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| SY > SEC Filings for SY > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
• Critical Accounting Policies that we believe are important to understanding the assumptions and judgments underlying our financial statements.
• Results of Operations that begins with an overview followed by a more detailed discussion of our revenue and expenses.
• Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments.
You should note that this MD&A discussion contains forward-looking statements
that involve risks and uncertainties. Please see the section entitled "Risk
Factors, Future Operating Results" at the beginning of Item 1(A) for important
information to consider when evaluating such statements.
You should read this MD&A in conjunction with the Consolidated Financial
Statements and related Notes in Part II, Item 8.
On November 8, 2006 we acquired Mobile 365, Inc. (which we renamed Sybase 365)
for approximately $418.5 million. Sybase 365 delivers mobile data and messaging,
premium content, and value-added services for leading mobile operators, content
providers, global brands, media companies, and financial institutions worldwide.
Total revenues and operating income of Sybase 365 were $178.1 million and
$5.3 million, respectively in 2008. Total revenues and operating loss of Sybase
365 were $140.7 million and $0.5 million, respectively in December 31, 2007.
Total revenues and operating loss of Mobile 365, were $19.4 million and $
1.2 million, respectively for period from November 8, 2006 through December 31,
2006.
Executive Overview
Our Business
Sybase is a global enterprise software and services company exclusively focused
on managing and mobilizing information from the data-center to the point of
action. We provide open, cross-platform solutions that securely deliver
information anytime, anywhere, providing decision-ready information to the right
people at the right time.
Our value proposition involves enabling the Unwired Enterprise by allowing
enterprises to extend their information securely and make it useful for people
anywhere using any device. We deliver a full range of solutions to ensure that
customer information is securely managed and mobilized to the point of action,
including enterprise and mobile databases, middleware, synchronization,
encryption and device management software, and mobile messaging services.
During 2008 our business was organized into three business segments: IPG, which
principally focuses on enterprise class database servers, integration and
development products; iAS, which provides mobile database and mobile enterprise
solutions; and Sybase 365, which provides global services for mobile messaging
interoperability and the management and distribution of mobile content. For
further discussion of our business segments, see Note Ten to Consolidated
Financial Statements, Part II, Item 8, incorporated here by reference.
Our Results
We reported total revenues of $1,132 million for 2008 compared to $1,026 million
for 2007. The increase in total revenues from 2007 to 2008 was attributable to
increases in each of our revenue streams, with license revenues increasing
11 percent, service revenue increasing 5 percent and messaging revenues
increasing 29 percent. Our IPG segment saw a $64.5 million (8 percent) increase
in revenues, Sybase 365 grew revenues $37.3 million (27 percent) and iAS
experienced a $5.6 million (3 percent) increase in revenues.
The increase in IPG revenues was driven by a 12 percent increase in license
revenue and a 6 percent increase in services revenues. The growth in IPG license
revenues was primarily attributed to a 28 percent increase in database revenues,
namely our IQ and Adaptive Server Enterprise Products Adaptive Server®
Enterprise (ASE) 15.0 and Sybase IQ products, while the increase in services
revenues was primarily attributable to an 8 percent increase in technical
support services revenue.
The increase in iAS revenues from 2007 to 2008 was driven by a 3 percent
increase in license revenue and a 4 percent increase in services revenues. The
increase in license revenues was primarily attributed to a 23 percent increase
in revenues from our Afaria device management product, while the increase in
service revenue came from an increase in technical support services. Our
iAnywhere product platform continues to garner accolades for its market
leadership from the likes of Gartner and IDC. Currently, Sybase is the only
vendor to be rated as a leader in three enterprise mobility categories:
multi-access gateways, enterprise mobile email, and mobile device management &
security. We have also been a long-time leader in the mobile and embedded
database market. We believe that as a market leader, we are positioned to
benefit from growth in the enterprise mobility market.
