects of the
partner with which we may not otherwise already be engaged. |
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Leverage Strategic Software and Other Vendor
Partnerships. We have relationships with enterprise
application software and other vendors, such as Global eXchange
Services (“GXS”), Oracle Corporation (including both
the Peoplesoft and JD Edwards product lines), SAP AG and Siebel
Systems, whereby they embed a limited-use implementation of
webMethods’ software into their solutions and/or resell
components of our product line. As a result, customers who
license products in which our software is embedded receive
access to our technology. We believe these customers are good
candidates to purchase additional webMethods software, and that
our association with the major enterprise application vendors
distinguishes us from many of our competitors, providing us with
an incumbency advantage that positions webMethods as the lowest
risk option for customers of these software products. |
PRODUCTS
webMethods Fabric™
Our primary offering is webMethods Fabric, a unified business
integration and optimization product suite that we introduced in
October 2004. webMethods Fabric combines into a single offering
our existing product capabilities and features as well as
previously acquired technologies. These include the EAI and B2B
capabilities for which webMethods is widely known, our existing
BPM and workflow functionality, and the technologies that we
acquired in October 2003, which were comprised of a Web services
deployment and management framework (from The Mind Electric),
advanced BAM functionality (from The Dante Group), and a
development environment (from the DataChannel assets owned by
Netegrity), that allows end-users to build and deploy
portal-based applications.
webMethods Fabric’s capabilities combine those of our four
foundation product groupings: Enterprise Services Platform, BPM,
BAM and Composite Application Framework.
Enterprise Services Platform
The webMethods Enterprise Services
Platformtm
is the foundation of the webMethods Fabric product suite.
Conceptually, it serves as the basis by which systems are
integrated and made available as business
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services, which can then be linked together into new business
processes or assembled into new software applications. The key
capabilities of the webMethods Enterprise Services Platform
include the following:
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Proven business integration functionality (derived from
our previous flagship offering, the webMethods Integration
Platform) that provides customers a unified XML-based
environment for addressing both application-to-application and
business-to-business integration scenarios, including the
ability to connect reliably to a variety of legacy systems and
packaged applications, communicate securely across firewalls,
perform data transformations and mappings, and manage a
community of trading partners. |
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An extensive library of adapters that provides customers
a standard mechanism for integrating applications that have
proprietary programming interfaces, such as those from vendors
like Oracle Corporation, SAP AG and Siebel Systems. Using
adapters, developers do not have to learn the technical
intricacies of each interface; instead, they have a graphical
interface for configuring the operations to be performed against
a software application. An adapter development kit simplifies
the creation of custom adapters for software applications that
are not supported within our broad library of adapters. |
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Support for a wide range of electronic commerce
protocols, enabling customers to integrate their information
systems with those of their customers and business partners and
automate inter-company interactions, such as purchasing and
procurement, supply chain management, and vendor-managed
inventory. Supported protocols and e-business standards include
EDI, EDIINT (AS1, AS2, and AS3), RosettaNet, CIDX, PIDX, FIX,
SWIFT, and ebXML. |
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High performance messaging middleware that serves as the
communications layer for webMethods Fabric, and enables the
real-time, event-driven interactions needed for BAM and other
high-volume applications that require reliable message delivery
and a scalable publish/subscribe architecture capable of
processing thousands of messages per second. A Java Message
Service (“JMS”)-compliant interface is also available. |
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webMethods Glue™, a light-weight, high-performance Web
services environment for creating standards-compliant Web
services from Java. Using webMethods Glue, developers are able
to make existing Java objects accessible as Web services without
having to modify existing Java logic, or incurring the
complexity and overhead of implementing these services on a J2EE
platform. |
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Web services enablement and management features that
allow customers to make existing software application functions
available as standard Web services, and then to manage the
deployment of those services — and any other Web
services in the environment, irrespective of where they
originate, with enterprise-class quality of service. The Web
services management capabilities, which are provided by the
product called webMethods
Servicenettm,
include a UDDI-based service registry, security, load balancing,
fail-over, and unique predictive monitoring enabled by
webMethods’ patent-pending BAM technology. |
Business Process Management (“BPM”)
webMethods’ BPM offerings have capabilities that facilitate
the design, deployment, and monitoring of processes that involve
interactions between computer systems as well as people. Some
business processes are automated, requiring minimal manual
intervention (often only to address exception situations),
whereas other types of business processes, such as loan or
claims processing, are primarily manual in nature.
webMethods’ BPM offerings support both scenarios. By
providing an easy-to-use process modeling environment that
shields users from the underlying software applications and
technical complexity, webMethods’ BPM offerings make it
feasible for non-technical staff to play a productive role in
defining business processes. The visual design environment
allows customers to create workflow solutions, including the
associated user interfaces for presenting users with tasks and
information, with minimal software coding effort.
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Business Activity Monitoring (“BAM”)
webMethods’ BAM offering has capabilities that are based on
a patent-pending technology that provide customers with a
real-time view into key business performance indicators (for
example, order processing time), and the ability to be alerted
proactively when results deviate from established norms (for
instance, if orders start taking longer than normal to process).
