UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-25375
VIGNETTE CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 74-2769415 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1301 South MoPac Expressway
Austin, Texas 78746
(Address of principal executive offices)
(512) 741-4300
(Registrant’s telephone number, including area code)
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
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ¨
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. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes x No ¨
As of June 30, 2004, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $383,878,499
As of February 28, 2005, 289,827,561 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held May 19, 2005 are incorporated by reference in Part III of this Annual Report on Form 10-K.
ANNUAL REPORT ON FORM 10–K
For the year ended December 31, 2004
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are not purely historical statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, hopes, intentions or strategies for the future. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this filing on Form 10-K to conform these statements to actual results. Factors that might cause or contribute to such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors That May Affect Future Results” and the risks discussed in our other historical Securities and Exchange Commission filings.
We maintain a World Wide Web site at www.vignette.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our Web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Web site and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Vignette is a trademark or registered trademark of Vignette Corporation in the United States and other countries. All other names are the trademarks or registered trademarks of their respective companies.
Our History
Vignette was founded in 1995 and for the first several years, we focused exclusively on the market for managing and delivering content via the Web. As companies began to adopt the Web as a channel for business communication, the technical requirements and complexities of managing and delivering information via the Web grew. Companies began to focus on understanding the usefulness of specific pieces of information, or content, to customers in the context of Web-based applications. In addition, they began to integrate their other existing sources of content into these Web-based applications to create information-rich Web sites.
The Web evolved as an important tool for helping companies run their businesses more efficiently, and we responded by aligning our business strategy and product development efforts with this trend. In February 2000, we acquired DataSage, Inc., a leading provider of Web-based analytics and personalization software and in July 2000, we acquired OnDisplay, Inc., a leading provider of software for integrating business information and applications within an enterprise. The combination of our Web content management technology with the integration technology from the OnDisplay, Inc. acquisition and the analytics technology from the Datasage, Inc. acquisition enabled us to offer an industry-leading suite of technology, introduced in September 2001 as Vignette V6, for optimizing the management and use of Web content across an organization to deliver powerful Web-based applications.
The downturn in IT spending, generally, and the precipitous decline in spending for enterprise software, specifically, had a severe impact on our business from 2001 to 2003. Customers and prospects reduced their focus on broad Web-based initiatives and, as a result, our revenue declined dramatically. In the latter part of 2003 and in 2004 we began to see some stabilization in our served markets, and we believe that the interest in delivering critical business information via the Web is increasing. We believe that companies are beginning to focus on the opportunity to drive business efficiency though the use of the Web as a channel for business communication. In addition, companies are expanding their focus from managing Web content to contemplate the capture, management, sharing and delivery of all types of enterprise content including documents, records, audio, video, e-mail and other forms of information. IDC estimates that Enterprise Content Management (ECM) market is growing at 9% compound growth rate and will exceed $4.1 billion by 2008.
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We have significantly broadened our product offerings through internal development and acquisitions to better address the opportunity to capture, manage, share and deliver enterprise information. In December 2002, we introduced Vignette V7, the latest iteration of our flagship Web content management product. Also in December 2002, we acquired Epicentric, Inc., a leading provider of business portals for delivering information via the Web. In December 2003, we acquired Intraspect Software, Inc., a leading provider of collaboration software for allowing information-sharing and in March 2004, we acquired TOWER Technology Pty Limited, a leading provider of enterprise document and records management solutions. We have strengthened our product portfolio under the expanded Vignette V7 product family and now offer what we believe is the leading suite of ECM solutions. We deliver these solutions with the added benefit of platform independence and full support of the Java 2 Platform Enterprise Edition (J2EE™) standards.
Overview
We believe we are well positioned to enable companies to integrate the management and delivery of content in a manner that helps companies use their information to drive revenue growth, cost reductions, increased employee productivity and improved customer satisfaction. Our portal, content, collaboration, integration, process and analysis, technologies give organizations the capability to provide a simple, personalized Web experience anytime, anywhere; integrate systems and information from inside and outside the organization; manage the lifecycle of enterprise information; and collaborate by supporting ad-hoc and business process-based information sharing. Together, our products and expertise help companies to harness the power of their information and the Web to deliver measurable improvements in business efficiency.