Sybase 365 revenues were driven by a 29 percent increase in messaging revenue
spurred by strong growth in both Europe and the United States. Our Sybase 365
segment continued to see strong growth in messaging volume and greater adoption
of messaging as an effective means for enterprises to reach their customers. We
believe continued growth in messaging traffic and the adoption of messaging by
the enterprise will offset continued pricing compression and lead to growth in
our messaging revenues.
We reported net income of $138.6 million for 2008, compared to 148.9 million
2007. Our 2008 operating income was $210.1 million (19 percent operating margin)
compared to $168.6 million (16 percent operating margin) in 2007. The increase
in operating income was primarily attributable to the IPG segment's
$35.4 million increase in operating income representing both their revenue
growth and operating margin expansion.
Net income decreased year over year due to a charge of $13.0 million in 2008 to
write down the value of certain auction rate securities, and the absence of a
$27.6 million 2007 tax credit relating to the release of certain valuation
allowances.
During 2008, we generated a record amount of net cash from operating activities
at $295.5 million, a 16 percent increase over the prior year. Our days sales
outstanding in accounts receivable was 80 days for the quarter ended
December 31, 2008 compared to 75 days for the quarter ended December 31, 2007.
For a discussion of certain factors that may impact our business and financial
results, see "Risk Factors - Future Operating Results," above.
Business Trends
Our business activity and pipeline was strong throughout 2008 despite a
deterioration in the macro economic environment. Entering 2009, we are
encouraged by the strength of our pipeline and the general condition of our
business. We believe, however, that the overall spending environment will be
very challenging in 2009, with the world economy mired in a recession and most
analysts predicting a decline in overall IT spending. While our short-term
pipeline is strong, it is more difficult than in the past to predict the overall
buying environment in the second half of the year. Additionally, in 2009 we
expect that our year over year revenue and net margin comparisons will be
adversely impacted by a significant strengthening of the U.S. dollar against
various foreign currencies, most specifically the Euro and other European
currencies.
We continue to see spending strength on mission critical applications and new
capabilities like business analytics and risk management - areas where our key
products have been doing very well. In contrast, we believe the spending
environment for discretionary projects and solutions requiring long professional
services engagements will continue to be poor during 2009. We have maintained a
strong short-term pipeline for enterprise infrastructure products used in
mission critical applications, especially our Adaptive Server Enterprise
(ASE) 15.0 product, for which we added 954 new customers during 2008.
We also benefit from the continued proliferation of enterprise data with our
customers showing willingness to invest resources on new analytic solutions. We
saw strong demand for our analytic solutions during 2008 with 200 new customers
for our IQ Analytic Server (IQ) product and 14 new customers for our Risk
Analytics Platform (RAP) product. IQ offers a highly optimized analytic engine
specifically designed to deliver dramatically faster results for business
intelligence, analytic and reporting solutions. Our RAP product , which is built
on IQ, is targeted to the financial service industry for risk, trading and
compliance analytics. The pipeline for RAP, which was launched in the first half
of 2008, continues to build and provides what we believe, will be a future
growth engine for our IQ product.
With respect to the market for mobility and integration products we believe
these products continue to gain market acceptance and will provide us with
growth opportunities in the future. For 2009 we are supported by a strong
product cycle with our refreshed iAnywhere product platform and will be focused
on expanding our relationships with system integrators and other partners.
With respect to the market for messaging services, we believe that our messaging
business will see revenue driven by continuing growth in worldwide Short
Messaging Services (SMS) and Multimedia Messaging Services (MMS) traffic levels
and an expanding demand for mobile data roaming (GRX) services. Additionally, we
continue to see growth as enterprises, focus more of their business towards
mobile messaging as an inexpensive means of interacting with their customers on
a real time basis. Offsetting to some extent the growth in message volume has
been continued price compression. Our plans for the future are focused on
providing additional value added services such as hosted analytics
and mobile commerce solutions which we believe will allow us to demonstrate
service differentiation and provide us with the opportunity to expand financial
performance for the messaging business.