The integration between webMethods’ BPM and BAM
capabilities means there is minimal incremental effort for the
user to identify which metrics to monitor for a given business
process. webMethods’ BAM offering further reduces the
effort on the part of the user by automatically monitoring
certain pre-identified metrics and using statistical analysis to
establish normal patterns of behavior. This allows the system to
alert the user to an exception to such patterns of behavior,
through a unique feature called “fingerprinting”,
enabled once the system observes current readings drifting away
from previously-seen ranges. The advantage of our approach is
that users are not required to define limits manually, and the
system automatically adjusts thresholds based on actual data
(for example, accommodating variations in order processing time
depending on the time of day). The real-time nature of these
capabilities enables customers to anticipate exceptions,
allowing them to respond quickly and, potentially, to avoid
impact to the business. The ability to do root-cause analysis is
a further decision-making aid, helping customers determine the
specific factors causing a deviation in a monitored business
process metric.
Composite Application Framework (“CAF”)
The webMethods Composite Application
Frameworktm
enables customers to assemble new applications from the services
and resources made available by the webMethods Enterprise
Services Platform. The webMethods CAF provides an alternative to
coding traditional client/server or Web applications from
scratch and is especially advantageous when there is an
inventory of existing business components from which to assemble
new software applications. The webMethods
Portaltm
serves as the primary delivery channel for these composite
software applications, allowing people — both inside
and outside the organization — to be provided with
personalized, secure, access to the application functionality,
information, and business processes that are relevant to their
job function or relationship to the organization.
SERVICES
webMethods offers a range of professional services to assist our
customers both during the initial deployment of our products and
thereafter to address our customers’ needs through the
entire project lifecycle. Our professional services consultants
are located throughout the Americas, Europe/ Middle East/ Africa
(“EMEA”), Japan and Asia Pacific regions, allowing us
to provide localized, on-site support across our global customer
base. Our services include “jump start” packages and
full project implementations; advisory services, including
architecture and performance assessments, and services
concerning SOA strategy or best practices with regard to the
establishment of integration competency centers; product
training; and ongoing outsourced maintenance and operational
support. We may provide these services directly or augment the
efforts of a systems integration partner. Our professional
services organization has developed GEAR, an integration
methodology derived from our experience and specific to our
products. GEAR provides customers with best practices, project
templates, white papers, and other tools. Together, these
resources assist in gathering requirements, capturing the scope
of the project, defining the architecture, implementing a
solution, and rolling out the finished system.
We offer training and continuing education to help ensure the
success of our customer implementations. We provide a mix of
classroom, onsite, and online training designed to best meet our
users’ requirements. We have regularly scheduled courses
covering our entire product line and more than 20 key topics of
interest to developers, administrators, and business analysts.
We offer our customers a variety of support and maintenance
plans designed to meet their specific needs, including the
option of 24-hour coverage, seven days per week. We have
established a “follow-the sun” support model with
major support centers in Virginia and California in the United
States, and in
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Australia, Japan and the Netherlands. Our resellers and
distributors generally provide initial software support to their
customers, and we provide secondary support on more complicated
issues. Our customers and partners also have access to the
webMethods
Advantagetm
extranet, which provides access to software, product
documentation, discussion groups, implementation guides,
technical advisories and access to our customer service
management system that allows individuals to submit and monitor
the status of any technical issues.
SALES AND MARKETING
We license our software and sell our services primarily through
our direct sales organization. Secondary sales channels include
our strategic software vendor partners, major systems
integrators with whom we have strategic alliances, other
partners and distributors. In Japan and our Asia Pacific region
and, to a lesser extent, in EMEA and the Americas, we also
license our software through resellers who may also sell our
consulting and implementation services. We have relationships
with a number of resellers or distributors with expertise in
certain industry sectors or countries in which we do not
currently have a significant number of direct sales personnel.
We license our software primarily on a perpetual basis.
Our direct sales organization consists of sales representatives
and pre-sales consultants supported by personnel with experience
within the industries we target. At March 31, 2005, our
sales and marketing personnel serving North America were located
in our headquarters in Fairfax, Virginia, and in approximately
25 other offices in the United States and Canada. At that date,
our sales and marketing personnel in EMEA were located in nine
countries, and our sales and marketing personnel in Japan and
our Asia Pacific region were located in Australia, Japan and six
other countries. Information on revenue we derived from our
Americas, EMEA, Japan and Asia Pacific operations, as well as
long lived assets located in those geographic regions, is
included in Note 18 of the Notes to Consolidated Financial
Statements of webMethods, Inc., included elsewhere in this
report. We expect to continue expanding our sales and marketing
group through targeted recruitment of qualified individuals.
Our sales efforts are focused on customers, prospective
customers and business partners in manufacturing, process
industries (such as chemicals, oil and gas, life sciences,
metals, paper and plastics), financial services, consumer goods
manufacturing and retail, government and telecommunications.
The sales cycle for our software typically ranges from 90 to
270 days. A prospective customer’s decision to use our
products may involve a substantial financial commitment, which
may require a significant evaluation period and approval from or
by the customer’s senior management. A customer’s
decision to license certain of our products may also involve
significant user education and deployment costs, as well as
substantial involvement of the customer’s personnel. Due to
the nature of our business, we have no inventory.
