ITEM 1.
BUSINESS
Introduction
We have recently made a number of major announcements, including our acquisition of Intralinks Holdings, Inc. or Intralinks and the divestiture of our carrier activation business, which will help define the future strategy at Synchronoss. These transactions signify a pivot in our strategy to focus on our cloud, analytics and enterprise businesses moving forward. We believe that our “Synchronoss 3.0” strategy is laying the groundwork for our new growth vision. Our acquisition of Intralinks gives us an immediate enterprise pedigree, experience upon which to leverage our product portfolio, and go-to-market strategy providing a diversified customer footprint which allows for substantial cross-selling opportunities through Synchronoss. We believe that as one combined company, we can deploy enhanced enterprise and mobile solutions to our customers, while opening up new enterprise distribution channels across the world.
With the Intralinks acquisition, we believe that enterprise will represent a significant portion of our future total revenues, thus helping us further diversify our business model over the coming years. For our carrier business, key customer wins in our cloud and messaging businesses in the North America and Asia-Pacific regions are some of the strategic highlights of our business performance over the past year. We believe that we will be able to build on these customer wins to create a major opportunity for growth in our carrier business as we head into 2017 and beyond. On the enterprise front we are progressing with our strategic partnerships with Verizon and Goldman Sachs, as we have successfully built a strong pipeline of customer enterprise pilots across various verticals with a core focus on financial and healthcare markets.
During the fourth quarter, we had a number of successful conversions from our pipeline into signed deals, where our solutions replaced existing competitive deployments. During 2016, our sales force and strategic partnerships enjoyed some early enterprise customer validation, which is leading to additional subscription booking opportunities in our enterprise business. These partnerships, will now be part of our broader enterprise strategy that centers on the combined Intralinks-Synchronoss team driving our success forward.
We believe this foundation will serve us well as we build a comprehensive product roadmap and a go-to-market strategy for the enterprise market around identity, secure mobility, secure collaboration, and secure workflow platforms.
Intralinks Acquisition
On January 19, 2017, we completed the previously announced acquisition of Intralinks. Following the acquisition, Intralinks became our wholly-owned subsidiary. Intralinks is a global technology provider of software as a service or SaaS solutions for secure enterprise content collaboration within and among organizations. Intralinks’ cloud-based solutions enable organizations to securely manage, control, track, search, exchange and collaborate on sensitive information inside and outside the firewall. Intralinks provides its customers with cost-effective solutions to manage and control large amounts of electronic information, accelerate information intensive business processes, reduce time to market, optimize critical information workflows, meet regulatory and risk management requirements and collaborate with business counterparties in a secure, auditable and compliant manner. Intralinks helps its customers eliminate many of the inherent risks and inefficiencies of using email, fax, courier services and other existing solutions to collaborate and exchange information. Intralinks serves enterprises and governmental agencies across a variety of industries, including financial services, pharmaceutical, manufacturing, biotechnology, consumer, energy, telecommunications, industrial, legal, professional services, insurance and technology. Intralinks delivers its solutions through a cloud-based model, making them available on-demand over the internet using a multi-tenant SaaS architecture. Intralinks’ solutions are sold directly through a field sales team with industry-specific expertise and an inside sales team, and indirectly through a customer referral network and channel partners. Intralinks’ customer-facing teams provide a range of implementation and end-user support services to ensure that its customers remain productive throughout the duration of their use of our services.
Intralinks has built a highly secure and scalable, cloud-based, multi-tenant, content services platform upon which it develops multiple applications that allow its customers to collaborate, manage and exchange critical information securely across organizational and geographic boundaries. Intralinks integrates content management, enterprise collaboration and social, data analytics, file sync and sharing, and document security software into one platform that supports business collaboration and content exchange. The Intralinks platform scales from the needs of small groups and individuals within one organization to large teams of people across multiple enterprises, financial institutions and governmental agencies. The Intralinks platform also helps transform a wide range of slow, expensive and people- and information-intensive tasks into streamlined and efficient business processes.