In 2009 we will be aggressively maintaining cost controls to improve financial
performance. One area of focus will be to drive cost and revenue synergies
between our operating segments as we eliminate research and development overlap,
combine marketing efforts, integrate back office functions and streamline
business operations. With this focus we believe we can improve operating results
and maintain our strong cash flow in an uncertain environment.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with U.S. generally accepted
accounting principles (GAAP). These accounting principles require us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the date
of our financial statements. We also are required to make certain judgments that
affect the reported amounts of revenues and expenses during each reporting
period. We periodically evaluate our estimates and assumptions including those
relating to software and mobile messaging revenue recognition, impairment of
goodwill and intangible assets, valuation of investments without readily
available markets and the classification of related impairments, the allowance
for doubtful accounts, capitalized software, income taxes, stock-based
compensation, purchase accounting, restructuring, and contingencies and
liabilities. We base our estimates on historical experience, observable and
unobservable inputs under the 3-level SFAS 157 framework, and various other
assumptions that we believe to be reasonable based on specific circumstances.
Our management has reviewed the development, selection, and disclosure of these
estimates with the Audit Committee of our Board of Directors. These estimates
and assumptions form the basis for our judgments about the carrying value of
certain assets and liabilities that are not readily apparent from other sources.
Actual results could differ from these estimates. Further, changes in accounting
and legal standards could adversely affect our future operating results (see
"Risk Factors - Future Operating Results," above). Our critical accounting
policies include: software and mobile messaging revenue recognition, impairment
of goodwill and other intangible assets, valuation of investments without
readily available markets and classification of related impairments, allowance
for doubtful accounts, capitalized software, income taxes, stock-based
compensation, purchase accounting, restructuring and contingencies and
liabilities, each of which are discussed below.
• Revenue Recognition
Revenue recognition rules for software and message services companies are very complex. We follow specific and detailed guidance in measuring revenue, although certain judgments affect the application of our revenue recognition policy. These judgments would include, for example, the determination of a customer's creditworthiness, whether two separate transactions with a customer should be accounted for as a single transaction, reporting certain third party content delivery revenues net as an agent versus gross as a principal, or whether included software services are essential to the functionality of a product.
We recognize software revenue in accordance with Statement of Position
(SOP) 97-2, "Software Revenue Recognition," and SOP 98-9, and in certain
instances in accordance with SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" or SEC Staff
Accounting Bulletin, or SAB, No. 104, "Revenue Recognition." We license
software under non-cancelable license agreements. License fee revenues are
recognized when (a) a non-cancelable license agreement is in force, (b) the
product has been delivered, (c) the license fee is fixed or determinable, and
(d) collection is reasonably assured. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer
and all other revenue recognition criteria have been met.
Residual Method Accounting. In software arrangements that include multiple
elements (e.g., license rights and technical support services), we allocate the
total fees among each of the elements using the "residual" method of accounting.
Under this method, revenue allocated to undelivered elements is based on
vendor-specific objective evidence of fair value of such undelivered elements,
and the residual revenue is allocated to the delivered elements. Vendor specific
objective evidence of fair value for such undelivered elements is based upon the
price we charge for such product or service when it is sold separately. We may
modify our pricing practices in the future, which could result in changes to our
vendor specific objective evidence of fair value for such undelivered elements.
As a result, the timing of revenue recognition associated with multiple element
arrangements could differ significantly from our historical results.
Percentage of Completion Accounting. Fees from licenses sold together with
consulting services are generally recognized upon shipment of the licenses,
provided (i) the criteria described in subparagraphs (a) through (d) above are
met, (ii) payment of the license fee is not dependent upon performance of the
consulting services, and (iii) the consulting services are not essential to the
functionality of the licensed software. If the services are essential to the
functionality of the software, or performance of services is a condition to
payment of license fees, both the software license and consulting fees are
recognized under the "percentage of completion" method of accounting. We use
labor hours to estimate the progress to completion. Under this method, we are
required to estimate the number of total hours needed to complete a project, and
revenues are recognized based on the percentage of total contract hours as they
are completed while costs are recognized as incurred. Due to the complexity
involved in the estimating process, revenues and profits recognized under the
percentage of completion method of accounting are subject to revision as
contract phases are actually completed. Historically, these revisions have not
been material.
