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EX-32.1 - EX-32.1 - BLACKBOARD INC | w78384exv32w1.htm |
EX-31.2 - EX-31.2 - BLACKBOARD INC | w78384exv31w2.htm |
EX-31.1 - EX-31.1 - BLACKBOARD INC | w78384exv31w1.htm |
EX-32.2 - EX-32.2 - BLACKBOARD INC | w78384exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission file number 000-50784
Blackboard Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 52-2081178 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
650 Massachusetts Avenue, N.W. | ||
Washington D.C. | 20001 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants Telephone Number, Including Area Code: (202) 463-4860
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Class | Outstanding at April 30. 2010 | |
Common Stock, $0.01 par value | 34,138,946 |
Blackboard Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2010
For the Quarter Ended March 31, 2010
INDEX
Throughout this Quarterly Report on Form 10-Q, the terms we, us, our and Blackboard refer
to Blackboard Inc. and its subsidiaries.
ii
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PART I FINANCIAL INFORMATION
Item 1. | Consolidated Financial Statements |
BLACKBOARD INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 167,353 | $ | 146,276 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,184 and $868, respectively |
69,098 | 51,394 | ||||||
Inventories |
1,557 | 378 | ||||||
Prepaid expenses and other current assets |
14,803 | 14,477 | ||||||
Deferred tax asset, current portion |
2,692 | | ||||||
Deferred cost of revenues |
7,664 | 6,553 | ||||||
Total current assets |
263,167 | 219,078 | ||||||
Deferred tax asset, noncurrent portion |
18,188 | 18,800 | ||||||
Investment in common stock warrant |
3,124 | 3,124 | ||||||
Restricted cash |
3,923 | 3,896 | ||||||
Property and equipment, net |
34,483 | 33,044 | ||||||
Other assets |
1,453 | 1,180 | ||||||
Goodwill |
329,287 | 355,583 | ||||||
Intangible assets, net |
71,309 | 78,000 | ||||||
Total assets |
$ | 724,934 | $ | 712,705 | ||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,360 | $ | 2,192 | ||||
Accrued expenses |
28,264 | 21,999 | ||||||
Deferred rent, current portion |
1,021 | 475 | ||||||
Deferred tax liability, current portion |
| 478 | ||||||
Deferred revenues, current portion |
186,702 | 151,347 | ||||||
Total current liabilities |
218,347 | 176,491 | ||||||
Convertible senior notes, net of debt discount of $8,823 and $7,294, respectively |
156,177 | 157,706 | ||||||
Deferred rent, noncurrent portion |
11,507 | 11,879 | ||||||
Deferred tax liability, noncurrent portion |
1,474 | 1,694 | ||||||
Deferred revenues, noncurrent portion |
5,957 | 5,269 | ||||||
Total liabilities |
393,462 | 353,039 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value; 5,000,000 shares authorized, and no shares issued or
outstanding |
| | ||||||
Common stock, $0.01 par value; 200,000,000 shares authorized; 33,100,139 and 33,955,765
shares issued and outstanding, respectively |
331 | 340 | ||||||
Additional paid-in capital |
406,751 | 429,900 | ||||||
Accumulated deficit |
(75,610 | ) | (70,574 | ) | ||||
Total stockholders equity |
331,472 | 359,666 | ||||||
Total liabilities and stockholders equity |
$ | 724,934 | $ | 712,705 | ||||
See notes to unaudited consolidated financial statements.
1
Table of Contents
BLACKBOARD INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2010 | |||||||
Revenues: |
||||||||
Product |
$ | 80,126 | $ | 93,730 | ||||
Professional services |
6,322 | 7,336 | ||||||
Total revenues |
86,448 | 101,066 | ||||||
Operating expenses: |
||||||||
Cost of product revenues, excludes $3,638 and $2,508 in
amortization of acquired technology included in
amortization of intangibles resulting from acquisitions
shown below, respectively (1) |
21,444 | 24,534 | ||||||
Cost of professional services revenues (1) |
4,767 | 4,479 | ||||||
Research and development (1) |
10,827 | 12,205 | ||||||
Sales and marketing (1) |
23,941 | 25,315 | ||||||
General and administrative (1) |
13,602 | 14,705 | ||||||
Amortization of intangibles resulting from acquisitions |
8,585 | 8,978 | ||||||
Total operating expenses |
83,166 | 90,216 | ||||||
Income from operations |
3,282 | 10,850 | ||||||
Other expense, net: |
||||||||
Interest expense |
(2,891 | ) | (2,888 | ) | ||||
Interest income |
107 | 21 | ||||||
Other expense |
(558 | ) | (527 | ) | ||||
(Loss) income before benefit (provision) for income taxes |
(60 | ) | 7,456 | |||||
Benefit (provision) for income taxes |
23 | (2,420 | ) | |||||
Net (loss) income |
$ | (37 | ) | $ | 5,036 | |||
Net (loss) income per common share: |
||||||||
Basic |
$ | (0.00 | ) | $ | 0.15 | |||
Diluted |
$ | (0.00 | ) | $ | 0.15 | |||
Weighted average number of common shares: |
||||||||
Basic |
31,503,578 | 33,432,192 | ||||||
Diluted |
31,503,578 | 34,397,711 | ||||||
(1) Includes the following amounts related to
stock-based compensation: |
||||||||
Cost of product revenues |
$ | 270 | $ | 337 | ||||
Cost of professional services revenues |
90 | 148 | ||||||
Research and development |
227 | 268 | ||||||
Sales and marketing |
1,582 | 1,868 | ||||||
General and administrative |
1,818 | 2,335 |
See notes to unaudited consolidated financial statements.
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BLACKBOARD INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months | ||||||||
Ended March 31, | ||||||||
2009 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net (loss) income |
$ | (37 | ) | $ | 5,036 | |||
Adjustments to reconcile net (loss) income to net cash provided by (used
in) operating activities: |
||||||||
Deferred tax benefit |
(1,856 | ) | (398 | ) | ||||
Excess tax benefit from stock-based compensation |
(182 | ) | (2,800 | ) | ||||
Amortization of debt discount |
1,555 | 1,528 | ||||||
Depreciation and amortization |
4,719 | 4,629 | ||||||
Amortization of intangibles resulting from acquisitions |
8,585 | 8,978 | ||||||
Change in allowance for doubtful accounts |
289 | (316 | ) | |||||
Stock-based compensation |
3,987 | 4,956 | ||||||
Changes in operating assets and liabilities, net of effect of acquisitions: |
||||||||
Accounts receivable |
35,786 | 18,488 | ||||||
Inventories |
(178 | ) | 1,178 | |||||
Prepaid expenses and other current assets |
(3,858 | ) | 629 | |||||
Deferred cost of revenues |
1,344 | 1,112 | ||||||
Accounts payable |
73 | (1,628 | ) | |||||
Accrued expenses |
(6,914 | ) | (3,571 | ) | ||||
Deferred rent |
658 | (173 | ) | |||||
Deferred revenues |
(39,585 | ) | (38,877 | ) | ||||
Net cash provided by (used in) operating activities |
4,386 | (1,229 | ) | |||||
Cash flows from investing activities |
||||||||
Acquisitions, net of cash acquired |
| (34,912 | ) | |||||
Purchases of property and equipment |
(5,287 | ) | (3,165 | ) | ||||
Purchases of available-for-sale securities |
(6,586 | ) | | |||||
Payments for patent enforcement costs |
(41 | ) | | |||||
Net cash used in investing activities |
(11,914 | ) | (38,077 | ) | ||||
Cash flows from financing activities |
||||||||
Releases of letters of credit |
80 | 27 | ||||||
Excess tax benefits from stock-based compensation |
182 | 2,800 | ||||||
Proceeds from exercise of stock options |
1,684 | 15,402 | ||||||
Net cash provided by financing activities |
1,946 | 18,229 | ||||||
Net decrease in cash and cash equivalents |
(5,582 | ) | (21,077 | ) | ||||
Cash and cash equivalents at beginning of period |
141,746 | 167,353 | ||||||
Cash and cash equivalents at end of period |
$ | 136,164 | $ | 146,276 | ||||
See notes to unaudited consolidated financial statements.
3
Table of Contents
BLACKBOARD INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2010
In these Notes to Unaudited Consolidated Financial Statements, the terms the Company and
Blackboard refer to Blackboard Inc. and its subsidiaries.
1. Nature of Business and Organization
Blackboard Inc. (the Company) is a leading provider of enterprise software applications and
related services to the education industry. The Companys clients include colleges, universities,
schools and other education providers, textbook publishers and student-focused merchants who serve
these education providers and their students, and corporate and government clients.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. The results of
operations for the three months ended March 31, 2010 are not necessarily indicative of the results
that may be expected for the full fiscal year. The consolidated balance sheet at December 31, 2009
has been derived from the audited consolidated financial statements at that date but does not
include all of the information and notes required by U.S. generally accepted accounting principles
for complete financial statements.
These consolidated financial statements should be read in conjunction with the audited
consolidated financial statements as of December 31, 2008 and 2009 and for each of the three years
in the period ended December 31, 2009 included in the Companys Annual Report on Form 10-K filed
with the Securities and Exchange Commission on February 17, 2010.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries after elimination of all significant intercompany balances and transactions.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and it considers assumptions that market participants would use when pricing the
asset or liability. The Company evaluates the fair value of certain assets and liabilities using
the following fair value hierarchy which ranks the quality and reliability of inputs, or
assumptions, used in the determination of fair value:
Level 1 quoted prices in active markets for identical assets and liabilities
Level 2 inputs other than Level 1 quoted prices that are directly or indirectly observable
Level 3 unobservable inputs that are not corroborated by market data
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Table of Contents
The Company evaluates assets and liabilities subject to fair value measurements on a recurring
and nonrecurring basis to determine the appropriate level to classify them for each reporting
period. This determination requires significant judgments to be made by the Company. The following
table sets forth the Companys assets and liabilities that were measured at fair value as of March
31, 2010, by level within the fair value hierarchy (in thousands):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
March 31, | Identical Assets | Observable Inputs | Inputs | |||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents(1) |
$ | 97,765 | $ | 97,765 | $ | | $ | | ||||||||
Investment in common stock
warrant |
3,124 | | | 3,124 | ||||||||||||
Total assets |
$ | 100,889 | $ | 97,765 | $ | | $ | 3,124 | ||||||||
Liabilities: |
||||||||||||||||
Convertible senior notes(2) |
$ | 167,888 | $ | 167,888 | $ | | $ | | ||||||||
(1) | Cash equivalents consist of money market funds with original maturity dates of less than three months for which the fair value is based on quoted market prices. | |
(2) | The fair value of the Companys convertible senior notes is based on the quoted market price. |
Assets and liabilities that are measured at fair value on a non-recurring basis include
intangible assets and goodwill. These items are recognized at fair value when they are considered
to be impaired. During the three months ended March 31, 2010, there were no fair value adjustments
for assets and liabilities measured on a non-recurring basis.
The Company has determined that although some market data was available, the investment in the
common stock warrant was principally valued using the Companys own assumptions in calculating the
estimate of fair value including a discounted cash flow and comparable company analysis and, as a
result, is classified as a Level 3 instrument. There were no changes
in the fair value of the investment in common stock warrant during
the three months ended March 31, 2010.
The Company discloses fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that value. Due to their
short-term nature, the carrying amounts reported in the consolidated financial statements
approximate the fair value for accounts receivable, accounts payable and accrued expenses.
Investment in Common Stock Warrant
The Company holds a warrant to purchase common stock in an entity that provides technology
support services to educational institutions, including the Companys customers, that is
exercisable for 9.9% of the common shares of the entity. This common stock warrant meets the
definition of a derivative. In determining the fair value of the common stock warrant, the Company
considered an equity transaction between this entity and a venture capital firm during the year
ended December 31, 2009 as well as other measures that the Company evaluates in calculating fair
value including a discounted cash flow and comparable company analysis. The fair value of the
common stock warrant of $3.1 million is recorded as investment in common stock warrant on the
Companys consolidated balance sheets as of December 31, 2009 and March 31, 2010, respectively. The
Company will continue to evaluate the fair value of this instrument in subsequent reporting periods
and any changes in value will be recognized in the consolidated statements of operations.
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Table of Contents
Revenue Recognition and Deferred Revenue
The Companys revenues are derived from two sources: product sales and professional
services sales. Product revenues include software license fees, subscription fees from customers
accessing its on-demand application services, hardware, premium support and maintenance, and
hosting revenues. Professional services revenues include training and consulting services. The
Companys software does not require significant modification and customization services. Where
services are not essential to the functionality of the software, the Company begins to recognize
software licensing revenues when all of the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred; (3) the fee is fixed and determinable; and
(4) collectibility is probable.