For more information about Intralinks and its business, please see the Annual Report on Form 10-K filed by Intralinks for the fiscal year ended December 31, 2015 and its subsequent filings with the SEC. The remainder of the discussion in this Annual Report on Form 10-K relates to the period prior to our acquisition of Intralinks, and, except otherwise noted, generally does not give effect to the Intralinks acquisition.
For additional information about our Intralinks acquisition, see Note 19, "Subsequent Event Review" to our consolidated financial statements included in Part II, Item 8 of this report.
General
We are a global software and services company that provides essential technologies and services for the mobile transformation of business. Our portfolio, which is targeted at the Consumer and Enterprise markets, contains offerings such as personal cloud, secure-mobility, identity management and scalable messaging platforms, products and solutions. These essential technologies create a better way of delivering the transformative mobile experiences that service providers and enterprises need to help them stay ahead of the curve when it comes to competition, innovation, productivity, growth and operational efficiency.
Our products and platforms are designed to be carrier-grade, flexible and scalable, enabling multiple converged communication services to be managed across a range of distribution channels including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets. This business model allows us to meet the rapidly changing converged services and connected devices offered by our customers. Our products, platforms and solutions enable our enterprise and service provider customers to acquire, retain and service subscribers and employees quickly, reliably and cost-effectively with our white label and custom-branded solutions. Our customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and sharing/collaborating with connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of our platforms enable new revenue streams and retention opportunities for our customers through: new subscriber acquisitions, sale of new devices and accessories and new value-added service offerings in the Cloud, including the services offered by Intralinks. By using our technologies, our customers can optimize their cost of operations while enhancing their customer experience.
We currently operate in and market our solutions and services directly through our sales organizations in North America, Europe, the Middle East and Africa, or EMEA, Latin America and the Asia Pacific region. We deliver essential technologies for mobile trans
formation to two primary types of customers: service provider and enterprise customers in regulated verticals and use cases.
Service Providers, Retailers, OEMs, Re-sellers and Service Integrators
Our products and platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. Our customers rely on our solutions and technology to automate the process of activation and content and settings management for their subscribers’ devices while delivering additional communication services. Our portfolio includes: cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging and identity/access management that enable communications service providers, or CSPs, cable operators/multi-services operators, or MSOs, and original equipment manufacturers, or OEMs, with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, or MIDs, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices.
Divestiture of Call Center Operations
During the course of 2016, we strategically began the process of selling our traditional activation business. As part of this effort in late 2016, we divested a large portion of our Activation business to Sequential Technology International or STI, a newly formed company, to leverage the assets sold as part of this transaction to STI's existing global customer care operations. STI is 70% owned by Sequential Technology International Holdings, an unrelated third party that was formerly named Omniglobe International. Omniglobe has been serving many leading carriers and legal entities around the globe, including customers like AT&T for over 10 years. We retained an approximate 30% ownership in STI. Our remaining traditional activation software assets and application programming interfaces orAPI's will help facilitate new innovative platforms, aimed at accelerating the adoption of cloud and digital services for carriers and other customers. The divestiture of the service portion of the Activation business created a better overall solution for our customers as STI is positioned to capitalize on the combined experience of both teams and is expected to become a strong, global player, building on over a decade of call center operations.
Synchronoss Platforms, Products and Solutions
We provide platforms and solutions to help service provider and enterprise customers realize their own visions of mobile transformation in a variety of different areas within their respective businesses. We represent categorical points of entry for our customers to transform their relationships with subscribers and employees.
As mobile technology continues to transform the service provider and enterprise markets the value of our platforms, products and solutions is transforming along with it and enabling our customers to think and stay one step ahead of their competition. One common evolutionary shift lies in the value of data. Service providers are looking at ways to use data to fuel new revenue streams and enterprise customers are looking to data to create more effective context for improving the employee work experience, particularly in environments where a premium is placed on data security. We are able to use our platforms in powerful combinations to not only make more effective use of data such as messaging, user generated content, secure applications and sharing, but also to analyze that data to create new opportunities for our customers.
