| VITRIA TECHNOLOGY INC ITEM 1A RISK FACTORS Our operating results fluctuate significantly and an unanticipated decline in revenue may result in a decline in our stock price and may disappoint securities analysts or investors, and may also harm our relationship with our customers |
| Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future |
| If our operating results are below the expectations of securities analysts or investors, our stock price is likely to decline |
| Period-to-period comparisons of our historical results of operations are not necessarily a good predictor of our future performance |
| Our revenue and operating results depend upon the volume and timing of customer orders and payments and the date of product delivery |
| Historically, a substantial portion of revenue in a given quarter has been recorded in the third month of that quarter, with a concentration of this revenue in the last two weeks of the third month |
| We expect this trend to continue and, therefore, any failure or delay in the closing of orders would have a material adverse effect on our quarterly operating results |
| Since our operating expenses are based on anticipated revenue and because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue from one or more license transactions could cause significant variations in operating results from quarter to quarter and cause unexpected results |
| Our quarterly results depend primarily upon entering into new or follow-on contracts to generate revenue for that quarter |
| New contracts may not result in revenue in the quarter in which the contract was signed, and we may not be able to predict accurately when revenue from these contracts will be recognized |
| Our operating results are also dependent upon our ability to manage our cost structure |
| We have incurred substantial operating losses since inception and we cannot guarantee that we will become profitable in the future |
| We have incurred substantial losses since inception as we funded the development of our products and the growth of our organization |
| We have an accumulated deficit of dlra229dtta8 million as of December 31, 2005 |
| Since the beginning of 2002, we have reduced our workforce and consolidated certain facilities as part of our restructuring plans |
| In order to remain competitive we intend to continue investing in sales and marketing and research and development |
| 9 _________________________________________________________________ [62]Table of Contents Our operating results are substantially dependent on license revenue from BusinessWare and our business could be materially harmed by factors that adversely affect the pricing and demand for BusinessWare |
| Since 1998, a majority of our total revenue has been, and is expected to be, derived from the licensing and support of our BusinessWare platform product and for applications built for that platform |
| Accordingly, our future operating results will depend on the demand for BusinessWare by existing and future customers, including new and enhanced releases that are subsequently introduced |
| If our competitors release new products that are superior to BusinessWare in performance or price, or we fail to enhance BusinessWare and introduce new products in a timely manner, demand for our products may decline |
| A decline in demand for BusinessWare as a result of competition, technological change or other factors would significantly reduce our revenue |
| Failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and result in lower revenue |
| During 2005, we had a net loss of dlra12dtta1 million and our operating activities used dlra16dtta2 million of cash |
| As of December 31, 2005, we had approximately dlra61dtta5 million in cash and cash equivalents and short-term investments, dlra49dtta5 million in working capital, dlra22 million in short-term liabilities, and dlra5dtta3 million in long-term liabilities |
| We may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all |
| If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things: • develop or enhance our products and services; • acquire technologies, products or businesses; • expand operations, in the United States or internationally; • hire, train and retain employees; or • respond to competitive pressures or unanticipated capital requirements |
| Our failure to do any of these things could result in lower revenue and could seriously harm our business |
| The reluctance of companies to make significant expenditures on information technology could reduce demand for our products and cause our revenue to decline |
| There can be no assurance that the level of spending on information technology in general, or on business integration software by our customers and potential customers, will increase or remain at current levels in future periods |
| Lower spending on information technology could result in reduced license sales to our customers, reduced overall revenue, diminished margin levels, and could impair our operating results in future periods |
| Any general delay in capital expenditures may cause a decrease in sales, may cause an increase in our accounts receivable and may make collection of license and support payments from our customers more difficult |
| A general slow-down in capital spending, if sustained in future periods, could result in reduced sales or the postponement of sales to our customers |
| We experience long and variable sales cycles, which could have a negative impact on our results of operations for any given quarter |
| Our products are often used by our customers to deploy mission-critical solutions used throughout their organization |
| Customers generally consider a wide range of issues before committing to purchase our products, including product benefits, ability to operate with existing and future computer systems, ability to accommodate increased transaction volume and product reliability |
| Many customers will be addressing these issues for the first time |