The Company does not have vendor-specific objective evidence (VSOE) of fair value for
support and maintenance separate from software for the majority of its products. Accordingly, when
licenses are sold in conjunction with the Companys support and maintenance, license revenue is
recognized over the term of the maintenance service period. When licenses of certain offerings are
sold in conjunction with support and maintenance where the Company does have VSOE, the Company
recognizes the license revenue upon delivery of the license and recognizes the support and
maintenance revenue over the term of the maintenance service period.
Hosting fees and set-up fees are recognized ratably over the term of the hosting agreement.
After any necessary installation services are performed, hardware revenues are recognized when
all of the following criteria are met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed and determinable; and (4) collectibility is
probable.
The Company early adopted new accounting guidance on January 1, 2010 which impacts the way
that the Company accounts for (a) non-software components of tangible products and (b) software
components of tangible products that are sold, licensed, or leased with tangible products when the
software components and non-software components of the tangible product function together to
deliver the tangible products essential functionality. The Company applied this guidance on a
prospective basis to arrangements executed or significantly modified after December 31, 2009. The
Company allocates the overall consideration on such sales to each deliverable using a best estimate
of the selling price of individual deliverables in the arrangement in the absence of VSOE or other
third-party evidence of the selling price.
As a result of the adoption of this guidance, the product revenues and cost of product
revenues related to hardware and software sales in the Blackboard Transact product line will
generally be recognized upfront upon delivery of the product to the customer. Product revenues in
the Blackboard Transact product line generally consist of hardware, software and support.
Generally, the consideration allocated to the hardware and software deliverables is determined
using a best estimate of selling price which the Company estimates based on an analysis of market
data and the Companys internal cost to deliver each element. Generally, the consideration
allocated to the support deliverable is based on third party evidence. During the three months
ended March 31, 2010, the Company recognized approximately $2.7 million of product revenues under
this new accounting guidance related to arrangements executed or significantly modified after
December 31, 2009 and, of these arrangements, approximately $0.8 million is recorded as deferred
revenues as of March 31, 2010. The effect of changes in either selling price or the method or
assumptions used to determine selling price for a specific deliverable could have a material effect
on the allocation of the overall consideration of an arrangement.
Prior to the adoption of this new accounting guidance, in the absence of VSOE, all revenue on
such sales was recognized ratably over the term of the maintenance service period. If the Company
had adopted this guidance on January 1, 2009, revenues, income from operations, net income and
basic and diluted earnings per share would have been approximately
$2.4 million, $1.8 million, $1.1
million, $0.03 and $0.03, respectively, higher during the three months ended March 31, 2009. The
adoption of this new accounting guidance is expected to continue to have a material effect on the
Companys consolidated results of operations and financial condition.
The Companys sales arrangements may include professional services sold separately under
professional services agreements that include training and consulting services. Revenues from these
arrangements are accounted for separately from the license revenue because they meet the criteria
for separate accounting. The more significant factors considered in determining whether revenues
should be accounted for separately include the nature of the professional services, such as
consideration of whether the professional services are essential to the functionality of the
licensed product, degree of risk, availability of professional services from other vendors and
timing of payments. Professional services that are sold separately from license revenue are
recognized as the professional services are performed on a time-and-materials basis.
The Company does not offer specified upgrades or incrementally significant discounts. Advance
payments are recorded as deferred revenues until the product is shipped, services are delivered or
obligations are met and the revenues can be recognized. Deferred revenues represent the excess of
amounts invoiced over amounts recognized as revenues. Non-specified upgrades of the Companys
product are provided only on a when-and-if-available basis. Any contingencies, such as rights of
return, conditions of acceptance, warranties and price protection, are accounted for as a separate
element. The effect of accounting for these contingencies included in revenue arrangements has not
been material.
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Table of Contents
Cost of Revenues and Deferred Cost of Revenues
Cost of revenues includes all direct materials, direct labor, direct shipping and handling
costs, telecommunications costs related to the Blackboard Connect product, and those indirect costs
related to revenue such as indirect labor, materials and supplies, equipment rent, and amortization
of software developed internally and software license rights. Cost of product revenues excludes
amortization of acquired technology intangibles resulting from acquisitions, which is included as
amortization of intangibles acquired in acquisitions. Amortization expense related to acquired
technology was $3.6 million and $2.5 million for the three months ended March 31, 2009 and 2010,
respectively.
Deferred cost of revenues represents the cost of hardware (if sold as part of a complete
system) and software that has been purchased and has been sold in conjunction with the Companys
products. As a result of new accounting guidance adopted on January
1, 2010, the Company generally recognizes these costs upon shipment of the products to our
clients. In general, prior to the adoption of the new accounting guidance on January 1, 2010, the
Company initially deferred these costs and recognized them into expense over the period in which
the related revenue was recognized. The Company does not have transactions in which the deferred
cost of revenues exceed deferred revenues.
Basic and Diluted Net (Loss) Income per Common Share
Basic net (loss) income per common share excludes dilution for potential common stock
issuances and is computed by dividing net (loss) income by the weighted-average number of common
shares outstanding for the period. Diluted net (loss) income per common share reflects the
potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
The following table provides a reconciliation of the numerators and denominators used in
computing basic and diluted net (loss) income per common share:
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2010 | |||||||
(Unaudited) | ||||||||
(In thousands, except share and per share amounts) | ||||||||
Net (loss) income |
$ | (37 | ) | $ | 5,036 | |||
Weighted average shares outstanding, basic |
31,503,578 | 33,432,192 | ||||||
Dilutive effect of: |
||||||||
Stock options and restricted stock units related
to the issuance of common stock |
| 965,519 | ||||||
Weighted average shares outstanding, diluted |
31,503,578 | 34,397,711 | ||||||
Basic net (loss) income per common share |
$ | (0.00 | ) | $ | 0.15 | |||
Diluted net (loss) income per common share |
$ | (0.00 | ) | $ | 0.15 | |||
The dilutive effect of options to purchase an aggregate of 5,567,720 and 1,579,624
shares, respectively, were not included in the computations of diluted net (loss) income per common
share for the three months ended March 31, 2009 and 2010 as their effect would be anti-dilutive.
Comprehensive Net (Loss) Income
Comprehensive net (loss) income includes net (loss) income, combined with unrealized gains and
losses not included in earnings and reflected as a separate component of stockholders equity.
There were no material differences between net (loss) income and comprehensive net (loss) income
for the three months ended March 31, 2009 and 2010.
7
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Recent Accounting Pronouncements
In January 2010, the FASB amended the accounting standards for fair value measurement and
disclosures. The amended guidance requires disclosures regarding the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the
transfers. It also requires separate presentation of purchases, sales, issuances and settlements of
Level 3 fair value measurements. The guidance is effective for interim and annual reporting periods
beginning after December 15, 2009, with the exception of the additional Level 3 disclosures which
are effective for fiscal years beginning after December 15, 2010. The Company is currently
evaluating the guidance regarding the additional Level 3 disclosures and does not believe that this
guidance will have a significant impact on the Companys consolidated results of operations or
financial condition.
3. Mergers and Acquisitions
Saf-T-Net, Inc. Merger
On March 19, 2010, the Company completed its merger with Saf-T-Net, Inc. (Saf-T-Net)
pursuant to the Agreement and Plan of Merger dated March 7, 2010. Pursuant to the Agreement and
Plan of Merger, the Company paid merger consideration of $34.7 million. The effective cash portion
of the purchase price of Saf-T-Net before transaction costs of approximately $0.5 million was
$34.4 million, net of Saf-T-Nets March 19, 2010 cash balance of $0.2 million. The Company has
included the financial results of Saf-T-Net in its consolidated financial statements beginning
March 20, 2010.
Saf-T-Net is the provider of AlertNow, a leading messaging and mass notification solution for
the K-12 marketplace. The Company believes the merger with Saf-T-Net supports the Companys
long-term strategic direction and the demands for innovative technology in the education industry.
Management believes that the merger with Saf-T-Net will help the Company meet the growing demands
of its clients, including the ability to send mass communications via various means.
The merger was accounted for under the acquisition method of accounting. Assets acquired and
liabilities assumed were recorded at their fair values as of March 19, 2010. The total preliminary
purchase price was $34.7 million, excluding the estimated acquisition related transaction costs of
approximately $0.5 million and excluding acquired cash. Acquisition-related transaction costs
include investment banking, legal and accounting fees, and other external costs directly related to
the merger.
Preliminary Purchase Price Allocation
Under the acquisition method of accounting, the total estimated purchase price was allocated
to Saf-T-Nets net tangible liabilities and intangible assets based on their estimated fair values
as of March 19, 2010. The excess of the purchase price over the net tangible liabilities and
identifiable intangible assets was recorded as goodwill. The preliminary allocation of the purchase
price as shown in the table below was based upon managements preliminary valuation, which was
based on estimates and assumptions that are subject to change. The areas of the purchase price
allocation that are not yet finalized relate primarily to income and non-income based taxes. The
preliminary estimated purchase price is allocated as follows (in thousands):
Cash and cash equivalents |
$ | 238 | ||
Accounts receivable |
468 | |||
Prepaid expenses and other current assets |
30 | |||
Property and equipment |
14 | |||
Accounts payable |
(1,459 | ) | ||
Other accrued liabilities |
(586 | ) | ||
Deferred tax liabilities, net |
(3,176 | ) | ||
Deferred revenue |
(2,835 | ) | ||
Net tangible liabilities acquired |
(7,306 | ) | ||
Definite-lived intangible assets acquired |
15,680 | |||
Goodwill |
26,296 | |||
Total estimated purchase price |
$ | 34,670 | ||
Prior to the end of the measurement period for finalizing the purchase price allocation, if
information becomes available which would indicate adjustments are required to the purchase price
allocation, such adjustments will be included in the purchase price allocation retrospectively.
Of the total estimated purchase price, a preliminary estimate of $7.3 million has been
allocated to net tangible liabilities acquired, and $15.7 million has been allocated to
definite-lived intangible assets acquired. Definite-lived intangible assets consist of the value
assigned to Saf-T-Nets customer relationships of $12.7 million, developed and core technology of
$2.3 million, and
trademarks of $0.7 million. Approximately $26.3 million has been allocated to
goodwill.
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The value assigned to Saf-T-Nets customer relationships was determined by discounting the
estimated cash flows associated with the existing customers as of the date the merger was
consummated taking into consideration estimated attrition of the existing customer base. The
estimated cash flows were based on revenues for those existing customers net of operating expenses
and net of capital charges for other tangible and intangible assets that contribute to the
projected cash flow from those customers. The projected revenues were based on assumed revenue
growth rates and customer renewal rates. Operating expenses were estimated based on the supporting
infrastructure expected to sustain the assumed revenue growth rates. Net capital charges for assets
that contribute to projected customer cash flow were based on the estimated fair value of those
assets. A discount rate of 19% was deemed appropriate for valuing the existing customer base and
was based on the risks associated with the respective cash flows taking into consideration the
Companys weighted average cost of capital. The Company amortizes the value of Saf-T-Nets customer
relationships on a straight-line basis over seven years. Amortization of customer relationships is
not deductible for tax purposes.
The value assigned to Saf-T-Nets developed and core technology was determined by
discounting the estimated royalty savings associated with an estimated royalty rate for the use of
the technology to their present value. Developed and core technology, which consists of products
that have reached technological feasibility, includes products in Saf-T-Nets current product line.
The royalty rates used to value the technology were based on estimates of prevailing royalty rates
paid for the use of similar technology and
technology in market transactions involving licensing arrangements of companies that operate in
service-related industries. A discount rate of 19% was deemed appropriate for valuing developed and
core technology and was based on the risks associated with the respective royalty savings taking
into consideration the Companys weighted average cost of capital. The Company amortizes the
developed and core technology on a straight-line basis over three years. Amortization of developed
and core technology is not deductible for tax purposes.
The value assigned to Saf-T-Nets trademarks was determined by discounting the estimated
royalty savings associated with an estimated royalty rate for the use of the trademarks to their
present value. The trademarks consist of Saf-T-Nets trade name and various trademarks related to
its existing product lines. The royalty rates used to value the trademarks were based on estimates
of prevailing royalty rates paid for the use of similar trade names and trademarks in market
transactions involving licensing arrangements of companies that operate in service-related
industries. A discount rate of 19% was deemed appropriate for valuing Saf-T-Nets trademarks and
was based on the risks associated with the respective royalty savings taking into consideration the
Companys weighted average cost of capital. The Company amortizes the trademarks on a straight-line
basis over three years. Amortization of trademarks is not deductible for tax purposes.