We have experienced quarterly fluctuations in our operating
results and anticipate fluctuations in the future. In the past
we have experienced certain general seasonal factors, from time
to time, such as when revenue in our second fiscal quarter
(ending September 30) has been positively impacted by
budgeting cycles of the US Government, and has been negatively
impacted because businesses often defer purchase decisions
during summer months. In addition, revenue in our third fiscal
quarter (ending December 31) has been positively impacted
by the end-of-year budgeting cycles of many Global
2000 companies, and revenue in our fourth fiscal quarter
(ending March 31) has been positively impacted, as revenue
in our first fiscal quarter (ending June 30) has been
negatively impacted, by the annual nature of our sales
compensation plans. Quarterly revenue and operating results
depend on the volume and timing of orders received, which may be
affected by large individual transactions that sometimes are
difficult to predict.
PRODUCT DEVELOPMENT
We pursue a judicious mix of internal development, technology
acquisition, and strategic partnerships to allow us to offer a
compelling and differentiated solution. This strategy has at
times allowed us to bring capabilities to market more quickly
than some competitors who rely solely on internal development.
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We focus our ongoing product development efforts on a
combination of enhancing, broadening, and deepening the
functionality of our core products to address new industries,
marketplaces, geographies and software alliances as well as
bringing about innovations to meet emerging opportunities. In
October 2004, we introduced webMethods Fabric, unifying our
existing product capabilities with the technologies which we
acquired in October 2003. We have dedicated a significant amount
of effort to integrating our various product capabilities to
realize the vision of webMethods Fabric as a unified product
suite. Our research and development expenses, including
stock-based compensation, were $44.5 million,
$45.0 million and $47.5 million in our fiscal years
ended March 31, 2005, 2004 and 2003, respectively.
We maintain our primary development centers in Fairfax, Virginia
and Sunnyvale, California and have additional development teams
in Denver, Colorado and Seattle, Washington. In 2004, we
established a development center in Bangalore, India.
PARTNERS AND STRATEGIC RELATIONSHIPS
We believe that our strategic alliances with systems integrators
constitute a significant advantage over some of our competitors.
We work closely with several major systems integrators including
Accenture, Atos Origin, BearingPoint, Capgemini, CGI-AMS, Crowe
Chizek, CSC, Deloitte, EDS, HP and TCS to support our
customers’ integration needs and to expand the resources
available to implement our software. We invest in education to
assist our partners in staying knowledgeable in, and proficient
with, our software products and solutions. We believe that our
investment in these relationships is important because our
partners’ promotion of our products as the most appropriate
solution for their clients augments our direct sales force.
In November 2004, we announced a strategic partnership with
Global eXchange Services (“GXS”), a leading global
integration services provider, whereby the two companies agreed
to jointly develop, market and resell end-to-end integration
solutions based on our respective technologies and services.
Through our combined offerings, enterprises utilizing GXS’
managed services will be able to extend the capabilities of the
webMethods Fabric product suite more readily to their business
partners, providing a deeper level of integration and shared
visibility to streamline interactions between the organizations.
We believe that our relationship with GXS may help us more
effectively reach markets that we do not directly target, while
providing prospective customers with an additional means for
evaluating our technology as an embedded component of the GXS
service.
We also believe that our other strategic relationships represent
an advantage over our competition. We utilize our original
equipment manufacturer partnerships with enterprise application
software vendors, such as Oracle Corporation, SAP AG and Siebel
Systems, as a differentiator when selling to a prospective
customer that owns or plans to purchase products from these
companies in which a license-limited version of our software may
be embedded or utilized. We believe that this provides us with
an incumbency advantage for many of the new business
opportunities in which we compete. We expect to continue to
benefit from these relationships through our partners’
indirect promotion of our products.
We have a relationship with Informatica to resell their
PowerAnalyzer business intelligence product to provide
management dashboards and reporting capabilities which
complement the real-time monitoring functionality included in
our BAM solution.
We believe our partners influenced, directly or indirectly, a
significant portion of our license revenue during the fiscal
year ending March 31, 2005 and in prior fiscal years, and
we expect this to continue in future periods.
Under certain partnership arrangements, we may share license
fees derived from joint selling opportunities with our partner;
in these instances, we record the net license revenue we
receive. In systems integrator and other partnership
arrangements, we may pay a sales assistance fee to a partner who
performs or assists in certain sales activities, which we
include in our sales and marketing expenses, and that fee
usually is paid once payment from the joint customer of license
fees is received. Under certain partnerships with our enterprise
application software vendor partners, the partner may embed or
otherwise
8
utilize our software with their applications under limited use
licenses for a license fee or royalty fee, which we include in
our license revenue.
COMPETITION
The market for our software and services is extremely
competitive and subject to rapid change. While we believe that
we have a compelling offering in the webMethods Fabric product
suite, broad integration experience, expertise in trading
partner integration and management, a track record of
innovation, and are a recognized leader in Web services, we
compete with numerous other providers of integration software
products. Our competitors include BEA Systems, Inc.,
International Business Machines Corporation (“IBM”),
Microsoft Corporation, SAP AG, SeeBeyond Technology Corporation,
Sterling Commerce Inc., TIBCO Software, Inc. and a wide range of
companies associated with the capabilities that we offer. We may
encounter additional competition from other emerging companies.