Our cloud, messaging, security, collaboration, work flow management, predictive analytics and activation platforms are designed to be highly stable, secure, scalable and automated, managing transactions relating to a wide range of existing communications and digital content services across our customers. For example, we enable wireless providers to conduct business-to-consumer, or B2C, business-to-business, or B2B, enterprise and indirect channel (i.e., reseller/dealer) transactions. The capabilities of our platforms are designed to provide our customers with the opportunity to improve operational performance and efficiencies, dynamically identify new revenue opportunities and rapidly deploy new services. Our platforms are also designed to provide customers the opportunity to improve performance and efficiencies for activation, content migration and connectivity management for connected devices.
Our platforms power integrated sets of products that create repeatable, tailored deployments for Consumer and Enterprise customers. Many of these products are customized by our customers into specific solutions that play instrumental roles in helping our customers transform their relationship with their subscribers, partners and employees. This approach gives us a common technical foundation from which we can match products and solutions to flexibly solve the challenges of mobile transformation based on the needs of a variety of customer types, market dynamics and strategies.
Enterprise Solutions
Our Synchronoss Enterprise solutions support an advanced digital mobility experience for businesses and consumers enabling the accessing and protecting of their information. Our identity and access management platform helps consumers and business users to securely authenticate access to online websites to conduct e-commerce transactions or access important data. Our secure mobility platforms help users safely and securely store and share important data. Our solutions are based on understanding assumptions regarding individuals' behaviors by capturing who they are, what they are doing and how, where and when they are doing it. By doing this, our platforms help reduce fraud, improve cybersecurity detection/prevention and overall productivity. Our identity and access solution supports consumers by allowing them to self-register and verify their identities, while providing non-intrusive multi-factor authentication. At the same time, our identity and access solution enables businesses to be sure that the person at the other end of the transaction is the correct person. Our secure mobility solution combines the identity platform with a “bring your own device,” or BYOD, platform that is based on a secure container for accessing data, applications, content and personal information management tools like email, calendar, messaging and notes.
Our Synchronoss Enterprise solutions offer a best-in-class technology platform with purpose-built industry solutions that drive business outcomes for Enterprise customers including: improved employee productivity in a secure environment, greater agility and responsiveness to consumers, higher consumer loyalty and enhanced revenue opportunities, as well as proactively anticipating regulatory data/retention and privacy requirements. There are currently three primary components to this platform, which drive a secure digital online experience in select Enterprise vertical markets:
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Secure Mobility Management
: A BYOD implementation that provides the rich integration and orchestration of secure mobile productivity software featuring fine grain activity capture and dynamic policy execution through best in class mobility management, security and policy management tools and intelligent productivity through behavioral analytics.
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Data and Analytics
: A solution that supports fraud and cybersecurity detection/prevention, dynamic policy administration/execution and predictive productivity.
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Identity and Access Management
: A solution that allows customers to self-register and verify their respective identities while providing non-intrusive multi-factor authentication, which provides businesses with the assurance that the consumer with whom they are interacting is the person authorized to conduct the transaction.
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Our Synchronoss Enterprise solutions are targeted, initially at the following markets:
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Financial Services: Capital markets, banking and insurance
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Telecommunications: CSPs
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Healthcare: Providers and payers
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Life Sciences: Pharmaceuticals, device manufacturers and clinical research organizations
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Government: Federal and State governments and government agencies
Synchronoss Personal Cloud
Our Synchronoss Personal Cloud platform is designed to deliver an operator-branded experience for subscribers to backup, restore, synchronize and share their personal content across smartphones, tablets, computers and other connected devices from anywhere at any time. A key element of our Synchronoss Personal Cloud platform is that it extends a carrier’s or OEM’s visibility and reaches into all aspects of a subscriber’s use of a connected device. It introduces the notion of Connect-Sync-Activate for all devices. Once connected, most users of mobile devices avail themselves of content synchronization from the Cloud using policies that are appropriate and applicable to each specific device. Our Synchronoss Personal Cloud platform is specifically designed to support connected devices, such as smartphones, MIDs, laptops, tablets and wirelessly enabled consumer electronics such as wearables for health and wellness, cameras, e-readers, personal navigation devices and global positioning system, or GPS, enabled devices, as well as connected automobiles. Our Synchronoss Personal Cloud solution features products that facilitate the transfer of mobile content from one smart device to another and the sync, backup, storage, content management and content engagement features for mobile content.