Our portal helps organizations build, manage and deliver integrated composite applications that create a consistent user interface to Vignette content and document management products as well as other corporate information, repositories and applications. Our integration capability allows organizations to integrate content and processes from virtually any source or enterprise application as well as deploy integration objects for use on most any platform. Content capabilities can capture and manage enterprise content from creation to retirement and manage how information is stored and deliver it in the context of how it will be consumed. Collaboration capabilities provide a complete online environment for distributed networks while maintaining a group memory of intellectual property and work products. Our process capabilities automate business processes and move information and content through business workflows. In addition, organizations can evaluate and review the use of content, information and the portal with our analysis capabilities.
To meet the information technology needs of organizations of all sizes, our capabilities are developed using open technology standards. Our capabilities accelerate the time for organizations to recognize value by reaching new markets more quickly, growing revenue by anticipating or responding rapidly to changing market demands, and delivering software applications faster by using a set of comprehensive application services provided on a consistent standards-based platform. Our capabilities are adaptable, allowing organizations to configure the business solutions to meet the unique requirements of each organization as well as use the products with partner solutions or as an integrated suite.
Our products and capabilities are supported by our professional services organization, Vignette Professional Services™ (“VPS™”). VPS™ offers pre-packaged and custom services, along with documented best practices, to help organizations define their online business objectives and deploy their content management, portal, process, collaboration, integration and analysis applications. Our education, consulting and customer care teams give customers the benefit of our experience gained from thousands of customer implementations. We partner with a number of leading system integrators such as Accenture, Deloitte Consulting, EDS, and Tata Consulting Services to implement our software for their clients. In many cases, we work in blended teams to jointly implement solutions. To ensure that we provide support to our customers on their chosen platform and infrastructure, we have long-standing relationships with key technology providers such as BEA Systems, Hewlett Packard, and Sun Microsystems.
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Products
Our portal, integration, content management, document and records management, collaboration, process and analysis services form the complete suite of information management components to manage the entire information value chain and enable organizations to rapidly build, manage and deploy information-based applications. Our solutions help our customers:
| • | Increase their return on investment through the cost benefits of an integrated solution from a single vendor; |
| • | Derive value from our unique ability to use and manage information where it is currently stored, regardless of format and repository; |
| • | Automate important document-based processes such as claims processing, medical records, and loan origination that drive business efficiencies and deliver measurable returns on investment. |
| • | Create an information architecture for compliance initiative by managing processes, creating organizational visibility, archiving information with appropriate access and creating and disposing of records. |
| • | Unify the management of applications, information and processes across the enterprise through integration with current business applications; and |
| • | Lower the cost of ownership by leveraging implemented infrastructures and accepted market standards. |
We help organizations to combine a comprehensive understanding of content assets across the business, and their value, with Web applications that actively manage the information they have throughout their organization over its entire life cycle, and deliver the right information and processes to the right person at the right time, regardless of its source.
We have continued to provide an integrated services-oriented architecture to create and manage information, business processes, portals and applications. Vignette Content Management, Vignette Records and Documents and Vignette Application Portal form the core of our product family, and afford users the ability to manage information and interaction in an integrated fashion. Our products also deliver a set of new market-defining technologies that our customers can use to further expand the flexibility and functionality of their implementation of our products.
To address the particular size and requirements of our customers, we deliver our products in various suites: group, business and enterprise. Additionally, we allow organizations the flexibility to purchase products individually. Our produce offerings are grouped into six application services categories: portal, integration, content, collaboration, process, and analysis. Organizations may purchase products individually from these six service categories or pre-bundled into suites that meet their specific needs. Following is a listing of our product offerings.
Vignette Content Services - Robust content management services include library services, content type modeling, workflow, taxonomy, and search. Document and records management solutions are also available to expand the ability to capture, manage, utilize, retain and dispose of an organization’s enterprise content. In addition, imaging and transactional “Web capture” functionality can effectively promote transitioning paper-based processes to digital processes, streamlining high-volume transaction processes and facilitating the centralized capture, storage and archival of an organization’s business content. This solution also effectively delivers risk and compliance management processes upon the breadth of an organization’s business content, documents, transactions, images, e-mails, rich media and Web transactions.