In addition, we may face pricing pressures from our current
competitors and new market entrants in the future. We believe
that the competitive factors affecting the market for our
software and services are numerous and the specific importance
of any one of these factors varies significantly for each
specific customer environment. These competitive factors include
product functionality and features; performance and price; ease
and cost of product implementation; vendor and product
reputation; quality of customer support services; financial
strength; customer training and documentation; and quality of
professional services offerings. Although we believe that our
software and services currently compete favorably with respect
to such factors, we may not be able to maintain our competitive
position against current and potential competitors.
Some of our current and potential competitors have longer
operating histories, significantly greater financial, technical,
product development and marketing resources, greater brand
recognition and larger installed customer bases than we do. Our
present or future competitors may be able to develop software
similar to or even superior in functionality to what we offer,
some may be able to adapt more quickly than we do to new
technologies, evolving industry trends or new customer
requirements, or devote greater resources to the marketing,
design and development, and sale of their products than we do.
Accordingly, it is possible that we may not be able to compete
effectively in our markets, which may harm our business and
operating results. If we are not successful in developing new
software and enhancements to our existing software or in
achieving customer acceptance, our gross margins may decline,
and our business and operating results may suffer.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success is heavily dependent upon the technological and
creative skills of our personnel and how successfully we can
safeguard their efforts in developing and enhancing our software
and related technology through the protection of our
intellectual property rights, brand name, and associated
goodwill. We depend upon our ability to develop and protect our
proprietary technology and intellectual property rights to
distinguish our software from our competitors’ products. We
rely on a combination of confidentiality agreements,
confidentiality procedures and contractual provisions, as well
as trade secret, copyright, trademark and patent laws, to
establish and protect our proprietary rights and accomplish
these goals.
For example, we take measures to avoid disclosure of our trade
secrets, including, but not limited to, requiring all employees
and certain consultants, customers, prospective customers, and
others with which we have business relationships to execute
confidentiality agreements that prohibit the unauthorized use
and disclosure of our trade secrets and other proprietary
materials and information. Further, we enter into license
agreements with our customers, business partners, resellers and
distributors that limit the unauthorized access to, use and
distribution of our software, documentation and other
proprietary information. Our license agreements with our
customers, business partners, resellers and distributors impose
restrictions on the use of our technology, including prohibiting
the reverse engineering or de-compiling of our software, impose
restrictions on the licensee’s ability to utilize the
software and provide for specific remedies in the event of a
breach of these restrictions. We also restrict access to our
source code. While some of our license agreements require us to
place the source code for our software in escrow
9
for the benefit of the licensee, these agreements generally
provide these licensees with a limited, non-exclusive license to
use this code in the event we cease to do business without a
successor or there is a bankruptcy proceeding by or against
webMethods; certain agreements may provide that the licensee can
use the escrowed source code if we fail to provide the necessary
software maintenance and support.
We also seek to protect our technology, software, documentation
and other proprietary information under the copyright, trademark
and patent laws. We assert copyright in our software,
documentation and other works of authorship, and periodically
register copyrights with the U.S. Copyright Office in qualifying
works of authorship. We assert trademark rights in and to our
name, product names, logos and other markings that are designed
to permit consumers to identify our goods and services. We
routinely file for and have been granted trademark protection
from the U.S. Patent and Trademark Office for qualifying marks.
We currently hold a trademark registration in the United States
for the “webMethods”, “B2B Integration
Server” and “Glue” marks and a trademark
registration in certain other countries and the European Union
for the “webMethods” mark. We have a patent issued in
the United States and several patent applications pending for
technology related to our software. We may file additional
patent applications in the United States or other countries in
the future.
Despite our efforts to protect our proprietary rights,
contractual provisions, licensing restrictions and existing laws
and remedies afford us only limited protection. The steps we
have taken to protect our proprietary rights and intellectual
property may not be adequate to deter misappropriation of our
technology, and the protections we have may not prevent our
competitors from developing products with functionality or
features similar to our software. The use by others of our
proprietary rights could materially harm our business.
It is possible that the copyrights, trademarks or patent held by
us could be challenged and invalidated. For example, we cannot
be certain that the patent we hold, those that we have applied
for, if issued, or our potential future patents will not be
successfully challenged. Further, we cannot be certain that we
will be able to develop proprietary products or technologies
that are patentable, that any patent issued to us will provide
us with any competitive advantage or that the patents of others
will not seriously limit or harm our ability to do business.
We may not be able to detect unauthorized use of our proprietary
information or take appropriate steps to enforce our
intellectual property rights effectively, and the use by others
of our proprietary rights could materially harm our business.
Policing the unauthorized use of our products and other
proprietary rights is difficult and expensive, particularly
given the global nature and reach of the Internet. Effective
protection of our intellectual property rights may be limited in
certain countries as the laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of
the United States. For more information regarding our
proprietary rights, see “Factors That May Affect Future
Operating Results — If we are unable effectively to
protect our intellectual property, we may lose a valuable asset,
experience reduced market share, or incur costly litigation to
protect our rights.”
Despite our efforts to protect our proprietary rights, parties
may breach confidentiality agreements or other protective
licenses and contracts into which we have entered, and we may
not be able to enforce our rights effectively in the event of
these breaches. There can be no assurance that we will be able
to prevent unauthorized attempts to copy or reverse engineer
aspects of our software, to subvert our license key mechanisms
or to obtain and use information that we regard as proprietary.