Of the total estimated purchase price, approximately $26.3 million has been allocated to
goodwill and is not deductible for tax purposes. Goodwill represents factors including expected
synergies from combining operations and is the excess of the purchase price of an acquired business
over the fair value of the net tangible and intangible assets acquired. Goodwill will not be
amortized but instead will be tested for impairment at least annually (more frequently if
indicators of impairment arise). In the event that management determines that the goodwill has
become impaired, the Company will incur an accounting charge for the amount of the impairment
during the fiscal quarter in which the determination is made.
As a result of the Saf-T-Net merger, the Company recorded a net deferred tax liability of
approximately $3.2 million in its preliminary purchase price allocation. This balance is comprised
of approximately $6.0 million in deferred tax liabilities resulting primarily from the estimated
amortization expense of identified intangibles, and approximately $2.8 million in deferred tax
assets that relate primarily to federal and state net operating loss carry forwards.
Deferred Revenue
In connection with the preliminary purchase price allocation, the estimated fair value of the
support obligation assumed from Saf-T-Net in connection with the merger was determined utilizing a
cost build-up approach. The cost build-up approach determines fair value by estimating the costs
relating to fulfilling the obligation plus a normal profit margin. The sum of the costs and
operating profit approximates the amount that the Company would be required to pay a third party to
assume the support obligation. The estimated costs to fulfill the support obligation were based on
the historical direct costs related to providing the support services and correcting any errors in
Saf-T-Nets software products. These estimated costs did not include any costs associated with
selling efforts or research and development or the related fulfillment margins on these costs.
Profit associated with selling efforts is excluded because Saf-T-Net had concluded the selling
effort on the support contracts prior to March 19, 2010. The estimated profit margin was determined
to be approximately 24%, which approximates the Companys operating profit margin to fulfill the
obligations. In allocating the purchase price, the Company recorded an adjustment to reduce the
carrying value of Saf-T-Nets March 19, 2010 deferred support revenue by approximately $2.6 million
to $2.8 million, which represents the Companys estimate of the fair value of the support
obligation assumed. As former Saf-T-Net customers renew these support contracts, the Company will
recognize revenue for the full value of the support contracts over the remaining term of the
contracts, the majority of which are one year.
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Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of
operations of the Company and Saf-T-Net on a pro forma basis, as though the companies had been
combined as of the beginning of each of the periods presented. The pro forma financial information
is presented for informational purposes only and is not indicative of the results of operations
that would have been achieved if the acquisition had taken place at the beginning of each of the
periods presented. The pro forma financial information for all periods presented also includes
amortization expense from acquired intangible assets, adjustments to interest expense, interest
income and related tax effects.
The unaudited pro forma financial information for the three months ended March 31, 2010
combines the historical results for the Company for the three months ended March 31, 2010 and the
historical results for Saf-T-Net for the period from January 1, 2010 to March 19, 2010. The
consolidated financial results for the Company for the three months ended March 31, 2010 include
revenue and net loss for Saf-T-Net for the period from March 20, 2010 to March 31, 2010 of
$0.2 million each. The unaudited pro forma financial information for the three months ended March
31, 2009 combines the historical results for the Company for the three months ended March 31, 2009
and the historical results for Saf-T-Net for the same period and also gives effect to the Companys
merger with ANGEL Learning, Inc. (ANGEL) on May 8, 2009 as if it had occurred on January 1, 2009.
Three Months Ended March 31, | ||||||||
2009 | 2010 | |||||||
(In thousands, except per share amounts) | ||||||||
(Unaudited) | ||||||||
Total revenues |
$ | 94,345 | $ | 103,734 | ||||
Net income |
$ | 1,079 | $ | 4,448 | ||||
Basic net income per common share |
$ | 0.03 | $ | 0.13 | ||||
Diluted net income per common share |
$ | 0.03 | $ | 0.13 |
ANGEL Learning, Inc. Merger
On May 8, 2009, the Company completed its merger with ANGEL pursuant to the Agreement and Plan
of Merger dated May 1, 2009. Pursuant to the Agreement and Plan of Merger, the Company paid merger
consideration of $101.3 million, which includes $87.4 million in cash and $13.9 million in shares
of the Companys common stock, or approximately 0.5 million shares of common stock. The effective
cash portion of the purchase price of ANGEL before transaction costs was approximately
$80.8 million, net of ANGELs May 8, 2009 cash balance of approximately $6.6 million. The Company
has included the financial results of ANGEL in its consolidated financial statements beginning
May 9, 2009.
4. Stock-Based Compensation
Stock Incentive Plans
As of March 31, 2010, approximately 3.2 million shares of common stock were available for
future grants under the Companys Amended and Restated 2004 Stock Incentive Plan (the 2004 Plan)
and no options were available for future grants under the Companys Amended and Restated Stock
Incentive Plan adopted in 1998. Awards granted under the 2004 Plan generally vest over a three to
four-year period and have an eight to ten-year expiration period. The Board of Directors of the
Company has approved an increase in the total number of shares of common stock issuable under the
2004 Stock Incentive Plan from 10,500,000 to 12,000,000, which is subject to shareholder approval
at the Companys annual meeting of stockholders on June 4, 2010.
The compensation cost that has been recognized in the unaudited consolidated statements of
operations for the Companys stock incentive plans was $4.0 million and $5.0 million for the three
months ended March 31, 2009 and 2010, respectively. The total
excess tax benefits recognized for stock-based compensation arrangements was $0.2
million and $2.8 million for the three months ended March 31, 2009 and 2010, respectively and are
classified as a financing cash inflow with a corresponding operating cash outflow. For stock
subject to graded vesting, the Company has utilized the straight-line method for allocating
compensation expense by period.
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Stock Options
A summary of stock option activity under the Companys stock incentive plans as of March 31,
2010, and changes during the three months then ended are as follows (aggregate intrinsic value in
thousands):
Number of | Weighted Average | Aggregate | ||||||||||
Shares | Price/Share | Intrinsic Value | ||||||||||
Exercisable at December 31, 2009 |
2,141,431 | $ | 28.01 | |||||||||
Outstanding at December 31, 2009 |
4,607,782 | $ | 29.83 | |||||||||
Granted |
731,000 | $ | 38.72 | |||||||||
Exercised |
(727,284 | ) | $ | 22.52 | $ | 14,273 | ||||||
Cancelled |
(22,970 | ) | $ | 31.90 | ||||||||
Outstanding at March 31, 2010 |
4,588,528 | $ | 32.40 | $ | 42,774 | |||||||
Exercisable at March 31, 2010 |
1,832,282 | $ | 30.61 | $ | 20,337 | |||||||
The weighted average remaining contractual lives for all options outstanding under the
Companys stock incentive plans at March 31, 2009 and 2010 were 5.9 and 6.0 years, respectively.
The weighted average remaining contractual lives for exercisable stock options at March 31, 2009
and 2010 were 4.8 and 5.0 years, respectively. As of March 31, 2010, there was approximately
$35.3 million of total unrecognized compensation cost related to unvested stock options granted
under the Companys option plans. The cost is expected to be recognized through March 2014 with a
weighted average recognition period of approximately 1.5 years.
The Company recognizes compensation expense for share-based awards based on estimated fair
values on the date of grant. The weighted average fair value of the options at the date of grant
for the three months ended March 31, 2009 and 2010 was $11.89 and $15.89, respectively. The fair
value of options vested during the three months ended March 31, 2009 and 2010 was $2.9 million and
$5.3 million, respectively. The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing
model with the following weighted-average assumptions for stock options granted during the
three months ended March 31, 2009 and 2010:
Three Months Ended March 31, | ||||||||
2009 | 2010 | |||||||
Dividend yield |
0 | % | 0 | % | ||||
Expected volatility |
47.5 | % | 45.1 | % | ||||
Risk-free interest rate |
1.6 | % | 2.3 | % | ||||
Expected life of options |
4.9 years | 4.7 years | ||||||
Forfeiture rate |
14.4 | % | 12.3 | % |
Dividend yield The Company has never declared or paid dividends on its common stock and does
not anticipate paying dividends in the foreseeable future.
Expected volatility Volatility is a measure of the amount by which a financial variable such
as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected
volatility) during a period. The Company uses the Companys daily historical volatility since
January 1, 2006 to calculate the expected volatility.
Risk-free interest rate This is the average U.S. Treasury rate (having a term that most
closely approximates the expected life of the option) for the period in which the option was
granted.
Expected life of the options This is the period of time that the equity grants are expected
to remain outstanding. For grants that have been exercised, the Company uses actual exercise data
to estimate option exercise timing. For grants that have not been exercised, the Company generally
uses the midpoint between the end of the vesting period and the contractual life of the grant to
estimate option exercise timing. Options granted during the three months ended March 31, 2009 and
2010 have a maximum term of eight years.
Forfeiture rate This is the estimated percentage of equity grants that are expected to be
forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the
forfeiture rate based on past turnover data, level of employee receiving the equity grant and
vesting terms and revises the rate if subsequent information, such as the passage of time,
indicates that the actual number of instruments that will vest is likely to differ from previous
estimates. The cumulative effect on current and prior periods of a change in the estimated number
of instruments likely to vest is recognized in compensation cost in the period of the change.
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Restricted Stock and Restricted Stock Units
Restricted stock is a stock award that entitles the holder to receive shares of the Companys
common stock as the award vests over time. A restricted stock unit is a stock award that entitles
the holder to receive shares of the Companys common stock after a vesting requirement is
satisfied. The fair value of each restricted stock award and restricted stock unit award is
estimated using the intrinsic value method which is based on the closing price on the date of
grant. Compensation expense for restricted stock and restricted stock unit awards is recognized
over the vesting period on a straight-line basis.
As of March 31, 2010, there was approximately $20.1 million of total unrecognized compensation
cost related to unvested restricted stock and restricted stock unit awards granted under the
Companys stock incentive plans. The cost is expected to be recognized through December 2015 with a
weighted average recognition period of approximately 2.5 years.
A summary of restricted stock and restricted stock unit activity under the Companys stock
incentive plans as of March 31, 2010, and changes during the three months then ended are as follows
(aggregate intrinsic value in thousands):
Number of | Weighted Average | Aggregate | ||||||||||
Shares | Fair Value/Share | Intrinsic Value | ||||||||||
Unvested at December 31, 2009 |
500,250 | $ | 34.67 | |||||||||
Granted |
161,300 | 38.28 | ||||||||||
Vested and issued |
(60,812 | ) | 28.92 | |||||||||
Cancelled |
| |||||||||||
Unvested at March 31, 2010 |
600,738 | $ | 36.20 | $ | 25,027 | |||||||
5. Inventories
The carrying amounts of inventories as of December 31, 2009 and March 31, 2010 are as follows:
December 31, | March 31, | |||||||
2009 | 2010 | |||||||
(in thousands) | ||||||||
Raw materials |
$ | 611 | $ | 262 | ||||
Work-in-process |
261 | 45 | ||||||
Finished goods |
685 | 71 | ||||||
Total inventories |
$ | 1,557 | $ | 378 | ||||
6. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following:
December 31, | March 31, | Weighted-Average | ||||||||||
2009 | 2010 | Amortization Period | ||||||||||
(In thousands) | (In years) | |||||||||||
Goodwill |
$ | 329,287 | $ | 355,583 | ||||||||
Acquired technology |
$ | 68,955 | $ | 71,276 | 2.9 | |||||||
Accumulated amortization |
(59,849 | ) | (62,357 | ) | ||||||||
Acquired technology, net |
9,106 | 8,919 | ||||||||||
Contracts and customer lists |
130,675 | 143,355 | 5.2 | |||||||||
Accumulated amortization |
(69,388 | ) | (75,620 | ) | ||||||||
Contracts and customer lists, net |
61,287 | 67,735 | ||||||||||
Trademarks and domain names |
1,976 | 2,656 | 2.5 | |||||||||
Accumulated amortization |
(1,105 | ) | (1,343 | ) | ||||||||
Trademarks and domain names, net. |
871 | 1,313 | ||||||||||
Patents and related costs |
101 | 101 | 2.0 | |||||||||
Accumulated amortization |
(56 | ) | (68 | ) | ||||||||
Patents and related costs, net |
45 | 33 | ||||||||||
Intangible assets, net |
$ | 71,309 | $ | 78,000 | ||||||||
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Intangible assets from acquisitions are amortized over three to seven years. Amortization
expense related to intangible assets was approximately $8.6 million and $9.0 million for the three
months ended March 31, 2009 and 2010, respectively. Amortization expense for the years ended
December 31, 2010, 2011, 2012, 2013 and 2014 is expected to be approximately $34.5 million,
$20.4 million, $16.3 million, $8.0 million and $3.7 million, respectively.