Our Synchronoss Personal Cloud platform is linked to a family of clients designed to enable a persistent relationship between a subscriber and his or her content across devices and time. Our platform supports clients and data backup across major operating systems including: IOS, Android, Windows and works with mobile smart devices, tablets and PCs/Web. Our platform also supports the backup, sync, upload and download of data classes including photos, videos, music, messages, documents, contacts and call logs. Our clients may also feature interactive features intended to stimulate daily use of our platform such as Groups Spaces, smart push notifications, advanced sharing capabilities, smart album creation with more being added over time. Our Synchronoss Personal Cloud platform and clients may also be integrated with select third party providers to co-opt features that drive third party application and service engagement, a feature that is designed to provide future monetization opportunities to third parties and carriers.
Our Synchronoss Personal Cloud platform also has the ability to intelligently analyze a subscriber’s user generated content through image tagging, object and facial recognition, as well as metadata including location, time and date, sharing and other data profiles. This information drives an enhanced user experience allowing for smart features such as flashbacks, smart albums, etc., which also allows subscribers to effectively search a massive data base of content to find just the right piece of content without browsing. However, we derive the most value from this content through our ability to apply Synchronoss Analytics to analyze the context in which a subscriber collects content. This information can be used by our customers to create valuable incremental targeting of subscriber interests, creating a context that adds to the future monetization potential of subscriber data according to our service provider customers’ strategies and policies.
Synchronoss Mobile Content Transfer
Our Synchronoss Mobile Content Transfer solution is an easy to use product that enables a secure, peer-to-peer, wireless transfer of content from one mobile smart device to another in a carrier retail location or at home/work, etc. Our solution supports secure mobile content transfer across major operating systems including IOS, Android and Windows. Our Synchronoss Mobile Content Transfer solution can transfer select data classes that may include photos, videos, music, messages, documents, contacts and call logs, across operating systems with varying degrees of support in accordance with the openness of the platform.
Synchronoss Backup & Transfer
Our Synchronoss Backup & Transfer solution is a variation of our Synchronoss Mobile Content Transfer solution that offers the same peer-to-peer transfer of select data classes across smart mobile devices and major operating systems and also offers the ability to send supported data classes that may include photos, videos, music, messages, documents, contacts and call logs up to the cloud for temporary storage and then the ability to restore that content back onto that same device or to a new device with the same subscriber. This capability supports care channel use cases of securing content during a device wipe and also creates a value-added solution in the case of lost devices, cracked screens and other edge use cases. Furthermore, our Synchronoss Backup & Transfer solution enables the subscriber to establish a cloud account at the point of transfer and an auto sync capability to keep content backed up to the cloud account going forward. This unified experience is designed to drive cloud enrollment at the point of transfer (often during a new line or upgrade) and provide an opportunity to get content into the Cloud to reduce the time of transfer for the next upgrade.
Synchronoss Messaging
Our Synchronoss Secure Messaging platform was designed for demanding large-scale environments, with optional advanced email features. We
cover the spectrum when it comes to multichannel messaging, security, identity management, and customization solutions, enabling service providers to transform email and messaging from cost centers to revenue generators. With an approximate 35% market share and more than 400 million mailboxes installed worldwide, we believe that we are the premier partner for service providers around the globe. We also p
artner with various companies for best-in-class traffic management, anti-virus, anti-spam, and anti-malware technology.