| • | Vignette Content Management manages content, sites, content types and objects and the deployment and delivery of content. It also functions as a task inbox and workflow manager and includes a roles-based management console and essential library services. The Vignette Command |
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Center, the core of Vignette Content Management, is an intuitive and configurable roles-based management console that enables business and technical users to manage virtually all of their content management objectives through one interface. Once integrated with business processes, users can share knowledge and collaborate on virtually any tasks, using e-mail, desktop applications and Web-based workspaces. We also offer a variety of additional specialized products to enhance Vignette Content Management.
| • | Vignette Integrated Document Management™ is an integrated document management, archive and retrieval solution addressing document capture, production imaging supporting forms OCR/ICR, high-performance image viewing, printing, and storage management; business process automation and workflow supporting case management, BPM and Web services; output report management for capturing, mining, linking, distribution, and statement presentment; and COLD storage and records management supporting electronic and physical records, retention management, e-mail archiving and regulatory compliance. |
| • | Vignette Records and Documents™ is an enterprise document and records management solution that manages fixed assets, automates document based workflows, manages casework through a process, and implements important archival and disposition of records. Vignette Records and Documents facilitates risk and compliance management, and implements important document management capabilities including metadata search, QBE, indexed full text search, check in/out and ACL security. |
| • | Vignette WebCapture™ is a secure Web transaction capture and playback risk management solution that archives transactions on a customer’s site and creates a permanent record of them for dispute resolution. |
Vignette Portal Services - Powerful portal applications provide both a highly functional portal framework and a user-friendly development environment for assembling portlets.
| • | Vignette Application Portal is an adaptable, scalable, open-portal solution that enables organizations to rapidly build and deliver highly customizable applications for their real-time enterprise across diverse business communities such as employees, partners and customers. We also offer a variety of additional specialized products to enhance our application portal. |
| • | Vignette Builder enables quick creation, assembly and customization of applications, empowering organizations to respond rapidly to changing business needs. Wizard-based interfaces accelerate the development and deployment of a wide range of critical applications that automatically integrate into the customer’s collaborative portal environment. |
Vignette Integration Services - Rich integration capabilities provide unique capabilities to connect a broad range of unstructured, semi-structured and structured data (including transactional) sources.
| • | Vignette Business Integration Studio is a graphical application integration environment for collecting and integrating content and applications from a wide selection of sources with minimal coding. Vignette Business Integration Studio allows users to readily and dynamically map content from disparate schemas, remote repositories and applications to an aggregated destination. We offer over fifty pre-built application and technology adapters that can be used by Vignette Business Integration Studio to integrate with enterprise, desktop, database and proprietary content sources existing throughout an enterprise. |
| • | Vignette Technology Adapters are plug-ins to Vignette Business Integration Studio that provide prepackaged integration capabilities to common technology applications that already exist in an enterprise. |
Vignette Collaboration Services – Rich collaboration capabilities that enhanced our capability of sharing knowledge for teams using workspaces. Our collaboration services also provide interaction management.
| • | Vignette Business Workspaces is an enterprise solution for business users to create workspaces, where teams can share, capture and search information. Vignette Business Workspaces provides secure online workspaces where extended business teams can work together more effectively. This helps organizations to reduce the risk of knowledge being lost and improves business relationships. |
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| • | Vignette Project Delivery provides online workspaces where extended project teams can work together to better serve and collaborate with key project teams. This solution offers out-of-the-box templates for collaboration and can capture project assets, expertise and best practices. Using Vignette Project Delivery can help organizations increase the speed and repeatability of their projects and can help improve the productivity of internal teams. |
| • | Vignette Strategic Account Management is an enterprise solution for business users to create account workspaces and allows account teams to better serve key accounts by effectively capturing, sharing, and searching account-related information and knowledge. This allows organizations to reduce the account team communication cycles and captures valuable account communication, allowing organizations to improve customer satisfaction, and productivity of internal teamwork while reducing the costs of account management. |
| • | Vignette Dialog delivers highly personalized content to the intended recipients at the designated time through online and offline touch points. A simple, graphical environment allows business users to create planned, multi-step conversations that can be triggered by virtually any type of event, including Web site registration, completion of a purchase, event attendance or a customer service call. |
| • | Vignette Messenger allows business users to easily create, manage, launch and analyze e-mail marketing campaigns. The wizard-based user interface provides all of the tools necessary for non-technical users to properly execute targeted e-mail campaigns to the appropriate audience with the appropriate content. |
Vignette Process Services - Powerful standards-based process workflow engine and graphical process modeler allow users to build and deploy business processes across the enterprise application infrastructure.