7. Notes Payable
In June 2007, the Company issued and sold $165.0 million aggregate principal amount of
3.25% Convertible Senior Notes due 2027 (the Notes) in a public offering. The Notes bear interest
at a rate of 3.25% per year on the principal amount, accruing from June 20, 2007. Interest is
payable semi-annually on January 1 and July 1. During 2009, the Company made interest payments of
$2.7 million on each of June 30, 2009 and December 31, 2009. The Notes will mature on July 1, 2027,
subject to earlier conversion, redemption or repurchase.
The liability and equity components of the Notes are separately accounted for in a manner that
reflects the Companys nonconvertible debt borrowing rate because their terms include partial cash
settlement. The resulting debt discount is amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest expense. The Company has determined that
its nonconvertible borrowing rate at the time the Notes were issued was 6.9%. Accordingly, the
Company estimated the fair value of the liability (debt) component as $144.1 million upon issuance
of the Notes. The excess of the proceeds received over the estimated fair value of the liability
component totaling $20.9 million was allocated to the conversion (equity) component. The carrying
amount of the equity component of the Notes was $8.2 million and $6.9 million at December 31, 2009
and March 31, 2010, respectively, and is recorded as a debt discount and is netted against the
remaining principal amount outstanding on the consolidated balance sheets.
In connection with obtaining the Notes, the Company incurred $4.5 million in debt issuance
costs, of which $4.0 million was allocated to the liability component and $0.5 million was
allocated to the equity component. The carrying amount of the liability component of the debt
issuance costs is $0.6 million and $0.4 million at December 31, 2009 and March 31, 2010,
respectively, and is recorded as a debt discount and is netted against the remaining principal
amount outstanding on our consolidated balance sheets.
The debt discount, which includes the equity component and the liability component of the debt
issuance costs, is being amortized as interest expense using the effective interest method through
July 1, 2011, the first redemption date of the Notes. The Company recorded total interest expense
of approximately $2.9 million for each of the three months ended March 31, 2009 and 2010, which
consisted of $1.3 million in interest expense at a rate of 3.25% per year for each of the three
months ended March 31, 2009 and 2010, and $1.6 million in amortization of the debt discount for
each of the three months ended March 31, 2009 and 2010.
The principal amount of the liability component of the Notes was $165.0 million at
December 31, 2009 and March 31, 2010. The unamortized debt discount was $8.8 million and
$7.3 million at December 31, 2009 and March 31, 2010, respectively. The net carrying amount of the
liability component of the Notes was $156.2 million and $157.7 million at December 31, 2009 and
March 31, 2010, respectively.
The Company has evaluated whether certain instruments or features are indexed to the Companys
own stock using a two-step approach to evaluate the instruments contingent exercise provisions and
the instruments settlement provisions. The Company has determined that the embedded conversion
options are indexed to its own stock and, therefore, do not require bifurcation and separate
accounting.
8. Commitments and Contingencies
On August 19, 2009, the Company filed a lawsuit in the United States District Court for the
District of Columbia against Steven Zimmers and Daniel Davis. The Company is seeking a declaratory
judgment and unspecified damages relating to breach of contract between the Company and the
defendants. The defendants have filed counterclaims alleging breach of the agreement by the Company
and are seeking damages of at least $14.0 million. The initial court status conference occurred on
October 14, 2009 and the parties participated in a court-ordered mediation on December 16, 2009 but
the Company did not resolve the dispute. The matter remains pending.
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The Company, from time to time, is subject to other litigation relating to matters in the
ordinary course of business. The Company believes that any ultimate liability resulting from any
such other litigation will not have a material adverse effect on the Companys results of
operations, financial position or cash flows.
9. Quarterly Financial Information
The Companys quarterly operating results normally fluctuate as a result of seasonal
variations in its business, principally due to the timing of client budget cycles and student
attendance at client facilities. Historically, the Company has had lower new sales in its first and
fourth quarters than in the remainder of the year. The Companys expenses, however, do not vary
significantly with these changes, and, as a result, such expenses do not fluctuate significantly on
a quarterly basis. Historically, the Company has performed a disproportionate amount of its
professional services, which are recognized as incurred, in its second and third quarters each
year. The Company expects quarterly fluctuations in operating results to continue as a result of
the uneven seasonal demand for its licenses and services offerings.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
This report contains forward-looking statements. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words believes, anticipates, plans, expects, intends and
similar expressions are intended to identify forward-looking statements. The important factors
discussed under the caption Risk Factors, presented below, could cause actual results to differ
materially from those indicated by forward-looking statements made herein. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
General
We are a leading provider of enterprise software applications and related services to the
education industry. Our clients use our software to integrate technology into the education
experience and campus life, and to support activities such as a professor assigning digital
materials on a class website; a student collaborating with peers or completing research online; an
administrator managing a departmental website; a superintendant sending mass communications via
voice, email and text messages to parents and students; or a merchant conducting cash-free
transactions with students and faculty through pre-funded debit accounts. Our clients include
colleges, universities, schools and other education providers, textbook publishers, student-focused
merchants, and corporate and government clients.
We generate revenues from sales and licensing of products and from professional services. Our
product revenues consist principally of revenues from annual software licenses, subscription fees
from customers accessing our on-demand application services, client hosting engagements and the
sale of hardware systems. We typically sell our licenses and hosting services under annually
renewable agreements, and our clients generally pay the annual fees at the beginning of the
contract term. We recognize revenues from these agreements ratably over the contractual term, which
is typically 12 months. We initially record billings associated with licenses and hosting services
as deferred revenues and then recognize them ratably into revenues over the contract term. We also
generate product revenues from the sale of hardware, including third-party hardware. As a result of
new accounting guidance adopted on January 1, 2010, we generally recognize these revenues upon
shipment of the products to our clients.
We derive professional services revenues primarily from training, implementation, installation
and other consulting services. We perform substantially all of our professional services on a
time-and-materials basis. We recognize these revenues as the services are performed.
We have grown through internal growth and strategic acquisitions. In January 2008, we acquired
The NTI Group, Inc., or NTI, and in March 2010, we acquired Saf-T-Net, Inc., or Saf-T-Net. These
acquisitions allow us to offer clients the ability to send mass communications via voice, email and
text messages. We acquired the technology underlying our Blackboard Connect service, which we began
offering in February 2008, from NTI. We acquired the technology underlying the AlertNow service
from Saf-T-Net. In May 2009, we acquired ANGEL Learning, Inc., or ANGEL, a leading developer of
e-learning software to the U.S. education industry. In July 2009, we acquired the business assets
of Terriblyclever Design, LLC, which provides the foundation for our newest platform, Blackboard
Mobile. Blackboard Mobile allows us to offer our clients a comprehensive suite of mobile Web
applications for education and enables educational institutions to deliver education and campus
life services and content to mobile devices to connect students, parents, faculty, prospective
students and alumni to the campus experience.
We typically license our individual applications either on a stand-alone basis or bundled as
part of one of our four platforms: Blackboard Learntm; Blackboard
Transacttm; Blackboard Connecttm; and Blackboard
Mobiletm.
We offer Blackboard Learn in all of our markets, Blackboard Transact primarily to U.S. and
Canadian postsecondary clients, Blackboard Connect to primarily U.S. K-12, postsecondary and
government clients, and Blackboard Mobile primarily to U.S. postsecondary and K-12 clients. We also
offer application hosting for clients who prefer to outsource the management of their Blackboard
Learn systems. In addition to our products, we offer a variety of professional services, including
strategic consulting, project management, custom application development and training.
We generally price our software licenses on the basis of full-time equivalent students or
users. Accordingly, annual license fees are generally greater for larger institutions.
Our operating expenses consist of cost of product revenues, cost of professional services
revenues, research and development expenses, sales and marketing expenses, general and
administrative expenses and amortization of intangibles resulting from acquisitions.
Major components of our cost of product revenues include license and other fees that we owe to
third parties upon licensing software, and the cost of hardware that we bundle with our software.
As a result of new accounting guidance adopted on January 1, 2010, we generally recognize these
costs upon shipment of the products to our clients. In general, prior to the adoption of the new
15
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accounting guidance on January 1, 2010 we initially deferred these costs and recognized them
into expense over the period in which the related revenue was recognized. Cost of product revenues
also includes amortization of internally developed technology available for sale,
telecommunications costs related to the Blackboard Connect product, all direct materials and
shipping and handling costs, employee compensation, including bonuses, stock-based compensation and
benefits for personnel supporting our hosting, support and production functions, as well as related
facility rent, communication costs, utilities, depreciation expense and cost of external
professional services used in these functions. We expense all of these costs as incurred. Cost of
product revenues excludes amortization of acquired technology intangibles resulting from
acquisitions, which is included as amortization of intangibles acquired in acquisitions.
Amortization expense related to acquired technology was $3.6 million and $2.5 million for the three
months ended March 31, 2009 and 2010, respectively.
Cost of professional services revenues primarily includes the costs of compensation, including
bonuses, stock-based compensation and benefits for employees and external consultants who are
involved in the performance of professional services engagements for our clients, as well as travel
and related costs, facility rent, communication costs, utilities and depreciation expense used in
these functions. We expense all of these costs as incurred.
Research and development expenses include the costs of compensation, including bonuses,
stock-based compensation and benefits for employees who are associated with the creation and
testing of the products we offer, as well as the costs of external professional services, travel
and related costs attributable to the creation and testing of our products, related facility rent,
communication costs, utilities and depreciation expense used in these functions. We expense all of
these costs as incurred.
Sales and marketing expenses include the costs of compensation, including bonuses and
commissions, stock-based compensation and benefits for employees who are associated with the
generation of revenues, as well as marketing expenses, costs of external marketing-related
professional services, investor relations, facility rent, utilities, communications, travel
attributable to those sales and marketing employees in the generation of revenues and bad debt
expense. We expense all of these costs as incurred.
General and administrative expenses include the costs of compensation, including bonuses,
stock-based compensation and benefits for employees in the human resources, legal, finance and
accounting, management information systems, facilities management, executive management and other
administrative functions that are not directly associated with the generation of revenues or the
creation and testing of products. In addition, general and administrative expenses include the
costs of external professional services and insurance, as well as related facility rent,
communication costs, utilities and depreciation expense used in these functions. We expense all of
these costs as incurred.
Amortization of intangibles includes the amortization of costs associated with products,
acquired technology, customer lists, non-compete agreements and other identifiable intangible
assets. We recorded these intangible assets at the time of our acquisitions and they relate to
contractual agreements, technology and products that we continue to utilize in our business.
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. During the preparation of these consolidated financial statements,
we are required to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, fair value measures, and related disclosures of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including
those related to revenue recognition, bad debts, fixed assets, long-lived assets, including
purchase accounting and goodwill, and income taxes. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the circumstances. The
results of our analysis form the basis for making assumptions about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions, and the impact of such differences may
be material to our consolidated financial statements. Our critical accounting policies have been
discussed with the audit committee of our board of directors.
We believe that the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial statements. See the
information in our filings with the SEC from time to time; including Part I, Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, and our subsequent
periodic and current reports, for certain matters that may bear on our results of operations. The
following discussion of selected critical accounting policies supplements the information relating
to our critical accounting policies described in Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting Policies and
Estimates in our Annual Report on Form 10-K for the year ended December 31, 2009.
Revenue recognition. We derive revenues from two sources: product sales and professional
services sales. Product revenues include software license fees, subscription fees from customers
accessing our on-demand application services, hardware, premium support and maintenance, and
hosting revenues. Professional services revenues include revenues from training and consulting
services. Our software does not require significant modification and customization services. Where
services are not essential to the
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functionality of the software, we begin to recognize software licensing revenues when all of
the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed and determinable; and (4) collectibility is probable.
We do not have vendor-specific objective evidence, known as VSOE, of fair value for our
support and maintenance separate from our software for the majority of our products. Accordingly,
when licenses are sold in conjunction with our support and maintenance, we recognize the license
revenue over the term of the maintenance service period. When licenses of certain offerings are
sold in conjunction with our support and maintenance where we do have VSOE, we recognize the
license revenue upon delivery of the license and recognize the support and maintenance revenue over
the term of the maintenance service period.
We recognize hosting revenues and set-up fees ratably over the term of the hosting agreement.
After any necessary installation services are performed, hardware revenues are recognized when
all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the fee is fixed and determinable; and (4) collectibility is probable.
We early adopted new accounting guidance on January 1, 2010 which impacts the way that we
account for (a) non-software components of tangible products and (b) software components of
tangible products that are sold, licensed, or leased with tangible products when the software
components and non-software components of the tangible product function together to deliver the
tangible products essential functionality. We applied this guidance on a prospective basis to
arrangements executed or significantly modified after December 31, 2009. We allocate the overall
consideration on such sales to each deliverable using a best estimate of the selling price of
individual deliverables in the arrangement in the absence of VSOE or other third-party evidence of
the selling price.