Our Universal Messaging Suite is an email platform for expanding service provider subscriber bases and adding new revenue streams. It is an easy-to-use, end-to-end solution to make sense of different data and communications from a service provider. Our Universal Messaging Suite is a feature-rich, reliable and secure messaging solution that is available on any device and provides integrated email, chat, voice and video messaging. The use of our Universal Messaging Suite drives fewer customer service calls due to increased reliability. Our Universal Messaging Suite is a single messaging platform rather than separate infrastructures for back-end, front-end and security.
Our UX Suite 2.1 is an intuitive and easy-to-use email interface that is accessible on all smartphones, tablets and desktop devices. The user interface, or UI, applies to emails, contacts, calendars, and tasks. Our UX Suite 2.1 delivers highly intuitive and feature-rich mobile and desktop email experiences that match what any over-the-top, or OTT, providers offer and can be fully customized to provide a more engaging mobile and desktop email experience for service providers. Additionally, we also provide professional services program support in writing new feature functionality requirements, omni-channel strategy documents or use-case sequence diagrams. Our UX Suite 2.1 features include:
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full productivity information management suite, including mail, contacts, calendar, tasks, alerts, and invites
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multiple mail views, including top and right reading panes and contextual toolbars with drop-downs
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inline media preview for Microsoft Office documents, PDFs, images and videos within mail
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multiple address book support with quick action icons, contact search and alphabetical quick view
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aggregated email management from external accounts (e.g., Gmail, Hotmail, Yahoo or any other POP/IMAP)
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adaptive touch screen navigation (scroll, swipe, refresh) for fast mobile experiences
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access to native mobile device APIs, such as camera and photo albums
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advertising ready for integrating third-party applications and value-added services
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optimization for large mailbox load/search/sort from any device
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Synchronoss Analytics
Our Synchronoss Analytics platform is a cloud-based SaaS, platform that improves customer experience, retention, acquisition, monetization and financial performance. Our Synchronoss Analytics platform analyzes substantial volumes of data from internal and external sources to deliver daily business insights to our customers’ executives and leverages data science, machine learning, artificial intelligence, or AI, and workflow automation while integrating with internal systems to deliver insights around customer behavior, sentiment and operational performance. Our Synchronoss Analytics platform drives significant financial benefits to our service providers and enterprise customers and plays a key role in their efforts to monetize content and customer data in this era of digital transformation.
Our Synchronoss Analytics platform provides the following categories of functionality:
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Automated Data Generation
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A data generation system that processes tens of thousands of variables to produce advanced insights for use in monetizing Internet of Things, or IoT, initiatives by ingesting data from network devices, their usage, health, connectivity, alarms, behavior and more.
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Self-Learning Capabilities
- Automated monitoring and feedback software that adapts and learns from generated data in order to create the most valuable and up-to-date insights on an ongoing basis. This functionality precludes the need to update analytics systems, which would require the completion of expensive, labor-intensive and time-consuming projects.
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Repeatable Insight Delivery
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As opposed to standard analytics applications that require constant reassessments and rebuilds, our Synchronoss Analytics platform provides repeatable insight delivery with an easy-to-operate user interface.
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Data Processing Engine
- Our Synchronoss Analytics platform c
reates a robust, highly repeatable, scalable analytic data set upon which insights are continually generated.
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Measuring and Monitoring
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By measuring and monitoring progress, our Synchronoss Analytics platform automatically learns and applies what it learns to improve the functionality of the analytics software.
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Predictive Analytics Engine
- Our Synchronoss Analytics engine employs the most advanced and mature algorithms to create predictive and prescriptive insights to use for IoT business and operational purposes.
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Our Synchronoss Analytics platform helps marketers at our service provider customers target prospective customers more effectively and efficiently, while also proactively:
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improving customer retention
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identifying cross-sell and upsell opportunities
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improving the performance of marketing campaigns
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identifying the Next Best Action for each customer
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growing customer lifetime value
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delivering prescriptive insights to drive customer-centric business strategies such as acquisition, cross-sell and retention
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identifying customer profiles dynamically to increase each marketing campaign’s success
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simplifying the ability to take marketing actions by integrating with downstream systems such as campaign management and customer care
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driving results and constantly measuring return on investment customer-centric metrics and scorecards to support campaign execution
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Our Synchronoss Analytics platform is accessible from the Synchronoss Cloud and can be integrated directly into a service provider’s business and operational support systems, or BSS/OSS. Unlike internal solutions that can take up to 24 months to build, Synchronoss solutions can be operationalized in a short time period - approximately 90 days. Our Synchronoss Analytics platform automatically provides a service provider's customer care representatives with distinct prescriptive actions to take in the customer’s specific set of circumstances.