| As a result, we or other parties, including system integrators, must educate potential customers on the use and benefits of our product and services |
| In addition, the purchase of our products generally involves a significant commitment of capital and other resources by a customer |
| This commitment often requires significant technical review, assessment of competitive products, and approval at a number of management levels within the customer’s organization |
| Because of these issues, our sales cycle has ranged from six to nine months, and in some cases even longer, and it is very difficult to predict whether and when any particular license transaction might be completed |
| 10 _________________________________________________________________ [63]Table of Contents Because a small number of customers have in the past accounted for a substantial portion of our revenue, our revenue could decline due to the loss or delay of a single customer order |
| Sales to our ten largest customers accounted for 36prca of total revenue in the fiscal year ended December 31, 2005 |
| Our license agreements do not generally provide for ongoing license payments |
| Therefore, we expect that revenue from a limited number of customers will continue to account for a significant percentage of total revenue in future quarters |
| Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability, breadth and depth of our products, and the cost-effectiveness of our products |
| The loss or delay of individual orders could have a significant impact on revenue and operating results |
| Our failure to add new customers that make significant purchases of our product and services would reduce our future revenue |
| If we are not successful in developing industry specific pre-built process applications based on BusinessWare, our ability to increase future revenue could be harmed |
| We have developed and intend to continue to develop pre-built process applications based on BusinessWare which incorporate business processes, connectivity and document transformations specific to the needs of particular industries, including healthcare and insurance, telecommunications, manufacturing, finance and other industries |
| This presents technical and sales challenges and requires collaboration with third parties, including system integrators and standard organizations, and the commitment of significant resources |
| Specific industries may experience economic downturns or regulatory changes that may result in delayed spending decisions by customers or require changes to our products |
| If we are not successful in developing these targeted pre-built process applications or these pre-built process applications do not achieve market acceptance, our ability to increase future revenue could be harmed |
| To date we have concentrated our sales and marketing efforts toward companies in the healthcare and insurance, financial services, telecommunication and other vertical markets |
| Customers in these vertical markets are likely to have different requirements and may require us to change our product design or features, sales methods, support capabilities or pricing policies |
| If we fail to successfully address the needs of these vertical markets we may experience decreased sales in future periods |
| Our products may not achieve market acceptance, which could cause our revenue to decline |
| Deployment of our products requires interoperability with a variety of software applications and systems and, in some cases, the ability to process a high number of transactions per second |
| If our products fail to satisfy these demanding technological objectives, our customers will be dissatisfied and we may be unable to generate future sales |
| Failure to establish a significant base of customer references will significantly reduce our ability to license our product to additional customers |
| Our markets are highly competitive and, if we do not compete effectively, we may suffer price reductions, reduced gross margins and loss of market share |
| The market for our products and solutions is intensely competitive, evolving and subject to rapid technological change |
| The intensity of competition is expected to increase in the future |
| Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenue |
| Our current and potential competitors include, BEA, Fiorano, FileNet, Fuego, IBM Corporation, Intalio, Microsoft Corporation, Oracle, PolarLake, SAP, Savvion, Sonic Software, Sun Microsystems, TIBCO Software, Telcordia, TriZetto, webMethods and others |
| In the future, some of these companies may expand their products to provide or enhance existing business process management, business analysis and monitoring, and business vocabulary management functionality, as well as integration solutions for specific business problems |
| These or other competitors may merge to attempt the creation of a more competitive entity or one that offers a broader solution than we provide |
| In addition, “in-house” information technology departments of potential customers have developed or may develop systems that provide for some or all of the functionality of our products |
| We expect that internally developed application integration and process automation efforts will continue to be a principal source of competition for the foreseeable future |
| In particular, it can be difficult to sell our product to a potential customer whose internal development group has already made large investments in and progress 11 _________________________________________________________________ [64]Table of Contents towards completion of systems that our product is intended to replace |
| Finally, we face direct and indirect competition from major enterprise software developers that offer integration products as a complement to their other enterprise software products |
| These companies may also modify their applications to be more easily integrated with other applications through web services or other means |