Further, unauthorized parties may attempt to copy or otherwise
obtain and use software or technology that we consider
proprietary, and third parties may attempt to develop similar
technology independently. It is possible that our competitors
will adopt similar product or service names, impeding our
ability to protect our intellectual property and possibly
leading to customer confusion. The unauthorized reproduction or
other misappropriation of our proprietary technology could
enable third parties to benefit from the technology developed by
us without paying for it.
The software industry is characterized by the existence of a
large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other
intellectual property rights. We believe that software
developers in our market will increasingly be subject to
infringement claims as
10
the number of products in different software industry segments
overlap. Although we attempt to avoid infringing known
proprietary rights of third parties in our product development
efforts, third parties have claimed that the use of our software
in certain situations infringed on their intellectual property
rights. Third parties may in the future claim that we have
infringed on their intellectual property rights (including those
intellectual property rights currently existing or developed in
the future) or that the use our software in certain situations
infringes on their intellectual property rights. We may
increasingly be subject to infringement claims as the number of
products and competitors in our industry grows and
functionalities of products overlap. Furthermore, former
employers of our current and future employees may assert that
their employees have improperly disclosed confidential or
proprietary information to us.
Expensive litigation may be necessary in the future to enforce
our intellectual property rights. We have been, and may in the
future be, subject to legal proceedings and claims for alleged
infringement by us or our licensees of third-party proprietary
rights, such as copyrights, trademarks, patents or trade
secrets, from time to time in the ordinary course of our
business. While we do not currently believe that any of our
software, documentation, copyrights, trademarks, patents, or
other proprietary rights infringe the proprietary rights of
third parties, third parties have claimed, and may in the future
claim, that we have infringed their current or future products,
technology or intellectual property rights or that use of our
software in certain situations may infringe on their
intellectual property rights. Any infringement claims, with or
without merit, brought by such third parties may be
time-consuming, result in costly litigation, prevent product
shipment, cause delays, distract us from managing our business
or require us to enter into royalty or licensing agreements
which are not advantageous to us, any of which could materially
harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties, and is commonly
quite expensive.
Parties making claims against us could secure substantial
damages, as well as injunctive or other equitable relief that
could effectively block our ability to license our software in
the United States or abroad. Such a judgment could materially
harm our business. In the event an infringement claim against us
was successful and we could not obtain a license on acceptable
terms, license a substitute technology or redesign to avoid
infringement, our business would be harmed materially. In
addition, parties making these claims may be able to obtain an
injunction, which could prevent us from selling our software in
the United States or abroad. Any of these results could harm our
business materially.
For more information regarding our proprietary rights, see
“Factors That May Affect Future Operating
Results — Third-party claims that we infringe upon
their intellectual property rights may be costly to defend and
could damage our business.”
In addition, we license technology from third parties that is
incorporated into our software, and we bundle technology from
third parties with our software. We also incorporate into our
software certain “open source” software code or
software tools, the use of which in commercial software
products, such as ours, may be prohibited or restricted now or
in the future. Any significant interruption in the supply or
support of any technology we license from third parties, or our
inability to continue to use “open source” software in
our products, could adversely affect our business, unless and
until we can replace the functionality provided by the licensed
technology or “open source” software. Our use of
licensed technology or “open source” software could
cause our products to infringe the intellectual property rights
of others, causing costly litigation and the loss of significant
rights.
CORPORATE INFORMATION
webMethods, Inc. was organized in Delaware in 1996. We completed
our initial public offering in February 2000. In August 2000,
webMethods, Inc. acquired Active Software, Inc., a publicly-held
software company that developed and delivered enterprise
application integration software. In February 2001, we acquired
IntelliFrame Corporation, its workflow technology and its
research and development team. In October 2003, we acquired The
Mind Electric, Inc., The Dante Group, Inc. and certain assets of
Data Channel from Netegrity. References to
“webMethods,” “we,” “us” or
“our” include webMethods, Inc. and its subsidiaries
unless a statement specifically refers to webMethods, Inc. Our
executive offices are located
11
at 3877 Fairfax Ridge Road, South Tower, Fairfax, Virginia
22030, and our main telephone number is (703) 460-2500. We
operate in a single segment of software and related services.
AVAILABLE INFORMATION
Our internet address is www.webMethods.com. Our Investor
Relations page of our web site provides a link to a service
giving access to our securities filings as soon as reasonably
practical after we electronically file with the Securities and
Exchange Commission (“SEC”) our annual reports,
quarterly reports, current reports and any amendments to those
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and as soon as
reasonably practical after any of our directors or executive
officers electronically file with the SEC any reports pursuant
to Section 16 of the Securities Exchange Act of 1934. We do
not charge for access to and viewing of those filings. Other
information on our Investor Relations page and our web site is
not part of this Form 10-K or any other webMethods
securities filing unless specifically incorporated. In addition,
our reports, proxy statements and other information are filed
with the SEC through the SEC’s Electronic Data Gathering,
Analysis and Retrieval system and are publicly available through
the SEC’s site on the World Wide Web, 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 that 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.