| • | Vignette Process Workflow Modeler provides an intuitive graphical environment for non-technical users to model workflows and other business processes through Microsoft Visio, a well-known business user application. The Vignette Process Workflow Modeler is capable of handling complex tasks such as conditional branching, sub-workflows, looping and parallel routing, while also supporting advanced capabilities such as flexible payloads, dynamic resource assignment and the invocation of external systems and business processes. |
Vignette Analysis Services - In-depth metrics and reporting based on Web logs, content delivery logs and process performance logs help drive return on investment through the analysis of content usage, Web site or application performance, and process performance.
| • | Vignette Web Log Reporting provides robust site and operations reporting metrics that are integrated with the Vignette Command Center. Vignette Web Log Reporting provides integrated and pre-packaged reports for measuring such metrics as site analysis, page analysis, referral statistics, click-stream and downloads. |
| • | Vignette Analysis and Reporting measures the return on investment for Web initiatives by monitoring and analyzing content interactions. With Vignette Analysis and Reporting, business users can track interactions such as most- and least-used content items, customer activity by each node in the taxonomy, unregistered content items that receive the most “hits” by an audience, the amount of activity on each presentation channel and top search terms. We also offer a variety of additional specialized products to enhance our analysis services products. |
Open Architecture
We have built an open and comprehensive platform and provide support for major industry standard platforms, including both Java 2 Platform-Enterprise Edition (J2EE™) and Microsoft .NET. Our applications support various combinations of operating systems, directory servers, Web servers, application servers and databases. We refer to this combination of operating systems, directory servers, Web servers, application servers and databases as our supported platform matrix. A representative, but not exhaustive, list of
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supported platforms includes Sun Solaris, IBM AIX and Microsoft Windows operating systems, IBM and SunOne Directory Servers, Microsoft and IBM Web servers, IBM WebSphere and BEA WebLogic application servers and Oracle, IBM DB2 and Microsoft SQLServer databases. Representative presentation layer support includes Vignette Application Portal’s own portal framework as well as JavaServer Pages (JSP), ActiveServer Pages (ASP) and XML with style sheets. Our open architecture permits easy integration and use of third-party development environments, layout and design tools, authoring tools and systems management environments.
Services
We provide services to help define online business objectives and to develop and deliver content, portal, process, collaboration, integration and analysis applications. Our consulting, education and customer care services are based on best practices, methodologies and tools developed from experience. Our services are designed to reduce time to deployment, mitigate risk and achieve greater return on our customers’ software investment.
Vignette Professional Services (VPS™) offers consulting and education services to help customers identify their strategic application objectives, design content, portal, process, collaboration, integration and analysis applications and deliver solutions using our products. Our services center on the Vignette Solution Methodology. This established framework allows customers and partners to leverage best practices to plan, build and maintain portal, content, integration, collaboration, process, and analysis solutions. VPS™ provides services that are tailored to the individual customer through either “Velocity Services,” a set of packaged service offerings, or customized services. VPS™ also partners with consulting partners to provide best-of- class services needed to create Web applications designed to meet customers’ business objectives. We generally sell our services under time-and-materials agreements.
Our Customer Care, Maintenance and Support Services organizations are committed to our customers’ ongoing business success. Customer Care services include a combination of account management and global technical support offerings that are tailored to meet customers’ specific needs. Vignette Global Support provides optional 24x7 access to skilled technical engineers and flexible, easy-to-use telephone and Web resources that can provide our customers with timely, effective assistance.
Strategy
Our objective is to maintain and extend our leadership position as a global provider of applications and products that enable organizations to harness the power of information and the Web to deliver measurable improvements in business efficiency. We will continue to focus on delivering sustained revenue and profitable growth, expanding our customer base of global 2000 organizations both at the enterprise and departmental levels, extending our technology and product leadership through internal investment in research and development, expanding our global sales capabilities and extending our partnership alliances with leading technology and services companies.