| Some of these companies include Oracle and SAP AG Many of our competitors have more resources and broader customer and partner relationships than we do |
| In addition, many of these competitors have extensive knowledge of our industry |
| Current and potential competitors have established or may establish cooperative relationships among themselves or with third-parties to offer a single solution and increase the ability of their products to address customer needs |
| Although we believe that our solutions generally compete favorably with respect to these factors, our market is relatively new and is evolving rapidly |
| We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater resources |
| The cost and difficulty in implementing our product could significantly harm our reputation with customers, diminishing our ability to license additional products to our customers |
| Our products are often purchased as part of large projects undertaken by our customers |
| Failure by customers to successfully deploy our products, or the failure by us or third-party consultants to ensure customer satisfaction, could damage our reputation with existing and future customers and reduce future revenue |
| In many cases, our customers must interact with, modify, or replace significant elements of their existing computer systems |
| The cost of our products and services represent only a portion of the related hardware, software, development, training and consulting costs |
| The significant involvement of third parties, including system integrators, reduces the control we have over the implementation of our products and the quality of customer service provided to organizations which license our software |
| In some circumstances we provide consulting services for significant production, customization or modification of software for customers |
| Such services may be quite complex and it may be difficult to predict the level of resources needed and the timing of completion, particularly in light of changes in customer requirements or resources |
| In the event we are not able to resolve such claims to the satisfaction of such a customer, we may be subject to litigation or other actions that could adversely impact our financial results and our ability to license products or provide services to this or other customers |
| If our products do not operate with the many hardware and software platforms used by our customers, our business may fail |
| We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms |
| If our products fail to gain broad market acceptance, due to their inability to support a variety of these platforms, our operating results may suffer |
| Our business depends, among others, on the following factors: • our ability to integrate our product with multiple platforms and existing, or legacy, systems and to modify our products as new versions of packaged applications are introduced; • the portability of our products, particularly the number of operating systems and databases that our products can source or target; • our ability to anticipate and support new standards, especially Internet standards; • the integration of additional software modules under development with our existing products; and • our management of software being developed by third parties for our customers or use with our products |
| 12 _________________________________________________________________ [65]Table of Contents If we fail to introduce new versions and releases of our products in a timely manner, our revenue may decline |
| We may fail to introduce or deliver new products on a timely basis, if at all |
| In the past, we have experienced delays in the commencement of commercial shipments of our BusinessWare products |
| To date, these delays have not had a material impact on our revenue |
| If new releases or products are delayed or do not achieve market acceptance, we could experience a delay or loss of revenue and cause customer dissatisfaction |
| In addition, customers may delay purchases of our products in anticipation of future releases |
| If customers defer material orders in anticipation of new releases or new product introductions, our revenue may decline |
| Our products rely on third-party programming tools and applications |
| If we lose access to these tools and applications, or are unable to modify our products in response to changes in these tools and applications, our revenue could decline |
| Our programs utilize Java programming technology provided by Sun Microsystems |
| We also depend upon access to the interfaces, known as “APIs,” used for communication between external software products and packaged application software |
| Our access to APIs of third-party applications are controlled by the providers of these applications |
| If the application provider denies or delays our access to APIs, our business may be harmed |
| Some application providers may become competitors or establish alliances with our competitors, increasing the likelihood that we would not be granted access to their APIs |
| We also license technology related to the connectivity of our product to third-party database and other applications and we incorporate some third-party technology into our product offerings |
| Loss of the ability to use this technology, delays in upgrades, failure of these third parties to support these technologies, or other difficulties with our third-party technology partners could lead to delays in product shipment and could cause our revenue to decline |
| The use of Open Source Software in our products may expose us to additional risks and harm our intellectual property our intellectual property position |
| “Open Source Software” is software that is covered by a license agreement which permits the user to liberally copy, modify and distribute the software for free |
| Certain Open Source Software is licensed pursuant to license agreements that require a user who intends to distribute the Open Source Software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software |