EMPLOYEES
As of March 31, 2005, we employed approximately 833
full-time employees. These included approximately 239 in sales
and marketing, 204 in professional services and technical
support, approximately 263 in research and development and
approximately 127 in other administrative areas, including
accounting, finance, human resources, facilities and information
technology. Our future success will depend in part on our
ability to attract, retain and motivate highly qualified
technical and management personnel, for whom competition is
intense. From time to time, we have employed, and will continue
to employ, independent contractors and consultants to support
research and development, marketing and sales, and business
development. Our employees generally are not represented by a
collective bargaining agreement, although employees in certain
of our international subsidiaries have claimed membership in
trade unions or sought to invoke union representation in certain
personnel matters; we have never experienced a strike or similar
work stoppage. We consider relations with our employees to be
good.
EXECUTIVE OFFICERS OF WEBMETHODS
Our executive officers and their ages and positions as of
May 31, 2005 are as follows:
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| Name |
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Age | |
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Position |
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| |
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David Mitchell
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|
40 |
|
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President and Chief Executive Officer |
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Richard Chiarello
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|
52 |
|
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Executive Vice President, Worldwide Operations |
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Mary Dridi
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44 |
|
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Executive Vice President and Treasurer |
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Douglas W. McNitt
|
|
|
40 |
|
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General Counsel, Executive Vice President and Secretary |
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Kristin Weller Muhlner
|
|
|
34 |
|
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Executive Vice President, Product Development |
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Mark L. Wabschall
|
|
|
49 |
|
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Senior Vice President, Finance and Chief Accounting Officer |
David Mitchell began his career at webMethods in December
1997 as Vice President, Sales and served as Vice President,
Worldwide Sales from September 1999 through December 1999. He
served as Chief Operating Officer from January 2000 to October
2004, as President since January 2001 and as Chief Executive
Officer since October 2004. Throughout his tenure at webMethods,
Mr. Mitchell has played a major role in all facets of our
business and in overseeing webMethods’ global sales
organization, as well as our marketing, industry solutions,
business development, and customer service operations. Prior to
joining
12
webMethods, Mr. Mitchell held a variety of executive
positions at various companies, including serving from 1993 to
1995 as President and Chief Executive Officer of VYCOR
Corporation, which was acquired in 1995 by McAfee Software.
Mr. Mitchell holds a B.S. in Marketing from Virginia
Commonwealth University.
Richard Chiarello joined webMethods in April 2004 as
Executive Vice President, Worldwide Operations. From October
2002 to 2004, he served as Senior Vice President, Worldwide
Sales, of Siebel Systems, Inc., where he managed all aspects of
the company’s worldwide sales operations. From December
1998 to September 2002, he served as President of ATL LLC
Consulting, a private sales consulting company founded by
Mr. Chiarello to serve clients in the information
technology industry. He also served as President and Chief
Operating Officer of AMC Computer Corporation, a hardware and
professional services company, from October 2000 to June 2001.
From December 1985 to December 1998, Mr. Chiarello held
several sales, marketing and executive management positions at
Computer Associates International, Inc., the most recent of
which was Executive Vice President and General Manager,
Worldwide Sales and Channels. Prior to joining Computer
Associates International, Inc., Mr. Chiarello served in a
variety of sales positions with IBM Corporation from 1977 to
1985. Mr. Chiarello holds a B.A. from Queens College in New
York and has completed executive management training in the IBM
Management Training program and with Babson Business School,
Boston, Massachusetts.
Mary Dridi joined webMethods in May 1998 as Chief
Financial Officer and Treasurer. She became an Executive Vice
President in January 2002. She resigned as Chief Financial
Officer in May 2005. From July 1991 to April 1998, she served as
the Controller and Vice President of Finance for SRA
International, Inc., an information technology company. From
1987 to 1991, Ms. Dridi served as the Director of Finance at
Geostar Corporation, a mobile satellite communications company.
From 1983 to 1987, Ms. Dridi provided audit and other
business services with the accounting firm of Peat Marwick.
Ms. Dridi holds a B.S. in Commerce and Accounting from the
University of Virginia.
Douglas W. McNitt joined webMethods in October 2000 as
General Counsel, became an Executive Vice President in January
2002, and became Secretary in May 2003. Mr. McNitt served
in various capacities, including Senior Counsel and Assistant
General Counsel for America Online, Inc. during his service
there from December 1997 to September 2000. From May 1996 to
December 1997, he was an associate with the law firm of Tucker,
Flyer & Lewis, a professional corporation, and was an
associate with the law firm of McDermott, Will & Emery from
April 1994 to May 1996. Mr. McNitt holds a B.A. from
Stanford University and a J.D. from Notre Dame Law School.
Kristin Weller Muhlner joined webMethods as Vice
President of Professional Services and Customer Care in
September 1998. She became Vice President of Product Development
in January 2000, Senior Vice President of Product Development in
October 2001 and Executive Vice President of Product Development
in March 2003. From 1994 to September 1998, Ms. Muhlner
served as Senior Manager for Deloitte & Touche Consulting
Group, where she participated in the development of their
enterprise resource planning (ERP) implementation
methodology. Ms. Muhlner holds a B.A. in Economics from
Rhodes College.