Our Synchronoss Analytics platform integrates easily with back-end systems through the use of web services APIs and batch processing. This is instrumental for faster integration with additional applications, systems and processes including:
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queuing applications to enhance the customer retail experience,
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call center enhancements/optimization for calls to customer service/care,
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social network care teams,
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Cloud customer service apps,
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service-on-demand mobile apps for customer callbacks,
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timely technician appointments (truck rolls),
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mobile apps to track technicians,
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partnerships with logistics firms.
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Synchronoss Financial Assurance
Our Synchronoss Financial Assurance platform is offered as either a secure cloud or license-based application suite. Key features of this platform include:
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management of network partners and transactions,
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data loading and normalization,
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consolidated and central database for all network infrastructure expense,
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automated and user-configurable audits and alerts that quantify billing errors and let customers proactively manage their vendors and reduce expense,
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approval workflow that mirrors the financial checks and balances that customers use throughout their organizations,
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automated general ledger coding/accounting for accurate cost allocation,
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seamlessly integration into enterprise resource planning and accounts payable systems.
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Synchronoss Activation Services
Our Synchronoss Activation Services platform is a scalable and flexible platform that decouples the order processing customer experience from varied and legacy information technology, or IT, back office order management systems. Our platform enables sale, delivery and assurance of our customers’ new “complex product” bundles quickly and inexpensively, creating a uniform product portfolio and pricing schema across all of their sales channels and reducing their costs while improving the customer experience through reduced error rates and throughput time in processing orders, alarms, etc. Our platform is fully scalable, agile and adaptable to future products, services and channel changes, serving as a future-proof activation platform with end-to-end channel visibility and analytics and featuring a flexible commercial model. We sell this platform either on a SaaS basis or as a product license sale with accompanying professional services.
Demand Drivers for Our Business
Our products and services are capable of managing a wide variety of transactions across multiple customer delivery channels and services, which we believe enables us to benefit from increased growth, complexity and technological change in the communications technology industry and in several of the enterprise markets we are targeting. As the communications technology industry evolves, new access networks, connected devices and applications with multiple services and modes are emerging. More significantly, the accumulation of multiple connected devices per subscriber is creating new opportunities for network and cloud-driven service continuity. This proliferation of services and advancement of technologies is accelerating subscriber revenue growth, significantly expanding the types and volume of rich content accessed and stored by consumers and increasing the number of transactions between our customers and their subscribers. The technology advances are also continuing the demand for our products and services in the enterprise market segment, especially in the financial and life science sectors. Key elements of our demand drivers include:
New and Richer Operating Systems and the move to 4G-LTE Networks
Device operating systems like iOS for the iPhone/iTouch/iPad portfolio, Android produced by Google, Windows mobile devices, and BlackBerry OS for the BlackBerry portfolio have accelerated the adoption and usage of smartphones. Other growing markets are in smart wearables and connected vehicles. Apple has watchOS and CarPlay, while Google has Android Wear and Android Auto, respectively. According to IDC, the smartwatch market has a compounded annual growth rate or CAGR of about 43% from 2015-2019. For connected vehicles, BI Intelligence forecasts that 82% of all cars shipped in 2021 will be connected, representing a CAGR of 35% from 2016. In addition, the continued growth of 4G-LTE networks is expected to improve the customer experience with connected devices given the network’s higher data speeds and reduced latency. In addition, devices such as mobile routers and tablets can generate mobile hotspots. With fixed mobile broadband, mobile carriers and MSOs can also offer bundled services. At the same time, these networks are also focused on enhancing machine to machine communications.