Sublicense Revenues. We recognize sublicense fees as reported to us by our
licensees. License fees for certain application development and data access
tools are recognized upon direct shipment by us to the end user or upon direct
shipment to the reseller for resale to the end user. If collection is not
reasonably assured in advance, revenue is recognized only when sublicense fees
are actually collected and all other revenue recognition criteria have been met.
Service Revenues. Technical support revenues are recognized ratably over the
term of the related support agreement, which in most cases is one year. Revenues
from consulting services under time and materials contracts, and for education,
are recognized as services are performed. Revenues from fixed price consulting
agreements are generally recognized based on the proportional performance of the
project, with performance measured based on hours of work performed.
Message Revenues
We recognize message revenue in accordance with SAB No. 104, Emerging Issues
Task Force No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF
00-21") and where applicable in accordance with EITF, No. 99-19, Reporting
Revenue Gross as a Principal Versus Net as an Agent ("EITF 99-19"). We recognize
revenue when (a) there is persuasive evidence of an arrangement; (b) the service
has been provided to the customer; (c) the amount of the fees to be paid by the
customer is fixed and determinable; and (d) the collection of the fees is
reasonable assured.
We generate a significant portion of our message revenue from per message
transaction fees and to a lesser extent, from fixed price messaging arrangements
providing for the delivery of an unlimited number of messages for a specified
period of time, and revenue share agreements related to the delivery of third
party content. We recognize revenue from transaction fees based upon the number
of messages successfully processed by our platforms and delivered in accordance
with the terms of our arrangements. We recognize revenue from the fixed price
messaging arrangements ratably over the period of time specified in the
agreement.
In some instances third party content providers, and other enterprises enter
into revenue sharing arrangements with us. Under a standard revenue sharing
transaction we deliver content from a third party provider to the cell phone of
a mobile operator's subscriber. Third party content includes, among others,
ringtones, wallpapers, interactive games, competitions, directory inquiry
services, and information services. The subscriber is invoiced by their mobile
operator, who upon receipt of payment, remits a portion of the charge to us.
Upon payment from the mobile operator, we generally remit payment to the third
party content provider. In accordance with EITF 99-19, we have determined that
we act as an agent under these revenue sharing arrangements and accordingly,
record as revenue the net amount retained by us. The net amount retained by us
reflects the gross amount billed to the operator less amounts due to the content
provider.
• Impairment of Goodwill, Non-amortizable Intangible Assets and Other Purchased
Intangible Assets
Goodwill and other non-amortizable intangible assets, such as tradenames, have generally resulted from our business combinations accounted for as purchases. We are required to test amounts recorded as goodwill or other non-amortizable intangible assets with indeterminate lives, at least annually for impairment. The review of goodwill and indeterminate lived intangibles for potential impairment is highly subjective and requires us to make numerous estimates, using a discounted cash flow model, to determine the fair values of our reporting units to which goodwill is assigned. For these purposes, our reporting units equate to our reported segments. See Note Ten to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference. If the estimated fair value of a reporting unit is determined to be less than its carrying value, we are required to perform an analysis similar to a purchase price allocation for an acquired business in order to determine the amount of goodwill impairment, if any. This analysis requires a valuation of certain other purchased intangible assets with determinate and indeterminate useful lives including in-process research and development, and developed technology. We performed our annual impairment analysis for each of our historical operating units (IPG, iAS, and SY365) and for each indeterminate lived intangible asset as of December 31, 2008. This analysis indicated that the estimated fair value of each reporting unit or indeterminate lived intangible exceeded its carrying value. Therefore, we were not required to recognize an impairment loss in 2008. As of December 31, 2008, our goodwill balance totaled $527.2 million and our other non-amortizable purchased intangibles totaled $7.1 million. Changes in our internal business structure, increases in the applicable discount rate, changes in our future revenue and expense forecasts, and certain other factors that directly impact the valuation of our reporting units could result in a future impairment charge.