Mark L. Wabschall, a Certified Public Accountant, joined
webMethods as Senior Vice President, Finance in July 2004 and
became Chief Accounting Officer in May 2005. He served as Vice
President, Finance for Innovative Technology Application, Inc.,
a diversified technology firm, from 2003 to 2004, and he served
as President of Delphi Business Solutions, LLC, a financial
consulting firm from 2000 to 2003. From 1994 to 2000, he held
senior financial and operational management positions with the
Baan Company, including Senior Vice President of Operations,
Vice President of Investor Relations and Chief Financial Officer
of the Americas. He also served as an audit partner with Arthur
Andersen, a major international public accounting firm.
Mr. Wabschall holds a B.S. in Business Administration from
the Ohio State University.
13
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should consider the following risks and uncertainties when
evaluating our statements in this report and elsewhere.
webMethods is subject to risks and uncertainties in addition to
those described below, which, at the date of this report, we may
not be aware of or which we may not consider significant. Each
of these factors may adversely affect our business, financial
condition, results of operation or the market price of
webMethods’ common stock, and investors may potentially
lose all or part of their investment.
Our quarterly revenue — especially the amount of
license revenue we recognize in a
quarter — and operating results could
fluctuate, which could significantly affect the market price of
webMethods’ common stock.
Our quarterly operating results have fluctuated in the past and
are likely to do so in the future. A significant reason for
these fluctuations is variation in the level of our quarterly
revenue — especially the amount of license revenue we
recognize in a quarter — which is difficult to predict
with certainty and which varies depending on a number of
factors. These fluctuations may cause quarter-to-quarter or
year-to-year comparisons of our financial results not to be
reliable indicators of our future revenue, license revenue or
operating results. If our quarterly or annual total revenue,
license revenue or operating results fail to meet the guidance
we provide publicly or the expectations of investors or
securities analysts, there could be a material adverse effect on
the market price of webMethods’ common stock. Our quarterly
operating results have varied substantially in the past and may
vary substantially in the future depending upon a number of
factors, including:
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• |
changes in demand for our software products and services; |
| |
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• |
the timing and terms of large transactions with customers; |
| |
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• |
the spending environment for business integration and
optimization solutions; |
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• |
competitive pressures; |
| |
| |
• |
fluctuations in the revenue and license revenue of our
geographic regions; |
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• |
our ability to execute on our business strategy and sales
strategies; |
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• |
a low number of quota bearing sales representatives experienced
with our solutions, software products and sales processes; |
| |
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• |
the timing and amount of revenue from acquired technologies or
businesses; |
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• |
the amount and timing of operating costs; |
| |
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• |
delays in the availability of new products or new releases of
existing products; |
| |
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• |
costs of legal compliance, including compliance with the
Sarbanes-Oxley Act of 2002 and regulatory requirements and
investigating or resolving pending or threatened legal claims;
and |
| |
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• |
changes that we may make in our business, operations and
infrastructure. |
In addition, economic conditions and other events beyond our
control, such as economic uncertainties, geopolitical
developments or uncertainties, travel limitations, terrorist
acts and other major, unanticipated events may have significant
negative impact on our quarterly revenue, license revenue or
operating results and delay our ability to return to and
maintain profitability on a basis determined in accordance with
accounting principles generally accepted in the United States
(“GAAP”). If our quarterly total revenue, license
revenue or operating results are adversely impacted for any
reason, that could have a material adverse effect on the market
price of webMethods’ common stock.
We generally close a substantial number of license transactions
in the last month of each quarter, which makes it difficult to
predict with certainty the level of license revenue we will have
in any quarter until near to, or after, its conclusion. Our
operating expenses, which include sales and marketing, research
14
and development and general and administrative expenses, are
based on our expectations of future revenue and are relatively
fixed in the short term. If total revenue or license revenue
falls below our expectations in a quarter and we are not able to
quickly reduce our spending in response, our operating results
for that quarter could be significantly below the guidance we
provide publicly or expectations of investors or securities
analysts. As a result, the market price of webMethods’
common stock may fall significantly.
If we fail accurately to forecast our future total
revenue, license revenue or operating results, we may not
satisfy the expectations of investors or securities
analysts.
We forecast our future total revenue and license revenue and
operating results based upon information from our sales
organization, finance and accounting department and other groups
within our organization. The information on which our forecasts
are based reflect expectations of future performance, beliefs
regarding continuation of trends and anticipated future
achievements, which involve elements of speculation and are
subject to a number of risks and uncertainties that we attempt
to articulate for investors and securities analysts. We may fail
to accurately forecast our future total revenue or license
revenue due to a number of factors, including changes in
customer demand, economic conditions, the timing and terms of
large transactions with customers, competitive pressures,
fluctuations in the total revenue and license revenue of our
geographic regions, our ability to execute on our business
strategy and sales strategies, a low number of quota bearing
sales representatives experienced with our solutions, software
products and sales processes, the timing and amount of revenue
from acquired technologies or businesses, delays in the
availability of new products or new releases of existing
products, changes that we may make in our business, operations
and infrastructure, seasonal factors or major, unanticipated
events.
We also may experience delays or declines in expected total
revenue or license revenue due to patterns in the capital
budgeting and purchasing cycles of our current and prospective
customers, purchasing practices and requirements of prospective
customers, including contract provisions or contingencies they
may request, changes in demand for our software and services,
changes that we may make in our business or operations, economic
uncertainties, geopolitical developments or uncertainties,
travel limitations, terrorist acts or other major unanticipated
events. These periods of slower or no growth may lead to lower
total revenue or license revenue or both, which could cause
fluctuations in our quarterly operating results. In addition,
variations in sales cycles may have an impact on the timing of
our recognition of license revenue, which in turn could cause
our quarterly total revenue and operating results to fluctuate.
