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| PRO > SEC Filings for PRO > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
Overview
We are a leading provider of pricing and margin optimization software, an emerging category of enterprise applications designed to allow companies to improve financial performance by implementing pricing excellence best practices through the use of our software products. By using our software products, our customers gain insight into their pricing strategies, identify detrimental pricing practices, optimize their pricing decision-making and improve their business processes and financial performance. Our software products incorporate advanced pricing science, which includes operations research, forecasting and statistics. Our innovative science-based software products analyze, execute and optimize pricing strategies using data from traditional enterprise applications, often augmenting it with real-time and historical data. Our software also uses data elements that are determined using advanced pricing science and are stored in our database. Our high performance software architecture supports real-time high volume transaction processing and allows us to handle the processing and database requirements of the most sophisticated and largest customers, including customers with hundreds of simultaneous users and sub-second electronic transactions. We provide professional services to configure our software products to meet the specific pricing needs of each customer, they do not write custom code for each implementation.
Many of our customers process large volumes of individually priced business-to-consumer and business-to-business transactions every day. Our high-performance, real-time, dynamic pricing products differ from static retail pricing products by delivering the relevant pricing information at the time the price is quoted, the deal is negotiated and the sale transaction is made. Our software products are also used to provide optimized price lists and goal-driven price guidance. While companies in our target industries differ in the wide range of business-to-business and business-to-customer products and services that they provide, many are similar in their need to optimally and dynamically price each individual transaction. We have installed over 200 solutions for over 100 customers across a range of industries in more than 40 countries.
We recorded revenue of $75.6 million, $62.1 million and $46.0 million for the years ended December 31, 2008, 2007, and 2006, respectively, and have achieved ten consecutive years of profitability. Approximately 54% of our total revenue came from customers outside the United States for the year ended December 31, 2008 and approximately 63% of our total revenue came from customers outside the United States for the years ended December 31, 2007 and December 31, 2006.
Generally, we recognize the majority of our license and implementation revenue on a percentage-of-completion basis because we consider implementation services to be essential to our customers' usability of our licensed software. Under this recognition policy, the revenue we recognize during a reporting period is based on the total man-days expended on an implementation of our software products during the reporting period as a percentage of the total man-days estimated to be necessary to complete the implementation of our software products. As a result of our revenue recognition policy, revenue from license arrangements are recognized over the implementation period, which typically ranges from six months to several years.
Our revenue recognition policy provides visibility into a significant portion of our revenue in the near-term quarters, although the actual timing of recognition of revenue will vary based on the nature and requirements of our contracts. We do not recognize license and implementation revenue upon signing a new contract with a customer. Our revenue recognition only begins when efforts are expended toward implementation, which alleviates pressure to enter into license agreements by the end of any particular quarter as we would not be able to recognize the corresponding revenue during the period in which the agreement is signed except to the extent we provide implementation services during the period.
Background
We were founded in 1985 and initially focused our efforts on providing complex, science-based revenue management solutions to the global airline industry. In 1999, we began to consider ways to diversify our product offering to include a broader suite of pricing and margin optimization functionality. We expanded our focus beyond the airline industry to include other industries that we believed to have similar pricing challenges and a need for advanced pricing and margin optimization solutions. Our efforts toward diversification of products and customers intensified following September 11, 2001 as a result of the ensuing challenges faced by many airlines following those events. Despite the events of September 11, 2001 and the resulting decline in our revenue, we remained profitable as we sought additional ways to grow our business, and we have had ten consecutive years of profitability.
Our future revenue growth and profitability will depend on the continued acceptance of our pricing and margin optimization software products, further penetration of our target industries and the increased adoption of pricing and margin optimization software generally.
In July 2007, we completed our initial public offering ("IPO") of our common stock in which we sold and issued 5,118,750 shares of common stock and the selling stockholders sold an additional 1,706,250 shares of common stock. As a result of the IPO, we raised $56.3 million in gross proceeds, before deducting underwriter's discounts and commission of $3.9 million and offering costs of $1.8 million. In addition, in December 2007, we completed a follow on offering of 5,000,000 shares of our common stock in which we sold and issued 65,000 shares of common stock and the selling stockholders sold an additional 4,935,000 shares of common stock. As a result of the follow on offering, we raised $1.0 million in gross proceeds before deducting offering costs of $0.4 million.
Trends
We have noted several trends that we believe are significant to understand our financial results and condition.