As a result of the adoption of this guidance, the product revenues and cost of product
revenues related to hardware and software sales in the Blackboard Transact product line will
generally be recognized upfront upon delivery of the product to the customer. Product revenues in
the Blackboard Transact product line generally consist of hardware, software and support.
Generally, the consideration allocated to the hardware and software deliverables is determined
using a best estimate of selling price which we estimate based on an analysis of market data and
our internal cost to deliver each element. Generally, the consideration allocated to the support
deliverable is based on third party evidence. During the three months ended March 31, 2010, we
recognized approximately $2.7 million of product revenues under this new accounting guidance
related to arrangements executed or significantly modified after December 31, 2009 and, of these
arrangements, approximately $0.8 million is recorded as deferred revenues as of March 31, 2010.
The effect of changes in either selling price or the method or assumptions used to determine
selling price for a specific deliverable could have a material effect on the allocation of the
overall consideration of an arrangement.
Prior to the adoption of this new accounting guidance, in the absence of VSOE, all revenue on
such sales was recognized ratably over the term of the maintenance service period. If we had
adopted this guidance on January 1, 2009, revenues, income from operations, net income and basic
and diluted earnings per share would have been approximately
$2.4 million, $1.8 million, $1.1
million, $0.03 and $0.03, respectively, higher during the three months ended March 31, 2009. The
adoption of this new accounting guidance is expected to continue to have a material effect on our
consolidated results of operations and financial condition.
Our sales arrangements may include professional services sold separately under professional
services agreements that include training and consulting services. We account for revenues from
these arrangements separately from the license revenue because they meet the criteria for separate
accounting. The more significant factors we consider in determining whether revenue should be
accounted for separately include the nature of the professional services, such as consideration of
whether the professional services are essential to the functionality of the licensed product,
degree of risk, availability of professional services from other vendors and timing of payments. We
recognize professional services revenues that are sold separately from license revenue as the
professional services are performed on a time-and-materials basis.
We do not offer specified upgrades or incrementally significant discounts. We record advance
payments as deferred revenues until the product is shipped, services are delivered or obligations
are met and the revenue can be recognized. Deferred revenues represent the excess of amounts
invoiced over amounts recognized as revenues. We provide non-specified upgrades of our product only
on a when-and-if-available basis. Any contingencies, such as rights of return, conditions of
acceptance, warranties and price protection are accounted for as a separate element. The effect of
accounting for these contingencies included in revenue arrangements has not been material.
Recent Accounting Pronouncements. In January 2010, the FASB amended the accounting standards
for fair value measurement and disclosures. The amended guidance requires disclosures regarding the
amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the
reasons for the transfers. It also requires separate presentation of purchases, sales, issuances
and settlements of Level 3 fair value measurements. The guidance is effective for interim and
annual reporting periods beginning after December 15, 2009, with the exception of the additional
Level 3 disclosures which are effective for fiscal years beginning after
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December 15, 2010. We are currently evaluating the guidance regarding the additional Level 3
disclosures and do not believe that this guidance will have a significant impact on our
consolidated results of operations or financial condition.
Important Factors Considered by Management
We consider several factors in evaluating both our financial position and our operating
performance. These factors, while primarily focused on relevant financial information, also include
other measures such as general market and economic conditions, competitor information and the
status of the regulatory environment.
To understand our financial results, it is important to understand our business model and its
impact on our consolidated financial statements. The accounting for the majority of our contracts
requires us to initially record deferred revenues on our consolidated balance sheet upon invoicing
the sale and then to recognize revenue in subsequent periods ratably over the term of the contract
in our consolidated statements of operations. Therefore, to better understand our operations, one
must look at both revenues and deferred revenues.
In evaluating our revenues, we analyze them in two categories: recurring revenues and
non-recurring revenues.
| Recurring revenues include those product revenues that recur each year assuming clients renew their contracts. These revenues include revenues from the licensing of all of our software products, hosting arrangements, subscription fees from customers accessing our on-demand application services and enhanced support and maintenance contracts related to our software products, including certain professional services performed by our professional services groups. | ||
| Non-recurring revenues include those product revenues that do not contractually recur. These revenues include certain hardware components of our Blackboard Transact products, certain third-party hardware and software sold to our clients in conjunction with our software licenses, professional services, fees from our off-campus payment merchant program, certain sales of licenses, as well as the supplies and commissions we earn from publishers related to digital course supplement downloads. |
Many of our product revenues are recognized ratably over the contract term, which is typically
one year. As a result, in the case of both recurring revenues and non-recurring revenues, an
increase or decrease in the revenues in one period may be attributable primarily to increases or
decreases in sales in prior periods.
Other factors that we consider in making strategic cash flow and operating decisions include
cash flows from operations, capital expenditures, total operating expenses and earnings.
Our operating results and cash flows normally fluctuate as a result of seasonal variations in
our business, principally due to the timing of client budget cycles and student attendance at
client facilities. Historically, we have had lower new sales in our first and fourth quarters than
in the remainder of the year. Our expenses, however, do not vary significantly with these changes,
and, as a result, such expenses do not fluctuate significantly on a quarterly basis. Historically,
we have performed a disproportionate amount of our professional services, which are recognized as
incurred, in our second and third quarters each year. We expect quarterly fluctuations in operating
results to continue as a result of the uneven seasonal demand for our licenses and services
offerings.
Results of Operations
The following table sets forth selected unaudited consolidated statement of operations data
expressed as a percentage of total revenues for each of the periods indicated.
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2010 | |||||||
Revenues: |
||||||||
Product |
93 | % | 93 | % | ||||
Professional services |
7 | 7 | ||||||
Total revenues |
100 | 100 | ||||||
Operating expenses: |
||||||||
Cost of product revenues, excludes amortization of
acquired technology included in amortization of
intangibles resulting from acquisitions shown below |
25 | 24 | ||||||
Cost of professional services revenues |
5 | 4 | ||||||
Research and development |
13 | 12 | ||||||
Sales and marketing |
28 | 25 | ||||||
General and administrative |
15 | 15 | ||||||
Amortization of intangibles resulting from acquisitions |
10 | 9 | ||||||
Total operating expenses |
96 | 89 | ||||||
Income from operations |
4 | % | 11 | % | ||||
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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Our total revenues for the three months ended March 31, 2010 were $101.1 million, representing
an increase of $14.7 million, or 17.0%, as compared to $86.4 million for the three months ended
March 31, 2009.
A detail of our total revenues by classification is as follows:
Three Months Ended March 31, | ||||||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||||||
Product | Professional | Professional | ||||||||||||||||||||||
Revenues | Services Revenues | Total | Product Revenues | Services Revenues | Total | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Recurring revenues |
$ | 70.4 | $ | 1.2 | $ | 71.6 | $ | 80.0 | $ | 1.9 | $ | 81.9 | ||||||||||||
Non-recurring revenues |
9.7 | 5.1 | 14.8 | 13.7 | 5.5 | 19.2 | ||||||||||||||||||
Total revenues |
$ | 80.1 | $ | 6.3 | $ | 86.4 | $ | 93.7 | $ | 7.4 | $ | 101.1 | ||||||||||||
Product revenues. Product revenues, including domestic and international, for the three months
ended March 31, 2010 were $93.7 million, representing an increase of $13.6 million, or 17.0%, as
compared to $80.1 million for the three months ended March 31, 2009. Recurring product revenues
increased by $9.6 million, or 13.6%, for the three months ended March 31, 2010 as compared to the
three months ended March 31, 2009. This increase in recurring revenues was primarily due to a $4.2
million increase in revenues recognized from Blackboard Learn enterprise licenses, which was
attributable to current and prior period sales to new and existing clients, the continued shift of
our existing clients from Blackboard Learn basic products to Blackboard Learn enterprise products
and the cross-selling of other enterprise products to existing clients. Blackboard Learn enterprise
products have additional functionality that is not available in Blackboard Learn basic products and
consequently some Blackboard Learn basic product clients upgrade to Blackboard Learn enterprise
products. Licenses of the enterprise version of Blackboard Learn products have higher average
pricing, which normally results in at least twice the contractual value as compared to Blackboard
Learn basic product licenses. The remaining increase in recurring product revenues primarily
resulted from a $3.5 million increase in hosting revenues and a $1.2 million increase in revenues
related to our Blackboard Transact software licenses. The increase in non-recurring product
revenues relates to a $2.0 million increase in revenues related to Blackboard Transact hardware and
third-party hardware sales and the remaining increase primarily relates to arrangements with our
technology partners.
Of our total revenues, our total international revenues for the three months ended March 31,
2010 were $17.9 million, representing an increase of $1.5 million, or 9.1%, as compared to $16.4
million for the three months ended March 31, 2009. International revenues as a percentage of total
revenues decreased to 17.7% for the three months ended March 31, 2010 from 19.0% for the three
months ended March 31, 2009. International product revenues, which consist primarily of recurring
product revenues, were $16.9 million for the three months ended March 31, 2010, representing an
increase of $1.8 million, or 11.9%, as compared to $15.1 million for the three months ended March
31, 2009. The increase in international recurring product revenues was primarily due to an increase
in international revenues from Blackboard Learn enterprise products resulting from prior period
sales to new and existing clients. In addition, the increase in international revenues also
reflects our investment in increasing the size of our international sales force and international
marketing efforts during prior periods, which expanded our international presence and enabled us to
sell more of our products to new and existing clients in our international markets.
Professional services revenues. Professional services revenues for the three months ended
March 31, 2010 were $7.4 million, representing an increase of $1.1 million, or 16.0%, as compared
to $6.3 million for the three months ended March 31, 2009. The increase in professional services
was primarily attributable to increased sales of consulting services. As a percentage of total
revenues, professional services revenues for the three months ended March 31, 2009 and 2010 were
each 7.3%.
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Cost of product revenues. Our cost of product revenues for the three months ended March 31,
2010 was $24.5 million, representing an increase of $3.1 million, or 14.4%, as compared to $21.4 million for the three
months ended March 31, 2009. The increase in cost of product revenues was primarily due to an
increase of $1.8 million in expenses related to hosting services due to the increase in the number
of clients contracting for new hosting services or existing clients expanding their existing
hosting arrangements. The remaining increase was primarily due to increases in our technical
support expenses associated with increased headcount and personnel costs to support an increase in
licenses held by new and existing clients. Cost of product revenues as a percentage of product
revenues decreased to 26.2% for the three months ended March 31, 2010 compared to 26.8% for the
three months ended March 31, 2009.
Cost of product revenues excludes amortization of acquired technology intangibles resulting
from acquisitions, which is included as amortization of intangibles resulting from acquisitions.
Amortization expense related to acquired technology was $3.6 million and $2.5 million for the three
months ended March 31, 2009 and 2010, respectively. This decrease was attributable to the
completion of the amortization of acquired technology acquired in connection with our acquisition
of WebCT, Inc. (WebCT) in 2006. Cost of product revenues, including amortization of acquired
technology, as a percentage of product revenues was 28.9% for the three months ended March 31, 2010
as compared to 31.3% for the three months ended March 31, 2009.
Cost of professional services revenues. Our cost of professional services revenues for the
three months ended March 31, 2010 was $4.5 million, representing a decrease of $0.3 million, or
6.0%, as compared to $4.8 million for the three months ended March 31, 2009. Cost of
professional services revenues as a percentage of professional services revenues decreased to 61.1%
for the three months ended March 31, 2010 from 75.4% for the three months ended March 31, 2009.
The increase in professional services revenues margin was primarily attributable to an increase in
professional services revenues from new professional service engagements in current and prior
periods.
Research and development expenses. Our research and development expenses for the three months
ended March 31, 2010 were $12.2 million, representing an increase of $1.4 million, or 12.7%, as
compared to $10.8 million for the three months ended March 31, 2009. This increase was primarily
attributable to increased personnel-related costs due to higher average headcount during the three
months ended March 31, 2010 as compared to the three months ended March 31, 2009, including
increased personnel-related costs associated with the inclusion of ANGEL following the merger that
closed in May 2009 and Saf-T-Net following the merger that closed in March 2010.
Sales and marketing expenses. Our sales and marketing expenses for the three months ended
March 31, 2010 were $25.3 million, representing an increase of $1.4 million, or 5.7%, as compared
to $23.9 million for the three months ended March 31, 2009. This increase was primarily
attributable to increased personnel-related costs due to higher average headcount during the three
months ended March 31, 2010 as compared to the three months ended March 31, 2009, including
increased personnel-related costs associated with the inclusion of ANGEL following the merger that
closed in May 2009 and Saf-T-Net following the merger that closed in March 2010.