Strategic Alliances
We establish strategic alliances to assist us in the marketing, selling, distribution, and development of customer Web applications for our mutual customers and prospects, as well as to increase product interoperability within the industry. This approach is intended to increase the number of qualified personnel available to perform application design and development services for our customers, and to provide additional marketing expertise, technical expertise, and increased channels of distribution in certain vertical industry segments. In addition, our renewed focus on vertical and horizontal solution offerings of Web services applications increases the importance of our relationships with technology partners, strategic consulting partners and other channels of distribution to the market.
We have established partnerships to offer solutions based on our technology offerings and have extended our sales and implementation services reach with leading systems integrators such as Accenture, Deloitte Consulting, EDS, and Tata Consulting Services. We have also established strategic alliances with technology leaders such as BEA Systems, Hewlett-Packard, and Sun Microsystems. We recently expanded
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our product and services distribution channel via a new relationship with Access Distribution. Through this relationship, Access Distribution will make Vignette portal and collaboration solutions available through its reseller network.
We intend to invest in our existing partner relationships as well as to form new partnerships with other market-leading systems integrators, technology vendors and distribution channels.
Business Combinations
The following is a listing of our three most recent acquisitions:
TOWER Technology Pty Limited. Effective March 1, 2004, we acquired TOWER Technology Pty Limited (“Tower Technology”), a leading provider of enterprise document and records management solutions. We paid approximately $125.0 million for Tower Technology, consisting of approximately $49.8 million in cash and 27.2 million shares of common stock for all of the issued and outstanding shares of Tower Technology.
Intraspect Software, Inc. Effective December 11, 2003, we acquired all of the outstanding stock of Intraspect Software, Inc. (“Intraspect”), a leading provider of collaboration software, in exchange for $10.0 million in cash and approximately 4.2 million shares of stock. The total purchase price, including transaction costs of $0.5 million, was approximately $20.4 million.
Epicentric, Inc. Effective December 3, 2002, we acquired all of the outstanding stock of Epicentric, Inc. (“Epicentric”), a leading provider of business portal solutions, in exchange for $26.0 million in cash. The total purchase price, including transaction costs of $3.1 million, was $29.1 million.
In connection with each of our acquisitions, we incurred one-time acquisition costs and integration-related charges. Such charges relate to product integration, cross-training of employees, and other merger-related items. In four of our acquisitions, a portion of the purchase price was allocated to in-process research and development and was expensed upon the consummation of the respective transaction. These related acquisition, integration and in-process research and development charges totaled approximately $7.6 million, $4.3 million, and $1.8 million during 2004, 2003, and 2002, respectively.
Customers
As of December 31, 2004, we had served over 1,800 end-user customers. Our customer list includes successful organizations in the entertainment, financial services, government, healthcare, high technology, higher education, life sciences, manufacturing, new media and publishing, retail, telecom and travel industries.
Competition
The market for our products is intensely competitive, subject to rapid technological change and significantly affected by new product introductions and other market activities of industry participants. We expect competition to persist and intensify in the future. We have three primary sources of competition: in-house development efforts by potential customers or partners; other vendors of software that directly address Web-based application solutions; and developers of point solution software that address only certain technology components of the solution set that we provide (e.g., content management, document and records management, portal management, process, collaboration, integration or analytics).
Many of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do and thus may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Also, many current and potential competitors have wider name recognition and more extensive customer bases that could be leveraged, thereby gaining market share to our detriment. Such competitors may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies, and offer more attractive terms to purchasers than we can. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.
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Such competition could materially and adversely affect our ability to obtain revenues from either license or service fees from new or existing customers on terms favorable to us. Further, competitive pressures may require us to reduce the price of our software. In either case, our business, operating results and financial condition would be materially and adversely affected. There can be no assurance that we will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on our business, financial condition and operating results. See “Risk Factors that May Affect Future Results—Risks Related to Our Business—We Face Intense Competition from Other Software Companies, Which Could Make it Difficult to Compete Successfully.”
Research and Development
We have made substantial investments in research and development through both internal development and technology acquisitions. Although we plan to continue to evaluate externally developed technologies for integration into our product lines, we expect that most enhancements to existing and new products will be developed internally. We have recently moved to a model where approximately 50 percent of our research and development operations will be maintained in India. There, third-party developers are acting as an extension of our primary development and information technology operations in Austin, Texas and Sydney, Australia. We expect this model to help us achieve significant efficiencies, including reduced operational costs and permit an around-the-clock development cycle. See “Risk Factors that May Affect Future Results—Risks Related to Our Business—Our Business May Become Increasingly Susceptible to Numerous Risks Associated with International Operations.”