To successfully sell our software and services, we generally
must educate our potential customers regarding their use and
benefits, which can require significant time and resources. Any
misperception by us in the needs of our customers and
prospective customers or any delay in sales of our software and
services could cause our revenue and operating results to vary
significantly from our prior public forecasts. Any failure to
achieve our prior public forecasts could cause us to fail to
satisfy the expectations of investors or securities analysts,
which could have a significant adverse effect on the market
price of webMethods’ common stock.
The market price of webMethods’ common stock
fluctuates as a result of factors other than our quarterly total
revenue, license revenue and operating results, including
actions taken by or performance of our competitors, estimates
and recommendations of securities analysts, industry volatility
and changes to accounting rules.
The market price for webMethods’ common stock has
experienced significant fluctuation over the years and may
continue to do so. From our initial public offering in February
2000 until June 13, 2005, the closing price of
webMethods’ stock on the Nasdaq National Market has ranged
from a high of $308.06 to a low of $3.96. In addition to our
quarterly total revenue, license revenue or operating results,
this volatility in the market price for webMethods’ common
stock may be affected by a number of other factors, including:
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• |
the overall volatility of the stock market, particularly the
stock prices of software and technology companies; |
15
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• |
fluctuation in the levels of total revenue, license revenue and
operating results of competitors; |
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• |
changes in securities analysts’ estimates and
recommendations with respect to webMethods’ common stock or
our industry; |
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• |
rapid developments within our industry; and |
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• |
changes to accounting rules. |
If any of these market or industry-based factors has a
significant negative impact on the market price for
webMethods’ common stock, investors could lose all or part
of their investment, regardless of our actual operating
performance.
Our markets are highly competitive, and we may not compete
effectively.
The markets for business integration solutions, SOA
capabilities, BAM and BPM solutions and CAF capabilities are
rapidly changing and intensely competitive. There are a variety
of methods available to integrate software applications, monitor
and optimize business processes and workflows, provide SOA,
enable Web services and provide customers the capabilities to
run, manage and optimize their enterprise. We expect that
competition will remain intense as the number of entrants and
new technologies increases. We do not know if our markets will
widely adopt and deploy our SOA technology, our webMethods
Fabric product suite or other solutions we offer or have
announced. If our technology, software and solutions are not
widely adopted by our markets or if we are not able to compete
effectively against current or future competitors, our business,
operating results and financial condition may be harmed.
Our current and potential competitors include, among others,
large software vendors; companies that develop their own
integration software or Web services technology; business
integration software vendors; electronic data interchange
vendors; vendors of proprietary enterprise application
integration; vendors of portal products; and application server
vendors. We also face competition from providers of various
technologies to enable Web services. Further, we face
competition for some aspects of our software and service
offerings from major system integrators, both independently and
in conjunction with corporate in-house information technology
departments, which have traditionally been the prevalent
resource for application integration. In addition, application
software vendors with whom we have or had strategic
relationships sometimes offer competitive solutions or may
become or are competitors. Some of our competitors or potential
competitors may have more experience developing technologies or
solutions competitive with ours, larger technical staffs, larger
customer bases, more established distribution channels, greater
brand recognition and greater financial, marketing and other
resources than we do. Our competitors may be able to develop
products and services that are superior to our solutions, that
achieve greater customer acceptance or that have significantly
improved functionality or performance as compared to our
existing solutions and future software and services. In
addition, negotiating and maintaining favorable customer and
strategic relationships is critical to our business. Our
competitors may be able to negotiate strategic relationships on
more favorable terms than we are able to negotiate or may
preclude us from entering into or continuing strategic
relationships. Many of our competitors may also have
well-established relationships with our existing and prospective
customers. Increased competition may result in reduced margins,
loss of sales, decreased market share or longer sales cycles or
sales processes involving more extensive demonstrations of
product capabilities, which in turn could harm our business,
operating results and financial condition.
Economic conditions could adversely affect our revenue
growth and cause us not to achieve our forecasts of license
revenue and total revenue.
Our ability to achieve revenue growth and profitability of our
business depends on the overall demand for business integration
and optimization software and services. Our business depends on
overall economic conditions, the economic and business
conditions in our target markets and the spending environment
for information technology projects, and specifically for
business integration and optimization solutions, in those
markets. A weakening of the economy in one or more of our
geographic regions, unanticipated major
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events and economic uncertainties may make more challenging the
spending environment for our software and services, reduce
capital spending on information technology projects by our
customers and prospective customers, result in longer sales
cycles for our software and services or cause customers or
prospective customers to be more cautious in undertaking larger
license transactions. Those situations may cause a decrease in
our license revenue and total revenue. A decrease in demand for
our software and services caused, in part, by a continued
weakening of the economy, domestically or internationally, may
result in a decrease in our revenue and growth rates. In that
event, we could fail to achieve our prior public forecasts of
revenue and operating results or otherwise fail to satisfy the
expectations of investors or securities analysts, which could
have a significant adverse ef