General and administrative expenses. Our general and administrative expenses for the three
months ended March 31, 2010 were $14.7 million, representing an increase of $1.1 million, or 8.1%,
as compared to $13.6 million for the three months ended March 31, 2009. This increase was primarily
attributable to increased personnel-related costs due to higher average headcount during the three
months ended March 31, 2010 as compared to the three months ended March 31, 2009, including
increased personnel-related costs associated with the inclusion of ANGEL following the merger that
closed in May 2009 and Saf-T-Net following the merger that closed in March 2010. This increase was
also attributable to Saf-T-Net acquisition related transaction costs of approximately $0.5 million
incurred during the three months ended March 31, 2010.
Amortization of intangibles resulting from acquisitions. Our amortization of intangibles
resulting from acquisitions for the three months ended March 31, 2010 were $9.0 million,
representing an increase of $0.4 million, or 4.6%, as compared to $8.6 million for the three months
ended March 31, 2009. This increase was attributable to amortization of certain intangible assets
acquired following the ANGEL merger that closed in May 2009 and the Saf-T-Net merger that closed in
March 2010 offset, in part, by the completion of the amortization of intangible assets acquired in
connection with our acquisition of WebCT in 2006.
Net interest expense. Our net interest expense for the three months ended March 31, 2010 was
$2.9 million, representing an increase of $0.1 million, or 3.0%, as compared to $2.8 million for
the three months ended March 31, 2009. This change was primarily attributable to decreased
interest income during the three months ended March 31, 2010 as compared to the three months ended
March 31, 2009 due to lower interest yields and lower average interest-bearing cash and cash
equivalent balances.
Other expense. Our other expense for the three months ended March 31, 2010 was $0.5 million,
representing a decrease of $0.1 million, or 5.6%, as compared to other expense of $0.6 million for
the three months ended March 31, 2009. This change was related to the remeasurement of our foreign
subsidiaries ledgers, which are maintained in the respective subsidiarys local foreign currency,
into the United States dollar.
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Benefit (provision) for income taxes. Our provision for income taxes for the three months
ended March 31, 2010 was $2.4 million as compared to our benefit for income taxes of $23,000 for
the three months ended March 31, 2009. This change was due to our income before provision for
income taxes during the three months ended March 31, 2010 as compared to our loss before benefit
for income taxes during the three months ended March 31, 2009.
Liquidity and Capital Resources
Changes in Cash and Cash Equivalents
Our cash and cash equivalents were $146.3 million at March 31, 2010 as compared to $167.4
million at December 31, 2009. The decrease in cash and cash equivalents was primarily due to net
cash consideration of $34.9 million for the acquisition of Saf-T-Net, including transaction costs
of approximately $0.5 million. Cash and cash equivalents consist of highly liquid investments,
which are readily convertible into cash and have original maturities of three months or less.
Net cash used in operating activities was $1.2 million during the three months ended March 31,
2010 as compared to net cash provided by operating activities of $4.4 million during the three
months ended March 31, 2009. Amortization of intangibles resulting from acquisitions was $9.0
million during the three months ended March 31, 2010 and related to the amortization of identified
intangibles resulting from acquisitions. We recognize revenues on annually renewable agreements,
which results in deferred revenues. Deferred revenues decreased by $38.9 million during the three
months ended March 31, 2010, net of the impact of acquired deferred revenues related to the
Saf-T-Net merger, due to the timing of certain client renewal invoicing and sales to new and
existing clients during the current period. Accounts receivable decreased $18.5 million during the
three months ended March 31, 2010, net of the impact of acquired receivables related to the
Saf-T-Net merger, due to the timing of certain client renewal invoicing, sales to new and existing
clients during the current period, and strong collections.
Net cash used in investing activities was $38.1 million during the three months ended March
31, 2010 as compared to $11.9 million during the three months ended March 31, 2009. During the
three months ended March 31, 2010 we paid $34.9 million in net cash consideration for the
acquisition of Saf-T-Net, including transaction costs of approximately $0.5 million. During the
three months ended March 31, 2010, cash expenditures for purchases of property and equipment were
$3.2 million, which represents 3.1% of total revenues for the three months ended March 31, 2010.
Net cash provided by financing activities was $18.2 million during the three months ended
March 31, 2010 as compared to $1.9 million during the three months ended March 31, 2009. During the
three months ended March 31, 2010, we received $15.4 million in proceeds from the exercise of stock
options as compared to $1.7 million during the three months ended March 31, 2009.
Notes Payable
In June 2007, we issued and sold the Notes in a public offering. The Notes bear interest at a
rate of 3.25% per year on the principal amount. Interest is payable semi-annually on January 1 and
July 1. During 2009, we made interest payments of $2.7 million on each of June 30, 2009 and
December 31, 2009. The Notes will mature on July 1, 2027, subject to earlier conversion, redemption
or repurchase.
If a make-whole fundamental change, as defined in the Notes, occurs prior to July 1, 2011, we
may be required in certain circumstances to increase the applicable conversion rate for any Notes
converted in connection with such fundamental change by a specified number of shares of our common
stock. We may not redeem the Notes prior to July 1, 2011. On or after July 1, 2011, we may redeem
the Notes, in whole at any time, or in part from time to time, at a redemption price, payable in
cash, up to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any.
Holders of the Notes may require us to repurchase some or all of the Notes on July 1, 2011, July 1,
2017 and July 1, 2022, or in the event of certain fundamental change transactions, at 100% of the
principal amount on the date of repurchase, plus accrued and unpaid interest, if any, payable in
cash. If such an event occurs, we would be required to pay the entire outstanding principal amount
of $165.0 million in cash, in addition to any other rights that the investors may have under the
Notes.
The Notes are unsecured senior obligations and are effectively subordinated to all of our
existing and future senior indebtedness to the extent of the assets securing such debt, and are
effectively subordinated to all indebtedness and liabilities of our subsidiaries, including trade
payables.
Working Capital Needs
We believe that our existing cash and cash equivalents and future cash provided by operating
activities will be sufficient to meet our working capital and capital expenditure needs over the
next 12 months. Our future capital requirements will depend on many factors, including our rate of
revenue growth, the expansion of our marketing and sales activities, the timing and extent of
spending to
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support product development efforts and expansion into new territories, the timing of
introductions of new products or services, the
timing of enhancements to existing products and services and the timing of capital
expenditures. Also, we may make investments in, or acquisitions of, complementary businesses,
services or technologies, which could also require us to seek additional equity or debt financing.
To the extent that available funds are insufficient to fund our future activities, we may need to
raise additional funds through public or private equity or debt financing. Additional funds may not
be available on terms favorable to us or at all. From time to time we may use our existing cash to
repurchase shares of our common stock, outstanding indebtedness or other outstanding securities.
Any such repurchases would depend on market conditions, the market price of our common stock, and
managements assessment of our liquidity and cash flow needs.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements with unconsolidated entities or related
parties, and, accordingly, there are no off-balance sheet risks to our liquidity and capital
resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest income on our cash and cash equivalents is subject to interest rate fluctuations. For
the three months ended March 31, 2010, a ten percent increase in interest rates would have
increased interest income by approximately $4.0 million.
We have accounts on our foreign subsidiaries ledgers which are maintained in the respective
subsidiarys local currency and remeasured into the U.S. dollar. As a result, we are exposed to
movements in the exchange rates of various currencies against the U.S. dollar and against the
currencies of other countries in which we sell products and services including the Canadian dollar,
Euro, British pound, Japanese yen, Australian dollar and others. Because of such foreign currency
exchange rate fluctuations, we recognized other expense of $0.5 million during the three months
ended March 31, 2010. For the three months ended March 31, 2010, a ten percent adverse change in
these various exchange rates into the U.S. dollar as of March 31, 2010 would not have had a
material effect on our consolidated results of operations or financial condition.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31,
2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
the evaluation of our disclosure controls and procedures as of March 31, 2010, our chief executive
officer and chief financial officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control over Financial Reporting.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The description of the legal proceedings contained in Note 8 Commitments and Contingencies
in the Notes to the Unaudited Consolidated Financial Statements is incorporated by reference
herein.
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In addition, we may be involved in various legal proceedings from time to time incidental to
the ordinary conduct of our business.
Item 1A. Risk Factors.
We describe our business risk factors below. This description includes any material changes to
and supersedes the description of the risk factors previously disclosed in Part I, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Challenging economic conditions may adversely affect our business.
The economic disruption experienced in the United States and globally since 2008 and any
continuing unfavorable economic conditions may affect our sales and renewals of our products and
services, and could negatively affect our revenues and our ability to maintain or grow our
business. In addition, the instability in the financial markets has resulted in a tightening of the
credit markets, which could impair the ability of our customers to obtain credit to finance
purchases of our products. Our client base is diverse and each client or potential client faces a
unique set of risks. These risks include, for example, the availability of public funds and the
possibility of state and local budget cuts, reduced enrollment, or lower revenues, which could lead
to a reduction in overall spending, including information technology spending, by our current and
potential clients and a corresponding decline in demand for our products and services. A prolonged
economic downturn may result in a reduction in overall demand for educational software products and
services, which could cause a decline in both new sales and renewals of our existing products and
difficulty in establishing a market for our new products and services. In addition, our accounts
receivable may increase and the relative aging of our receivables may deteriorate if our clients
delay or are unable to make their payments due to the tightening of credit markets and the lack of
available funding. A prolonged economic downturn may make it difficult for potential clients to buy
our products and might compromise the ability of existing clients to renew their licenses.
We could lose revenues if there are changes in the spending policies or budget priorities for
government funding of colleges, universities, schools and other education providers.
Most of our clients and potential clients are colleges, universities, schools and other
education providers who depend substantially on government funding. Accordingly, any general
decrease, delay or change in federal, state or local funding for colleges, universities, schools
and other education providers could cause our current and potential clients to reduce their
purchases of our products and services, to exercise their right to terminate licenses, or to decide
not to renew licenses, any of which could cause us to lose revenues. In addition, a specific
reduction in governmental funding support for products such as ours would also cause us to lose
revenues. In light of the severe economic downturn experienced in the United States and globally
since 2008, many of our clients have experienced and may continue to experience budgetary
pressures, which may have a negative impact on sales of our products.
Our investments in product development and product acquisition may not be successful; if our
products do not gain market acceptance, our revenues may decrease and we may not realize a return
on such investments.
We make substantial investments in improving our products and acquiring products through
mergers and acquisitions, and there can be no assurance that our investments will be successful.
Our ability to grow our business will be compromised if we do not develop products and services
that achieve broad market acceptance with our current and potential clients. We have recently
released a new version, Release 9.1, of our Blackboard Learn platform which offers enhanced
functionality over prior versions. If clients do not upgrade to the latest version of the
Blackboard Learn platform, the functionality of their existing installed versions will not compare
as favorably to competing products which may cause a reduction in renewal rates. Further, if the
latest version of our software does not become widely adopted by clients, we may not be able to
justify the investments we have made and our financial results will suffer.
If our newest products and services, Blackboard Connect, AlertNow and the Blackboard Mobile
product line, do not gain widespread market acceptance, our financial results could suffer. We
acquired the technology underlying Blackboard Connect through our merger with The NTI Group, Inc.
in January 2008 and the technology underlying the AlertNow service through our merger with
Saf-T-Net in March 2010. We acquired the technology underlying the Blackboard Mobile product line
through our purchase of the business assets of Terriblyclever Design, LLC in July 2009. Our ability
to grow our business will depend, in part, on client acceptance of these products. If we are not
successful in gaining market acceptance of these products, our revenues may fall below our
expectations.
We face intense and growing competition, which could result in price reductions, reduced operating
margins and loss of market share.
We operate in highly competitive markets and generally encounter intense competition to win
contracts. If we are unable to successfully compete for new business and license renewals, our
revenue growth and operating margins may decline. The markets for online education, transactional,
portal, content management, transaction systems and mass notification products are intensely
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competitive and rapidly changing, and barriers to entry in these markets are relatively low. With
the introduction of new technologies
and market entrants, we expect competition to intensify in the future. Some of our principal
competitors offer their products at a lower price, which has resulted in pricing pressures. Such
pricing pressures and increased competition generally could result in reduced sales, reduced
margins or the failure of our product and service offerings to achieve or maintain more widespread
market acceptance.
Our primary competitors for the Blackboard Learn platform are companies and open source
projects that provide course management systems, such as Desire2Learn Inc., Jenzabar, Inc.,
Microsoft, IBM, Oracle, Moodle, Pearson, The Sakai Project, UCompass Educator and WebTycho;
learning content management systems, such as Giunti Labs S.r.I. and Concord USA, Inc.; and
education enterprise information portal technologies, such as SunGard Higher Education Inc., an
operating unit of SunGard Data Systems Inc. We also face competition from clients and potential
clients who develop their own applications internally, large diversified software vendors who offer
products in numerous markets including the education market and open source software applications.
Our competitors for the Blackboard Transact platform include companies that provide transaction
systems, security and access systems and off-campus merchant relationship programs. Our competitors
for Blackboard Connect include a variety of competitors which provide mass notification
technologies including voice, email and text messaging communications.