We also continue to separately review our other purchased intangible assets (e.g., purchased technology, customer lists and covenants not to compete) for indications of impairment whenever events or changes in circumstances indicate the carrying amount of any such asset may not be recoverable. For these purposes, recoverability of these assets is measured by comparing their carrying values to the future undiscounted cash flows the assets are expected to generate. This methodology requires us to estimate future cash flows associated with certain assets or groups of assets. Changes in these estimates, technology obsolescence, customer terminations and other factors could result in impairment losses associated with other intangible assets. In 2008, we wrote off $4.5 million of certain purchased technologies.
• Valuation, Classification and Impairments of Investments
On January 1, 2006 we adopted the FASB Staff positions FAS Nos. 115-1 and FAS
124-1, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments (the FSPs). The FSPs were issued on November 3, 2005 and
nullified certain provisions of EITF No. 03-01 related to evaluating an
other-than temporary impairment and clarified the accounting policies set forth
in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
On October 10, 2008 we adopted FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active, ("FSP 157-3"). FSP
157-3 clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 is applicable to the valuation of auction-rate securities held
by the Company for which there was no active market as of December 31, 2008.
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," (SFAS 115) management determines the appropriate
classification of debt and equity securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. At December 31,
2008, we have classified short term bank deposits and long-term cash investments
as available-for-sale pursuant to SFAS 115. In addition, the Company has
classified $8.6 million invested in mutual funds as directed by participants of
a Rabbi Trust related to a deferred compensation plan as trading securities.
Investments classified as available for sale are recorded at fair value and
unrealized holding gains and losses (excluding impairments that are deemed other
than temporary), net of the related tax effect, if any, are not reflected in
earnings but are reported as a separate component of other comprehensive income
(loss) until realized. Realized gains and losses and impairments that are deemed
other than temporary are determined on the specific identification method and
are reflected in income. Investments classified as trading securities are
recorded at fair value and unrealized gains and losses and realized gains and
losses are included in the earnings of the Company.
As of December 31, 2008, long-term cash investments totaling $15.5 million
consist of six auction rate securities (ARS) with an aggregate par value of
$28.9 million. Our ARS are floating rate securities with longer-term maturities
which were marketed by financial institutions with auction reset dates at 28 day
intervals to provide short term liquidity. The underlying collateral of the ARS
we hold consists primarily of corporate bonds, commercial paper, debt
instruments issued by the U.S. Treasury and governmental agencies, money market
funds, asset backed securities, collateralized debt obligations, similar assets,
and in one instance, preferred stock in a bond insurance company. Certain of the
ARS may have direct or indirect investments in mortgages, mortgage related
securities, or credit default swaps. The credit ratings for five of the ARS were
AAA and for one of the ARS was AA at the time of purchase. Beginning in
August 2007 and into September 2007, each of the ARS auctions began to fail due
to a lack of market for these securities. As of the fourth quarter of 2008, the
credit ratings of four of the ARS were Baa1. The credit rating on a fifth ARS
was Baa2. And the credit rating on a sixth ARS was B3. In addition the
investments currently lack short-term liquidity and we will not be able to
access these funds until a future auction for the ARS investments is successful
or until we sell the securities in a reasonable secondary market which currently
does not exist.
During 2008, we recorded impairment losses totaling $13.4 million for the six
ARS. In determining whether each ARS is other than temporarily impaired we
considered the guidance provided by FAS 115, "Accounting for Certain Investments
in Debt and Equity Securities" and related guidance. This guidance specified
that we consider a variety of factors including (i) the quality and estimated
value of the investments held by the trust/issuer; (ii) the financial condition
and credit rating of the trust, issuer, sponsors, and insurers; and, (iii) the
frequency of the auction function failing. Future changes in these and other
factors could result in additional realized impairment losses. Based on our
cash, cash equivalents and cash investment balances of $635.6 million as of
December 31, 2008 and expected operating cash flows, we do not anticipate that
the lack of liquidity for the ARS will adversely affect our ability to conduct
business.
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