The majority of our research and development activity has been directed towards future extensions to our family of products. This development consists primarily of adding new competitive product features and additional tools and products.
Research and development expenditures, excluding acquired in-process research and development charges, for 2004, 2003 and 2002 were approximately $40.2 million, $39.9 million, and $51.3 million respectively. We expect that we will continue to commit significant resources to research and development in the future. Substantially all of our research and development costs have been expensed as incurred.
The market for our products and services is characterized by rapid technological change, frequent new product introductions and enhancements, evolving industry standards, and rapidly changing customer requirements. The introduction of products incorporating new technologies and the emergence of new industry standards could render existing products obsolete and unmarketable. While we believe we invest appropriate resources in our research and development efforts, our overall spending has been reduced as part of our focus on expense management. These reductions may impair our ability to maintain technology leadership. Our future success will depend in part on our ability to anticipate changes, enhance our current products, develop and introduce new products that keep pace with technological advancements and address the increasingly sophisticated needs of our customers. See “Risk Factors that May Affect Future Results—Risks Related to Our Business—If We are Unable to Meet the Rapid Changes in Software Technology, Our Existing Products Could Become Obsolete.”
As a part of Vignette’s cost reduction efforts in research and development, we have shifted an increased percentage of our development efforts offshore to our Global Development Center in Hyderabad, India. Although this center is being structured and operated properly, there are risks inherent to offshoring, risks inherent to outsourcing, and risks inherent to operating a team and facility in India. See “Risk Factors that May Affect Future Results—Risks Related to our Business— We Use a Third-Party Service Provider in India for a Significant Portion of Our Research and Development Operations and, If We Are Unable to Manage Our Outsourcing Relationship or if We Are Unable to Use Such a Provider, Our Business Could Be Adversely Affected.”
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Sales and Marketing
We market our products primarily through our direct sales force; however, we intend to expand our indirect sales channel through additional relationships with systems integrators, value-added resellers and original equipment manufacturers. We generate leads from a variety of sources, including businesses seeking partners to develop Web-based applications. Initial sales activities typically include a demonstration of our product capabilities followed by one or more detailed technical reviews. As of December 31, 2004, the direct sales force consisted of 177 sales executives and related support personnel.
We will continue to establish partnerships with major industry vendors and strategically selected regional partners that will add value to our products and expand distribution opportunities.
We use a variety of marketing programs to build market awareness of our brand name, our products, and Vignette as well as to attract potential customers for our products. A broad mix of programs are used to accomplish these goals, including market research, product and strategy updates with industry analysts, public relations activities, advertising, direct marketing and relationship marketing programs, seminars, customer events, user group meetings, trade shows and speaking engagements. Our marketing organization also produces marketing materials in support of sales to prospective customers that include brochures, data sheets, white papers, presentations and demonstrations.
Proprietary Rights and Licensing
Our success and ability to compete is dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We presently own eight (8) patents and have a number of patent applications pending in the United States. We have seventeen (17) registered trademarks in the United States, three (3) pending trademark applications in the United States, seventy-two (72) registered trademarks in foreign countries, and twenty-three (23) pending trademark applications in foreign countries. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to signed license or “shrink-wrap” agreements, which impose certain restrictions on the licensee’s ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and while we are unable to determine the extent to which piracy of our software exists, software piracy can be expected to be a persistent problem. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. However, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Any such resulting litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure by us to meaningfully protect our property could have a material adverse effect on our business, operating results and financial condition.
To date, we have not been notified that our products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement with respect to our current or future products. We expect that developers of commercial software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and as the functionality of products in different segments of the software industry increasingly overlaps. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert
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management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful claim of product infringement against us and our failure or inability to license the infringed technology or develop or license technology with comparable functionality could have a material adverse effect on our business, financial condition and operating results. See “Risk Factors that May Affect Future Results-Risks Related to Our Business-Our Business is Based on Our Intellectual Property and We Could Incur Substantial Costs Defending Our Intellectual Property from Infringement or a Claim of Infringement.”
We include certain third-party software in our products. This third-party software may not continue to be available on commercially reasonable terms. To the extent we could not maintain licenses to some or all of this third-party software, shipments of our products could be delayed until equivalent software could be developed or licensed and integrated into our products, which could materially adversely affect our business, operating results and financial condition.