| This effectively renders what was previously proprietary software Open Source Software |
| As competition in our markets increases, we must reduce our product development costs |
| Many features we may wish to add to our products in the future may be available as Open Source Software and our development team may wish to make use of this software to reduce development costs and speed up the development process |
| While we monitor the use of all Open Source Software and try to ensure that no Open Source Software is used in such a way as to require us to disclose the source code to the related product, such use could inadvertently occur |
| Additionally, if a third party has incorporated certain types of Open Source Software into its software, has not disclosed the presence of such Open Source Software and we embed that third party software into one or more of our products, we could, under certain circumstances, be required to disclose the source code to our product |
| This could have harm our business and intellectual property position |
| We could suffer losses and negative publicity if new versions and releases of our products contain errors or defects |
| Our products and their interactions with customers’ software applications and IT systems are complex, and accordingly, there may be undetected errors or failures when products are introduced or as new versions are released |
| We have in the past discovered software errors in our new releases and new products after their introduction that has resulted in additional research and development expenses |
| To date, these additional expenses have not been material |
| We may in the future discover errors in new releases or new products after the commencement of commercial shipments |
| Since many customers are using our products for mission-critical business operations, any of these occurrences could seriously harm our business and generate negative publicity |
| 13 _________________________________________________________________ [66]Table of Contents If we fail to attract and retain qualified personnel, our ability to compete will be harmed |
| We depend on the continued service of our key technical, sales and senior management personnel |
| None of these employees are bound by an employment agreement |
| The loss of senior management or other key research, development, sales and marketing personnel could harm our future operating results |
| We have experienced over the past few years turnover in our sales and marketing and finance organizations |
| In addition, we must attract, retain and motivate highly skilled employees |
| We face significant competition for individuals with the skills required to develop, market and support our products and services |
| We cannot assure that we will be able to recruit and retain sufficient numbers of these highly skilled employees |
| If we fail to adequately protect our proprietary rights, we may lose these rights and our business may be seriously harmed |
| We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our products from our competitors’ products |
| The use by others of our proprietary rights could materially harm our business |
| We rely on a combination of copyright, patent, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights |
| Despite our efforts to protect our proprietary rights, existing laws afford only limited protection |
| Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary |
| Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorized third party copying or use |
| Furthermore, policing the unauthorized use of our products is difficult and expensive litigation may be necessary in the future to enforce our intellectual property rights |
| Our products could infringe the intellectual property rights of others causing costly litigation and the loss of significant rights |
| Software developers in our market are increasingly being subject to infringement claims as the number of products in different software industry segments overlap |
| Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment or cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business |
| Patent litigation in particular involves complex technical issues and inherent uncertainties |
| In the event an infringement claim against us is successful and we cannot obtain a license on acceptable terms or license a substitute technology or redesign our product to avoid infringement, our business would be harmed |
| Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed to us or are using confidential or proprietary information |
| Our significant international operations may fail to generate significant product revenue or contribute to our drive toward profitability, which could result in slower revenue growth and harm our business |
| We have international presence in Australia, Canada, France, Germany, Italy, Japan, Korea, Singapore, Spain and the United Kingdom |
| During 2005, 47prca of our revenue was derived from international markets |
| There are a number of challenges to establishing and maintaining operations outside of the United States and we may be unable to continue to generate significant international revenue |
| If we fail to successfully establish or maintain our products in international markets, we could experience slower revenue growth and our business could be harmed |
| In addition, it also may be difficult to protect our intellectual property in certain international jurisdictions |
| We are at risk of securities class action litigation due to our expected stock price volatility |
| In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities |
| This risk is especially acute for us because technology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries |
| In November 2001, Vitria and certain of our officers and directors were named as defendants in a class action shareholder complaint |
| This litigation could result in substantial costs and divert management’s attention and resources, |