We may also face competition from potential competitors that are substantially larger than we
are and have significantly greater financial, technical and marketing resources, and established,
extensive direct and indirect sales and distribution channels. Similarly, our competitors may also
be acquired by larger and more well-funded companies which have more resources than our current
competitors. These larger companies may be able to respond more quickly to new or emerging
technologies and changes in client requirements, or to devote greater resources to the development,
promotion and sale of their products than we can. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or prospective
clients. Accordingly, it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share to our detriment.
If potential clients or competitors use open source software to develop products that are
competitive with our products and services, we may face decreased demand and pressure to reduce
the prices for our products.
The growing acceptance and prevalence of open source software may make it easier for
competitors or potential competitors to develop software applications that compete with our
products, or for clients and potential clients to internally develop software applications that
they would otherwise have licensed from us. One of the aspects of open source software is that it
can be modified or used to develop new software that competes with proprietary software
applications, such as ours. Such competition can develop without the degree of overhead and lead
time required by traditional proprietary software companies. As open source offerings become more
prevalent, customers may defer or forego purchases of our products, which could reduce our sales
and lengthen the sales cycle for our products or result in the loss of current clients to open
source solutions. If we are unable to differentiate our products from competitive products based on
open source software, demand for our products and services may decline, and we may face pressure to
reduce the prices of our products, which would hurt our profitability.
Our recent acquisition transactions present many risks, and we may not realize the financial and
strategic goals that were contemplated at the time of the transactions.
We have entered into a number of acquisition transactions as part of our growth strategy. We
completed our acquisitions of ANGEL and the business assets of Terriblyclever Design in 2009. We
completed our acquisition of Saf-T-Net on March 19, 2010. We have entered into these transactions
with the expectation that each would result in long-term benefits, including improved revenue and
profits, and enhancements to our product portfolio and customer base. Risks that we may encounter
in seeking to realize the benefits of these and other potential acquisition transactions include:
| we may not realize the anticipated financial benefits if we are unable to sell the acquired products to our current or future customers, if a larger than predicted number of customers decline to renew their contracts, or if the acquired contracts do not allow us to recognize revenues on a timely basis; | ||
| we may have difficulty incorporating the acquired technologies or products with our existing product lines and maintaining uniform standards, controls, procedures and policies; | ||
| we may face contingencies related to product liability, intellectual property, financial disclosures, and accounting practices or internal controls; | ||
| we may have higher than anticipated costs in supporting and continuing development of the acquired company products and in servicing new and existing clients of a company we acquire; | ||
| we may not be able to retain key employees from the companies we acquire; | ||
| the increased size and complexity of the combined company after our acquisitions may present operational challenges; and |
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| we may lose anticipated tax benefits or have additional legal or tax exposures. |
Our business strategy contemplates future business combinations and acquisitions which may be
difficult to integrate, disrupt our business, dilute stockholder value or divert management
attention.
During the course of our history, we have acquired several businesses, and a key element of
our growth strategy is to pursue additional acquisitions in the future. Any acquisition could be
expensive, disrupt our ongoing business and distract our management and employees. We may not be
able to identify suitable acquisition candidates, and if we do identify suitable candidates, we may
not be able to make these acquisitions on acceptable terms or at all. If we make an acquisition, we
could have difficulty integrating the acquired technology, employees or operations. In addition,
the key personnel of the acquired company may decide not to work for us. Acquisitions also involve
the risk of potential unknown liabilities associated with the acquired business.
As a result of these risks, we may not be able to achieve the expected benefits of any
acquisition. If we are unsuccessful in completing or integrating acquisitions that we may pursue in
the future, we would be required to reevaluate our growth strategy, and we may have incurred
substantial expenses and devoted significant management time and resources in seeking to complete
and integrate the acquisitions.
Future business combinations could involve the acquisition of significant tangible and
intangible assets, which could require us to record in our statements of operations ongoing
amortization of identified intangible assets acquired in connection with acquisitions, which we
currently do with respect to our historical acquisitions, including the NTI, ANGEL and Saf-T-Net
mergers. In addition, we may need to record write-downs from future impairments of identified
tangible and intangible assets and goodwill. These accounting charges would reduce any future
reported earnings, or increase a reported loss. In future acquisitions, we could also incur debt to
pay for acquisitions, or issue additional equity securities as consideration, which could cause our
stockholders to suffer significant dilution.
Additionally, our ability to utilize net operating loss carryforwards, if any, acquired in any
acquisitions may be significantly limited or unusable by us under Section 382 or other sections of
the Internal Revenue Code.
Our existing indebtedness could adversely affect our financial condition and we may not be able to
fulfill our debt obligations, including repayment of the Notes.
The outstanding Notes in the principal amount of $165.0 million pose the following risks to
our overall business:
| upon conversion or redemption of the Notes, we will be required to repay the principal amount of $165.0 million in cash; | ||
| we will use a significant portion of our cash flow to pay interest on our outstanding debt, limiting the amount available for working capital, capital expenditures and other general corporate purposes; | ||
| lenders may be unwilling to lend additional amounts to us for future working capital needs, additional acquisitions or other purposes or may only be willing to provide funding on terms we would consider unacceptable; | ||
| if our cash flow were inadequate to make interest and principal payments on our debt, we might have to refinance our indebtedness or issue additional equity or other securities and may not be successful in those efforts or may not obtain terms favorable to us; and | ||
| our ability to finance working capital needs and general corporate purposes for the public and private markets, as well as the associated cost of funding, is dependent, in part, on our credit ratings, which may be adversely affected if we experience declining revenues. |
We may be more vulnerable to adverse economic conditions than less leveraged competitors and
thus less able to withstand competitive pressures. Any of these events could reduce our ability to
generate cash available for investment or debt repayment or to make improvements or respond to
events that would enhance profitability. We may incur significantly more debt in the future, which
will increase each of the foregoing risks related to our indebtedness.
We may not be able to repurchase the Notes when required by the holders, including upon a defined
fundamental change or other specified dates at the option of the holder, or pay cash upon
conversion of the Notes.
Upon the occurrence of a fundamental change as defined in the Notes, holders of the Notes
would have the right to require us to repurchase the Notes at a price in cash equal to 100% of the
principal amount of the Notes plus accrued and unpaid interest. Any future credit agreement or
other agreements relating to indebtedness to which we become a party may contain similar
provisions. Holders will also have the right to require us to repurchase the Notes for cash or a
combination of cash and our common stock on July 1, 2011, July 1, 2017 or July 1, 2022. Moreover,
upon conversion of the Notes, we are required to settle a portion of the conversion obligation in
cash. In the event that we are required to repurchase the Notes or upon conversion of the Notes, we
may not have sufficient financial resources to satisfy all of our obligations under the Notes and
our other debt instruments. Our failure to pay the repurchase price when due, to pay cash upon
conversion of the Notes, or similarly fail to meet our payment obligations, would result in a default under the indenture governing the Notes.
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Conversion of the Notes may affect the market price of our common stock and may dilute the
ownership of existing stockholders.
The conversion of some or all of the Notes and any sales in the public market of our common
stock issued upon such conversion could adversely affect the market price of our common stock. The
existence of the Notes may encourage short selling by market participants because the conversion of
the Notes could depress our common stock price. In addition, the conversion of some or all of the
Notes could dilute the ownership interests of existing stockholders to the extent that shares of
our common stock are issued upon conversion.
Our reported earnings per share may be more volatile because of the contingent conversion
provision of the Notes.
The Notes may have a dilutive effect on earnings per share in any period in which the market
price of our common stock exceeds the conversion price for the Notes as a result of the inclusion
of the underlying shares in the fully diluted earnings per share calculation. Volatility in our
stock price could cause this condition or other conversion conditions to be met in one quarter and
not in a subsequent quarter, increasing the volatility of fully diluted earnings per share.
Because most of our licenses are renewable on an annual basis, a reduction in our license renewal
rate could significantly reduce our revenues.
Our clients have no obligation to renew their licenses for our products after the expiration
of the initial license period, which is typically one year, and some clients have elected not to do
so. A decline in license renewal rates could cause our revenues to decline. We have limited
historical data with respect to rates of renewals, so we cannot accurately predict future renewal
rates. Our license renewal rates may decline or fluctuate as a result of a number of factors,
including client dissatisfaction with our products and services, our failure to update our products
to maintain their attractiveness in the market or budgetary constraints or changes in budget
priorities faced by our clients.
We may experience difficulties that could delay or prevent the successful development,
introduction and sale of new products under development. If introduced for sale, the new products
may not adequately meet the requirements of the marketplace and may not achieve any significant
degree of market acceptance, which could cause our financial results to suffer. In addition, during
the development period for the new products, our customers may defer or forego purchases of our
products and services. We often obtain renewable client contracts in acquisitions, as was the case
in our acquisitions of WebCT, NTI, ANGEL, and Saf-T-Net, and if we experience a decrease in the
renewal rate from expected levels it could reduce revenues below our expectations.
Because we generally recognize revenues ratably over the term of our contract with a client,
downturns or upturns in sales will not be fully reflected in our operating results until future
periods.
We recognize most of our revenues from clients monthly over the terms of their agreements,
which are typically 12 months, although terms can range from one month to over 60 months. As a
result, much of the revenue we report in each quarter is attributable to agreements entered into
during previous quarters. Consequently, a decline in sales, client renewals, or market acceptance
of our products in any one quarter will not necessarily be fully reflected in the revenues in that
quarter, and will negatively affect our revenues and profitability in future quarters. This ratable
revenue recognition also makes it difficult for us to rapidly increase our revenues through
additional sales in any period, as revenues from new clients must be recognized over the applicable
agreement term.
Our operating margins may suffer if our professional services revenues increase in proportion to
total revenues because our professional services revenues have lower gross margins.
Because our professional services revenues typically have lower gross margins than our product
revenues, an increase in the percentage of total revenues represented by professional services
revenues could have a detrimental impact on our overall gross margins, and could adversely affect
our operating results. In addition, we sometimes subcontract professional services to third
parties, which further reduces our gross margins on these professional services. As a result, an
increase in the percentage of professional services provided by third-party consultants could lower
our overall gross margins.
If our products contain errors, new product releases are delayed or our services are disrupted, we
could lose new sales and be subject to significant liability claims.
Because our software products are complex, they may contain undetected errors or defects,
known as bugs. Bugs can be detected at any point in a products life cycle, but are more common
when a new product is introduced or when new versions are released. In the past, we have
encountered product development delays and defects in our products. We expect that, despite our
testing, errors will be found in new products and product enhancements in the future. In addition,
our service offerings may be disrupted causing delays or interruptions in the services provided to
our clients. Significant errors in our products or disruptions in the provision of our services
could lead to:
| delays in or loss of market acceptance of our products; |
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| diversion of our resources; | ||
| a lower rate of license renewals or upgrades; | ||
| injury to our reputation; and | ||
| increased service expenses or payment of damages. |
Because our clients use our products to store, retrieve and utilize critical information, we
may be subject to significant liability claims if our products do not work properly or if the
provision of our services is disrupted. Such an event could result in significant expenses, disrupt
sales and affect our reputation and that of our products. We cannot be certain that the limitations
of liability set forth in our licenses and agreements would be enforceable or would otherwise
protect us from liability for damages and our insurance may not cover all or any of the claims. A
material liability claim against us, regardless of its merit or its outcome, could result in
substantial costs, significantly harm our business reputation and divert managements attention
from our operations.
The length and unpredictability of the sales cycle for our software could delay new sales and
cause our revenues and cash flows for any given quarter to fail to meet our projections or market expectations.
The sales cycle between our initial contact with a potential client and the signing of a
license with that client typically ranges from 6 to 18 months. As a result of this lengthy sales
cycle, we have only a limited ability to forecast the timing of sales. A delay in or failure to
complete license transactions could harm our business and financial results, and could cause our
financial results to vary significantly from quarter to quarter. Our sales cycle varies widely,
reflecting differences in our potential clients decision-making processes, procurement
requirements and budget cycles, and is subject to significant risks over which we have little or no
control, including:
| clients budgetary constraints and priorities; | ||
| the timing of our clients budget cycles; | ||
| the need by some clients for lengthy evaluations that often include both their administrators and faculties; and | ||
| the length and timing of clients approval processes. |
Potential clients typically conduct extensive and lengthy evaluations before committing to our
products and services and generally require us to expend substantial time, effort and money
educating them as to the value of our offerings. In light of the ongoing economic disruption in the
U.S. and globally, we have experienced some lengthening of sales cycles and, depending on the
future economic climate, may see a continuation of this trend. Our client base is diverse and each
component faces a unique set of risks, including, for example, the possibility of state and local
budget cuts for K-12 institutions or reduced enrollment in higher education, which may affect our
revenues and our ability to grow our business. If the economic downturn worsens or is prolonged,
our clients and prospective clients may defer or cancel their purchases with us.