Employees
As of December 31, 2004, we had 730 employees, including 128 in research and development, 219 in sales and marketing, 295 in professional services and customer support, and 88 in finance and administration. 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 also employ independent contractors to support our professional services, product development, sales, marketing and finance organizations. We also outsource certain development, including product development and quality assurance. Our employees are not represented by any collective bargaining unit, and we have never experienced a work stoppage. We believe our relations with our employees are good.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks before making an investment decision. The risks described below are not the only ones that we face. Our business, operating results or financial condition could be materially adversely affected by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you as an investor may lose all or part of your investment. You should also refer to the other information set forth in this report, including our consolidated financial statements and the related notes.
Various sections of this Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Form 10-K. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Risks Related to Our Business
We Have Incurred Losses Throughout Our Operating History and May Not be Able to Achieve Consistent Profitability
Throughout our operating history, we have incurred operating losses on a quarterly and annual basis. As of December 31, 2004, we had an accumulated deficit of $2.4 billion. To achieve and sustain profitable operations and positive cash flows, we must increase our license and support services revenues. If our revenues do not grow at a rate greater than expenses required to fund our continuing operations, we will not become profitable, which could cause the price of our common stock to decline.
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Our Revenue For a Particular Period is Difficult to Forecast, and a Shortfall in Revenue Would Harm Our Operating Results
As a result of the evolving nature of the market in which we compete, our revenue, license bookings, and earnings are difficult to forecast and are likely to fluctuate from quarter to quarter. We plan our operating expense based on our historical results, and in part, on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if our revenues are lower than we had forecasted. Our ability to accurately forecast our quarterly revenue is limited because our software products have a long sales cycle that makes it difficult to predict the quarter in which sales will occur. We would expect our business, operating results and financial condition to be materially adversely affected if our revenues do not meet our projections and that net losses in a given quarter would be greater than expected.
We Expect Our Quarterly Revenues and Operating Results to Fluctuate
Our revenues and operating results have varied significantly from quarter to quarter in the past and we expect that our operating results will continue to vary significantly from quarter to quarter. A number of factors are likely to cause these variations, including:
| • | demand for our products and services; |
| • | the timing of sales of our products and services; |
| • | the timing of customer orders and product implementations; |
| • | seasonal fluctuations in information technology purchasing; |
| • | unexpected delays in introducing new products and services; |
| • | increased expenses, whether related to sales and marketing, product development, product migration and customer support, or administration; |
| • | changes in the rapidly evolving market for Web-based applications; |
| • | the mix of product license and services revenue, as well as the mix of products licensed; |
| • | the mix of services provided and whether services are provided by our own staff or third-party contractors; |
| • | the mix of domestic and international sales; |
| • | difficulties in collecting accounts receivable; |
| • | costs related to possible acquisitions of technology or businesses; |
| • | global events, including terrorist activities, military operations and widespread epidemics; |
| • | the general economic climate; and |
| • | changes to our licensing and pricing model. |
Accordingly, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of one quarter as an indication of future performance.
We will continue to invest in our research and development, sales and marketing, professional services and general and administrative organizations. We expect such overall spending, in absolute dollars, will increase in future periods, particularly given our recent acquisitions. If our revenue expectations are not achieved, our business, operating results or financial condition could be materially adversely affected and net losses in a given quarter would be greater than expected.
We Use a Third-Party Service Provider in India for a Significant Portion of Our Research and Development Operations and, If We Are Unable to Manage Our Outsourcing Relationship or if We Are Unable to Use Such a Provider, Our Business Could Be Adversely Affected
We are currently using a third-party service provider in India to supply approximately fifty percent of our research and development operations. As other software companies have done and are continuing to do, we may continue to allocate more development and IT resources to Indian third parties, and we may expand our own operational capabilities in India, with the expectation of achieving significant efficiencies including reduced operational costs and an around-the-clock development cycle. If we are unable to successfully manage our relationship with the third-party service provider, we will not be able to achieve such efficiencies and our business operations could be harmed.
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In addition, although to date, the dispute between India and Pakistan involving the Kashmir region and the incidents of terrorism in India have not adversely affected our ability to utilize a third-party service provider in India, such disputes and acts of terrorism could potentially affect our ability to obtain research and development operations from third-party providers. Should we be unable to use a third-party service provider in India for a portion of our research and development in the future, we believe that our business could be adversely affected.