† Difficult Economic Conditions. We believe the market for pricing and margin optimization software is underpenetrated and in the early innovator stage of adoption. The market demand had been increasing over the past several years; however the world economies are in a recession which may have a negative impact on the adoption of pricing and margin optimization software. We believe our solutions provide value to our customers during periods of growth as well as in recessions, but it is uncertain the extent to which a slowdown in technology investment will effect our business.
† Variability in revenue among industries and geography. Historically a substantial portion of our revenue has come from the airline industry. However, as we began to diversify our product offering, we saw our revenue growth driven by increases in sales to non-airline industry customers in manufacturing, distribution, services and hotel and cruise. From a geographical standpoint we have diversification our revenue with 54% of our revenue in 2008 outside the United States. The current economic environment could change our trends of revenue within industries and across geographies if certain industries or geographies are more impacted than others.
Discussion of consolidated financial information
Revenue:
We derive our revenue from license fees, implementation services and maintenance
and support services. Our arrangements with customers typically include:
(a) license fees paid for the use of our products either in perpetuity or over a
specified term and implementation fees for configuration, implementation and
training services and (b) maintenance and support fees related to technical
support and software updates. We consider our implementation services essential
to our customers' usability of our licensed software products, and therefore we
recognize revenue from perpetual software license and implementation services
together as the services are performed. For certain of our arrangements, we
engage an independent contractor to assist in the implementation. We recognize
revenue from these engagements net of the fees owed to the independent
contractor.
License and implementation revenue. We derive the majority of our license and implementation revenue from the sale of perpetual licenses for our software products and related implementation services. Revenue from our perpetual licenses and implementation services are generally recognized as implementation services are performed using the percentage-of-completion accounting method.
We also recognize revenue from the sale of a limited number of fixed-term licenses, which have terms ranging from two to five years, and related implementation services. Revenue from fixed-term licenses, which is included in License and implementation revenue in the Consolidated Statements of Operations, represented approximately 4.2%, 5.2% and 7.7%, of total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. Revenue from fixed-term licenses, which includes maintenance and support during the license period, are recognized ratably over the license term.
In addition, we also license software products through subscriptions. Similar to fixed term license arrangements, revenue and costs for subscription licenses are deferred until the delivery of the product and then recognized ratably over the subscription term. Revenue from subscriptions, which is included in License and implementation revenue in the Consolidated Statements of Operations, represented approximately 5.5%, 6.6% and 2.5%, of total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. Maintenance revenue
from subscriptions, which is stated separately in the agreement, is recognized in accordance with the terms of the agreements and is included in Maintenance revenue and represented approximately 1.1%, 1.5% and 0.9%, of total revenue for the years ended December 31, 2008, 2007 and 2006, respectively.
We had $1.1 million of capitalized implementation costs included in other assets, $0.2 million in accounts receivable and $6.1 million of long-term deferred revenue related to a subscription contract from a customer that delivered a notice of contract termination in April 2008. These amounts have been netted and are classified as other current liabilities as future recognition of revenue has been discontinued due to the uncertainty of its realization. This amount has not changed since April 2008 and will continue to be presented in the Consolidated Balance Sheet as Other current liabilities until the matter is resolved.
Maintenance and support revenue. We generate maintenance and support revenue from the sale of maintenance and support services for our software products. Our maintenance and support arrangements are sold with terms generally ranging from one to two years. Maintenance and support fees are invoiced to our customers either monthly, quarterly or on an annual basis. Maintenance and support revenue includes post-contract customer support and the right to unspecified software updates and enhancements on a when and if available basis. Maintenance and support renewals by customers continues to be greater than 90%.
Software license and implementation services that have been performed, but for which we have not invoiced the customer, are recorded as unbilled receivables, and invoices that have been issued before the software license and implementation services have been performed are recorded as deferred revenue in the accompanying Condensed Balance Sheets. We generally invoice for maintenance and support services on a monthly, quarterly or on an annual basis through the maintenance and support period.
Revenue distribution
Our revenue is geographically dispersed as we sell our solutions to a global customer base. We do not believe there are significant trends or uncertainties among our customers based on geography, and the percentages of revenue among geographic areas fluctuate from year to year. The substantial majority of our customer arrangements are denominated in U.S. dollars. For the year ended December 31, 2008, 46% of our revenue was from the United States. We believe that we are diversified, both geographically and across industries.