Our sales cycle with international postsecondary education providers and U.S. K-12 schools may be
longer than our historical U.S. postsecondary sales cycle, which could cause us to incur greater
costs and could reduce our operating margins.
As we target more of our sales efforts at international postsecondary education providers and
U.S. K-12 schools, we could face greater costs, longer sales cycles and less predictability in
completing some of our sales, which may harm our business. A potential clients decision to use our
products and services may be a decision involving multiple institutions and, if so, these types of
sales would require us to provide greater levels of education to prospective clients regarding the
use and benefits of our products and services. In addition, we expect that potential international
postsecondary and U.S. K-12 clients may demand more customization, integration services and
features. As a result of these factors, these sales opportunities may require us to devote greater
sales support and professional services resources to individual sales, thereby increasing the costs
and time required to complete sales and diverting sales and professional services resources to a
smaller number of international and U.S. K-12 transactions.
We may have exposure to greater than anticipated tax liabilities.
We are subject to income taxes and other taxes in a variety of jurisdictions and are subject
to review by both domestic and foreign taxation authorities. The determination of our provision for
income taxes and other tax liabilities requires significant judgment and the ultimate tax outcome
may differ from the amounts recorded in our consolidated financial statements, which may materially
affect our financial results in the period or periods for which such determination is made.
Our ability to utilize our net operating loss carryforwards may be limited.
Our federal net operating loss carryforwards are subject to limitations on how much may be
utilized on an annual basis. The use of the net operating loss carryforwards may have additional
limitations resulting from future ownership changes or other factors under Section 382 of the Internal Revenue Code.
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If our net operating loss carryforwards are further limited, and we have taxable income which
exceeds the available net operating loss carryforwards for that period, we would incur an income
tax liability even though net operating loss carryforwards may be available in future years prior
to their expiration. Any such income tax liability may adversely affect our future cash flow,
financial position and financial results.
The investment of our cash balances are subject to risks which may cause losses and affect the
liquidity of these investments.
We hold our cash in a variety of marketable investments which are generally investment grade,
liquid, short-term fixed-income securities and money market instruments denominated in U.S.
dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair
value is deemed to be other-than-temporary, we will be required to further write down the value of
our investments, which would be reflected in our statement of operations for that period. With the
continued unstable credit environment, we might incur significant realized, unrealized or
impairment losses associated with these investments.
Our future success depends on our ability to continue to retain and attract qualified employees.
Our future success depends upon the continued service of our key management, technical, sales
and other critical personnel, including employees who joined Blackboard in connection with our
acquisitions of WebCT, NTI, ANGEL, Saf-T-Net and the business assets of Terriblyclever. Whether we
are able to execute effectively on our business strategy will depend in large part on how well key
management and other personnel perform in their positions and are integrated within our company.
Key personnel have left our company over the years, including our Chief Financial Officer during
2010, and there may be additional departures of key personnel from time to time. In addition, as we
seek to expand our global organization, the hiring of qualified sales, technical and support
personnel has been difficult due to the limited number of qualified professionals. Failure to
attract, integrate and retain key personnel would result in disruptions to our operations,
including adversely affecting the timeliness of product releases, the successful implementation and
completion of company initiatives and the results of our operations.
If we do not maintain the compatibility of our products with third-party applications that our
clients use in conjunction with our products, demand for our products could decline.
Our software applications can be used with a variety of third-party applications used by our
clients to extend the functionality of our products, which we believe contributes to the
attractiveness of our products in the market. If we are not able to maintain the compatibility of
our products with third-party applications, demand for our products could decline, and we could
lose sales. We may desire in the future to make our products compatible with new or existing
third-party applications that achieve popularity within the education marketplace, and these
third-party applications may not be compatible with our designs. Any failure on our part to modify
our applications to ensure compatibility with such third-party applications would reduce demand for
our products and services.
If we are unable to obtain sufficient quantities of the hardware products we sell in a timely
manner, our sales could decline.
We rely on various third-party companies to provide us with hardware products which we sell to
our clients. Such companies include manufacturers of third-party products and manufacturers of
Blackboard Transact hardware products to which we have outsourced our manufacturing operations. The
failure to obtain sufficient quantities of the products we sell to our clients or any substantial
delays or product quality problems associated with our obtaining such products could decrease our
sales.
If we are unable to protect our proprietary technology and other rights, it will reduce our
ability to compete for business.
If we are unable to protect our intellectual property, our competitors could use our
intellectual property to market products similar to our products, which could decrease demand for
our products. In addition, we may be unable to prevent the use of our products by persons who have
not paid the required license fee, which could reduce our revenues. We rely on a combination of
copyright, patent, trademark and trade secret laws, as well as licensing agreements, third-party
nondisclosure agreements and other contractual provisions and technical measures, to protect our
intellectual property rights. These protections may not be adequate to prevent our competitors from
copying or reverse-engineering our products, and these protections may be costly and difficult to
enforce. Our competitors may independently develop technologies that are substantially equivalent
or superior to our technology. To protect our trade secrets and other proprietary information, we
require employees, consultants, advisors and collaborators to enter into confidentiality
agreements. These agreements may not provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use, misappropriation or
disclosure of such trade secrets, know-how or other proprietary information. The protective
mechanisms we include in our products may not be sufficient to prevent unauthorized copying.
Existing copyright laws afford only limited protection for our intellectual property rights and may
not protect such rights in the event competitors independently develop products similar to ours. In
addition, the laws of some countries in which our products are or may be licensed do not protect
our products and intellectual property rights to the same extent as do the laws of the United
States.
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If we are found to have infringed the proprietary rights of others, we could be required to
redesign our products, pay significant royalties or enter into license agreements with third
parties.
A third party may assert that our technology violates its intellectual property rights. As the
number of products in our markets increases and the functionality of these products further
overlaps, we believe that infringement claims may become more common. Any claims, regardless of
their merit, could:
| be expensive and time consuming to defend; | ||
| force us to stop licensing our products that incorporate the challenged intellectual property; | ||
| require us to redesign our products and reimburse certain costs to our clients; | ||
| divert managements attention and other company resources; and | ||
| require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, or at all. |
The nature of our business and our reliance on intellectual property and other proprietary
information subjects us to the risks of litigation.
We are in an industry where litigation is common, including litigation related to copyright,
patent, trademark and trade secret rights, and other types of claims. Litigation can be expensive
and disruptive to normal business operations. The results of litigation are inherently uncertain
and may result in adverse rulings or decisions. We may enter into settlements or be subject to
judgments that may result in an obligation to pay significant monetary damages, prevent us from
operating one or more elements of our business or otherwise hurt our operations.
Expansion of our business internationally will subject our business to additional economic and
operational risks that could increase our costs and make it difficult for us to operate
profitably.
One of our key growth strategies is to pursue international expansion. Expansion of our
international operations may require significant expenditure of financial and management resources
and result in increased administrative and compliance costs. As a result of such expansion, we will
be increasingly subject to the risks inherent in conducting business internationally, including:
| foreign currency fluctuations, which could result in reduced revenues and increased operating expenses; | ||
| potentially longer payment and sales cycles; | ||
| difficulty in collecting accounts receivable; | ||
| the effect of applicable foreign tax structures, including tax rates that may be higher than tax rates in the United States or taxes that may be duplicative of those imposed in the United States; | ||
| tariffs and trade barriers; | ||
| general economic and political conditions in each country; | ||
| inadequate intellectual property protection in foreign countries; | ||
| uncertainty regarding liability for information retrieved and replicated in foreign countries; | ||
| the difficulties and increased expenses of complying with a variety of foreign laws, regulations and trade standards; and | ||
| unexpected changes in regulatory requirements. |
Unauthorized disclosure of data, whether through breach of our computer systems or otherwise,
could expose us to protracted and costly litigation or cause us to lose clients.
Maintaining the security of our systems is of critical importance for our clients because they
may involve the storage and transmission of proprietary and confidential client and student
information, including personal student information and consumer financial data, such as credit
card numbers. This area is heavily regulated in many countries in which we operate, including the
United States. Individuals and groups may develop and deploy viruses, worms and other malicious
software programs that attack or attempt to infiltrate our products. If our security measures are
breached as a result of third-party action, employee error, malfeasance or otherwise, we could be
subject to liability or our business could be interrupted. Penetration of our network security
could have a negative impact on our reputation, could lead our present and potential clients to
choose competing offerings, and could result in legal
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or regulatory action against us. Even if we do not encounter a security breach ourselves, a
well-publicized breach of the consumer data security of another company could lead to a general
public loss of confidence in the use of our products, which could significantly diminish the
attractiveness of our products and services.
Operational failures in our network infrastructure could disrupt our remote hosting services,
could cause us to lose clients and sales to potential clients and could result in increased
expenses and reduced revenues.
Unanticipated problems affecting our network systems could cause interruptions or delays in
the delivery of the hosting services we provide to some of our clients. We provide remote hosting
through computer hardware that is currently located in third-party co-location facilities in
various locations in the United States, The Netherlands and Australia. We do not control the
operation of these co-location facilities. Lengthy interruptions in our hosting service could be
caused by the occurrence of a natural disaster, power loss, vandalism or other telecommunications
problems at the co-location facilities or if these co-location facilities were to close without
adequate notice. Although we have developed redundancies in some of our systems, we have
experienced problems of this nature from time to time in the past, and we will continue to be
exposed to the risk of network failures in the future. We currently do not have adequate computer
hardware and systems to provide alternative service for most of our hosted clients in the event of
an extended loss of service at the co-location facilities. Some of our co-location facilities are
served by data backup redundancy at other facilities. However, they are not equipped to provide
full disaster recovery to all of our hosted clients. If there are operational failures in our
network infrastructure that cause interruptions, slower response times, loss of data or extended
loss of service for our remotely hosted clients, we may be required to issue credits or pay
penalties, current clients may terminate their contracts or elect not to renew them, and we may
lose sales to potential clients. If we determine that we need additional hardware and systems, we
may be required to make further investments in our network infrastructure.
U.S. and foreign government regulation of our products and services could cause us to incur
significant expenses, and failure to comply with applicable regulations could make our business
less efficient or even impossible.
The application of existing laws and regulations potentially applicable to our products and
services, including regulations relating to issues such as privacy, telecommunications, defamation,
pricing, advertising, taxation, consumer protection, content regulation, quality of products and
services and intellectual property ownership and infringement, can be unclear. It is possible that
U.S., state, local and foreign governments might attempt to regulate our products and services or
prosecute us for violations of their laws. In addition, these laws may be modified and new laws may
be enacted in the future, which could increase the costs of regulatory compliance for us or force
us to change our business practices. Any existing or new legislation applicable to us could expose
us to substantial liability, including significant expenses necessary to comply with such laws and
regulations, and dampen the growth in use of our products and services.
We may be subject to state and federal financial services regulation, and any violation of any
present or future regulation could expose us to liability, force us to change our business
practices or force us to stop selling or modify our products and services.
Our transaction processing product and service offering could be subject to state and federal
financial services regulation or industry-mandated requirements. The Blackboard Transact platform
supports the creation and management of student debit accounts and the processing of payments
against those accounts for both on-campus vendors and off-campus merchants. For example, one or
more federal or state governmental agencies that regulate or monitor banks or other types of
providers of electronic commerce services may conclude that we are engaged in banking or other
financial services activities that are regulated by the Federal Reserve under the U.S. Federal
Electronic Funds Transfer Act or Regulation E thereunder or by state agencies under similar state
statutes or regulations. Regulatory requirements may include, for example:
| disclosure of consumer rights and our business policies and practices; | ||
| restrictions on uses and disclosures of customer information; | ||
| error resolution procedures; | ||
| limitations on consumers liability for unauthorized account activity; | ||
| data security requirements; | ||
| government registration; and | ||
| reporting and documentation requirements. |
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A number of states have enacted legislation regulating check sellers, money transmitters or
transaction settlement service providers as banks. If we were deemed to be in violation of any
current or future regulations, we could be exposed to financial liability and adverse publicity or
forced to change our business practices or stop selling some of our products and services. As a
result, we could face significant legal fees, delays in extending our product and services
offerings, and damage to our reputation that could harm our business and reduce demand for our
products and services. Even if we are not required to change our business practices, we could be required to obtain licenses or regulatory approvals that could cause us to incur
substantial costs.
Item 6. Exhibits.
(a) Exhibits:
Exhibit No. | Description | |
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Blackboard Inc. |
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Dated: May 7, 2010 | By: | /s/ John E. Kinzer | ||
John E. Kinzer | ||||
Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) |
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