Our Business May Become Increasingly Susceptible to Numerous Risks Associated with International Operations
International operations are generally subject to a number of risks, including:
| • | expenses associated with customizing products for foreign countries; |
| • | protectionist laws and business practices that favor local competition; |
| • | changes in jurisdictional tax laws including laws regulating intercompany transactions; |
| • | dependence on local vendors; |
| • | multiple, conflicting and changing governmental laws and regulations; |
| • | longer sales cycles; |
| • | difficulties in collecting accounts receivable; |
| • | seasonality of operations; |
| • | difficulties in staffing and managing foreign operations; |
| • | the need to localize our products; |
| • | licenses, tariffs, and other trade barriers; |
| • | loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection; |
| • | foreign currency exchange rate fluctuations; and |
| • | political and economic instability. |
The acquisition of Tower Technology and our recent consolidation of product development facilities to overseas labor markets substantially increase our international operations. Rapid and complete knowledge transfer and successful retention of key personnel is essential to our plan to consolidate product development facilities and transfer positions to labor markets with lower cost structures.
We recorded 38% and 26% of our total revenue for the years ended December 31, 2004 and 2003, respectively, through licenses and services sold to customers located outside of the United States. We expect international revenue to remain a large percentage of total revenue and we believe that we must continue to expand our international sales activities to be successful. Historically, a majority of our international revenues and costs have been denominated in foreign currencies, and we expect future international revenues and costs will be denominated in foreign currencies. Our international sales growth will be limited if we are unable to establish appropriate foreign operations, expand international sales channel management and support organizations, hire additional personnel, customize products for local markets, develop relationships with international service providers and establish relationships with additional distributors and third-party integrators. In that case, our business, operating results and financial condition could be materially adversely affected. Even if we are able to successfully expand international operations, we cannot be certain that we will be able to maintain or increase international market demand for our products.
In the third quarter of 2004, we adopted a foreign exchange policy to reduce our exposure to significant foreign currency fluctuations. We utilize foreign currency forward contracts to hedge foreign currency-denominated payables and receivables. To date, we have not hedged forecasted transactions or firm commitments denominated in foreign currencies. Gains and losses on hedging contracts are reflected currently in other income and expense. We typically limit the duration of our foreign currency forward contracts to 90 days. We do not invest in contracts for speculative purposes.
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We Must Overcome Significant Challenges in Integrating Businesses Operations and Product Offerings to Realize the Benefits of our Business Combinations
As part of our overall strategy, we have acquired or invested in, complementary companies, products, and technologies. Risks commonly associated with such transactions include:
| • | the potential difficulties of integrating international and domestic operations; |
| • | the potential disruption of our ongoing business and diversion of management resources; |
| • | the possibility that the business cultures will not be compatible; |
| • | the difficulty of incorporating acquired technology and rights into our products and services; |
| • | unanticipated expenses related to integration of operations; |
| • | the impairment of relationships with employees and customers as a result of any integration of new personnel; |
| • | potential unknown liabilities associated with the acquired business and technology; |
| • | costs and delays in implementing common systems and procedures, including financial accounting systems and customer information systems; and |
| • | potential inability to retain, integrate and motivate key management, marketing, technical sales and customer support personnel. |
For such transactions to achieve their anticipated benefits, we must successfully combine and integrate products in a timely manner. Integrating can be a complex, time-consuming and expensive process and may result in revenue disruption and operational difficulties if not completed in a timely and efficient manner. We may be required to spend additional time or money on integration that would otherwise be spent on developing our business or on other matters. If we do not integrate our operations and technology smoothly or if management spends too much time on integration issues, it could harm our business, financial condition and results of operations and diminish the benefits of the acquisition as well as harm our content management business.
Prior to the acquisitions, each company operated independently, each with its own business, business culture, markets, clients, employees and systems. Following the acquisitions, we must operate as a combined organization, utilizing common information communication systems, operating procedures, financial controls and human resource practices, including benefits, training and professional development programs. There may be substantial difficulties, costs and delays involved in the integration. There can be no assurance that we will succeed in addressing these risks or any other problems encountered in connection with the acquisition.