Cost of revenue
Cost of license and implementation revenue. Cost of license and implementation revenue includes those costs related to the implementation of our solutions. Cost of license and implementation revenue consists of (a) compensation and benefits related to personnel providing professional services, (b) billable and non-billable travel, lodging and other out-of-pocket expenses and (c) facilities and other overhead costs. Since 2003, we have seen improvement in our license and implementation gross margin as a result of improvements in our implementation processes and the standardization of our software products. This trend may not continue if the economy negatively impacts our revenue and we are unable to reduce costs. License and implementation costs may vary from period to period depending on a number of factors, including the amount of implementation services required to deploy our products.
Cost of maintenance and support revenue. Cost of maintenance and support
revenue includes those costs related to post-contract support on our deployed
solutions. Cost of maintenance and support revenue consists of (a) compensation
and benefits related to personnel providing customer support and (b) facilities
and other overhead costs. Maintenance and support gross margin increased during
2008 due to (i) an increase in maintenance and support revenue following the
completion of a number of implementations of our software products and an
inflationary index increase in the rate charged on maintenance renewals and
(ii) a decrease in cost of maintenance and support resulting from the reduced
resources required to provide support during the period. This trend may not
continue if the economy negatively impacts our revenue and we are unable to
reduce costs.
Operating expenses
Selling, general and administrative. Selling, general and administrative
expenses consist of (a) compensation and benefits related to selling, general
and administrative activities; (b) travel, lodging and other out-of-pocket
expenses; (c) marketing programs such as our conferences and participating in
industry trade shows; (d) accounting, legal and other professional fees and
(e) facilities and other related overhead.
Research and development. Research and development expenses consist of
(a) compensation and benefits of software developers, scientists and product
managers working on the development of our new products, enhancements of
existing products, scientific research, quality assurance and testing and
(b) facilities and other related overhead. We expense all of our research and
development costs as incurred, and we expect to continue to do so in the
foreseeable future.
Income taxes
We are subject to income taxes in the United States and abroad, and we use estimates in determining our provision for income taxes. We estimate separately our deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities. At December 31, 2008, our deferred tax assets consisted primarily of temporary differences related to the timing of deductions for federal income tax and financial reporting purposes and the deferral of revenue on subscription contracts for financial reporting purposes. We assess the likelihood that deferred tax assets will be realized and we recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business.
Our effective tax rates for the years ended December 31, 2008, 2007 and 2006 were 28%, 11% and 20% respectively. In the third quarter of 2007, we recognized a tax benefit of $1.1 million upon the reversal of a valuation allowance previously recorded against the deferred tax asset on our Research & Experimentation ("R&E") tax credit carryforwards. This reversal was the result of our determination during the third quarter that it was more likely than not that our R&E tax credit carryforwards would be utilized. Without this reversal, our effective tax rate would have been 20%.
Our Federal effective tax rate historically has been lower than the statutory rate of 35% largely due to the application of general business tax credits. In December 2007, Congress recessed without reinstating the Research and Experimentation ("R&E") tax credit. However, on October 3, 2008, Congress passed and the President of the United States of America enacted H. R. 1424, the Emergency Economic Stabilization Act of 2008, which included, among other items, the extension of the R&E tax credit. The passage of this legislation makes the R&E tax credit retroactive to January 1, 2008 and extends the R&E tax credit until December 2009. As a result of the retroactive reinstatement of the R&E tax credit, we recorded the full benefit of the R&E tax credit in the fourth quarter of 2008 which resulted in an estimated effective Federal effective tax rate of approximately 28% for the year ended December 31, 2008.
Deferred revenue and unbilled receivables
For our license fees and implementation services, we invoice and are paid based upon negotiated milestones in each customer arrangement with an initial payment due upon execution and remaining payments due throughout the implementation period. We record as deferred revenue any invoices that have been issued before implementation services have been performed and before the corresponding license and implementation revenue is recognized. We record as unbilled receivables any recognized license and implementation revenue in excess of the amount invoiced to the customer. We generally invoice for our maintenance and support services on a monthly, quarterly or annual basis through the maintenance and support period. Deferred revenue does not reflect the total contract value of our customer arrangements at any point in time because we only record deferred revenue as amounts are invoiced ahead of the performance of implementation services. As a result, there is little correlation between the timing of our revenue recognition, the timing of our invoicing and the amount of deferred revenue.
Critical accounting policies and estimates
We prepare our Consolidated Financial Statements in accordance with GAAP. We make estimates and assumptions in the preparation of our Consolidated Financial Statements, and our estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The complexity and judgment of our estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the percentage-of-completion method of accounting affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful accounts, useful lives of assets, depreciation, income taxes and deferred tax asset valuation, valuation of stock options, other current liabilities and accrued liabilities. Numerous internal and external factors can affect estimates. Our
management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our Audit Committee.
We believe the critical accounting policies listed below affect significant judgment and estimates used in the preparation of our Consolidated Financial Statements.
Revenue recognition
License and implementation. We consider our implementation services essential to our customers' usability of our licensed software products, and therefore, we recognize revenue from perpetual software licenses and implementation services together as the services are performed. We do so using the percentage-of-completion method in accordance with the provisions contained within American Institute of Certified Public Accountants Statement of Position ("SOP") 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The percentage-of-completion is measured as the total number of man-days expended on an implementation of our software products during a reporting period as a percentage of the total man-days estimated to be necessary to complete the implementation. The period over which we recognize license and implementation revenue depends on the number of licensed software products and the scope and complexity of the implementation requirements. Our revenue recognition period for an arrangement generally ranges from six months to several years.
Maintenance and support. Maintenance and support revenue includes post-contract customer support and the right to unspecified software updates and enhancements on a when and if available basis. Once an implementation is completed, maintenance and support revenue is recognized ratably over the term of the maintenance and support arrangement.
Allowance for doubtful accounts
In addition to our initial credit evaluations at the inception of arrangements, we regularly assess our ability to collect outstanding customer invoices. To do so, we must make estimates of the collectability of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable. We also analyze accounts receivable and historical bad debt experience, customer creditworthiness, changes in our customer payment history and industry concentration on an aggregate basis when evaluating the adequacy of the allowance for doubtful accounts. If any of these factors change, our estimates may also change, which could affect the level of our future provision for doubtful accounts.
Stock based compensation
On January 1, 2006, we adopted the provisions of FASB Statement of Financial Accounting Standards No. 123(R), Share-Based Payment ("SFAS No.123(R)"). Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payment awards. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We do not have an established history of market prices of our common stock as we only recently became a public company, and as such we estimate volatility in accordance with Staff Accounting Bulletin No. 107, using historical volatilities of similar public entities. The expected life of the share-based payment awards is a historical weighted average of the expected lives of similar securities of comparable public companies. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our expectation of paying no dividends. Stock-based compensation expense recorded in our financial statements under SFAS No.123(R) is based on awards that are ultimately expected to vest.
We evaluate the assumptions used to value our awards as we issue options. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees.
We account for stock options granted to non-employees in accordance with Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, ("EITF No. 96-18"), and related interpretations. We grant stock options to certain consultants and advisory board members for a fixed number of shares with an exercise price equal
to the fair value of our common stock at the date of grant. Under EITF No. 96-18, compensation expense on non-employee stock options is calculated using the Black-Scholes option-pricing model.
The fair value of our common stock for options granted before our initial public offering was estimated by our board, with input from management. Determining the fair value of our common stock requires making complex and subjective judgments. Our board considered objective and subjective factors including our financial results and financial condition, and discussions with the underwriters related to our potential initial public offering.
At December 31, 2008, there were an estimated $13.1 million of total unrecognized compensation costs related to share-based compensation arrangements for options and restricted stock units granted. These costs will be recognized over a weighted average period of 2.6 years.
In November 2008, we issued restricted stock units to employees, directors, and
consultants. We account for the issuance of restricted stock units under SFAS
123(R). The fair value of the restricted stock units is based on the closing
price of our stock on the date of grant. The expected life of the restricted
stock units is a historical weighted average of the expected lives of similar
securities of comparable public companies. The restricted stock units are
amortized over the vesting period. Stock based compensation expense recorded in
our financial statements under SFAS No.123(R) is based on awards that are
ultimately expected to vest.
Accounting for income taxes
We use the asset and liability method to account for income taxes, including recognition of deferred tax assets and liabilities for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax basis. We review our deferred tax assets for recovery. A valuation allowance is established when we believe that it is more likely than not that some portion of our deferred tax assets will not be realized. Changes in the valuation allowance from period to period are included in our tax provision in the period of change.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, ("FIN 48"). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise's financial statements. FIN 48 requires us to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax . . .
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