Increasing Mobile Adoption Worldwide
According to estimates by the International Telecommunication Union in 2016 there were 3.6 billion active mobile-broadband subscriptions in the world, representing 49.4% of the global population, and this number is expected to reach approximately 12% fixed-broadband penetration globally by 2017.
The massive penetration of smart devices in developing countries is causing a modernization of networks and IT capabilities in markets previously dominated by feature phones and standard telephony services. The nature of smart devices is to drive a massive increase in data utilization of high bandwidth networks, an increase in messaging and the creation of user generated content, or UGC, all of which lead to the need for Synchronoss products, solutions and platforms on a new scale to markets that are rapidly catching up to mobile transformation.
The Rise of User Generated Content
As smart phone data use grows, so does the creation of UGC such as pictures, videos and memes. The accumulation of UGC on mobile devices (where 1 trillion photos were taken in 2015) is on pace to outstrip UGC in computer hard drives. This creates a dilemma for users in terms of stranding content that is often perceived as being more valuable than their own device. At the same time, this proliferation of UGC also presents a formidable challenge when it comes to transferring content from device to device in retail. Our Synchronoss Personal Cloud platform solves both of these problems while improving customer loyalty, customer satisfaction and retail efficiency.
Big Data and Monetization
Along with the accumulation of UGC and messages, service providers are accumulating more and more data from all areas of their network. The collection of this data adds breadth to already deep customer data they maintain that is aimed at supporting their ability to deliver relevant offers to specific customers. Together, this data creates rich context creating a robust profile around millions and millions of subscribers. Service providers are starting to develop new ways to use “Big Data” to fuel valuable targeting for mobile ads and add new revenue streams to their existing service revenue lines. Our Synchronoss Analytics platform is used to create new insights on carrier data and add to the value of ad targeting. Our white label cloud and messaging services create additional rich context to add to our carrier customers’ already robust data. According to ABI Research, mobile operators will devote more than $50 billion to Big Data and machine learning analytics through 2021.
Messaging and the Consolidation of Email and Over The Top Players
Messaging such as e-mail is a standard offering provided by service providers to their subscribers. Recent consolidation of email providers in the global market is prompting a reconciliation of this offering across the globe. Messaging as a medium is moving beyond standard email and is fast becoming an interface for commerce. Service providers are seeing usage and monetization declining as a result of the rise in"over the top" or OTT messaging players such as Facebook, Line, What’s App, We Chat and others who are using advanced messaging to create commerce opportunities to give subscribers visibility to smart transactions within a sticky, high frequency environment. Chat bots, operating on artificial intelligence fueled from semantic analysis of messaging content are the latest entrants to create a “messaging user interface” that is linking subscribers and third parties together across multiple channels. According to Gartner, by 2020, the average person will have more conversations with bots than with his or her spouse.
Our track record of providing scalable, secure, white label email solutions to service providers provides a viable alternative to smaller providers or OTT partners. Service providers are not adopting new messaging clients to compete with highly competitive and viral OTT players; instead they are adopting the monetization techniques used by those players to extend subscriber information into third party applications and chat interfaces, creating stickier commerce opportunities. Our customers are using our Synchronoss Messaging platform, especially in the Asia Pacific market, to evolve service provider messaging into a cloud-centric commerce offering utilizing personal cloud, identity management and other advanced messaging protocols that will open up new revenue streams and allow service operators to compete with OTT providers in new ways.
Pressure on Customers to Improve Efficiency while Delivering a Superior Subscriber Experience
Increased competition, recessionary markets and the cost of network capacity have placed significant pressure on our customers to reduce costs and increase revenues. At the same time, due to deregulation, the emergence of new network technologies and the proliferation of services, the complexity of back-office operations has increased significantly. Customers with multiple back-end systems are looking for ways to help their systems interoperate for a better customer experience. In addition, customers are moving to automated provisioning systems that enable them to more easily purchase, upgrade or add new features, applications and content.
As a result, we believe our customers are looking for ways to offer new communications services more rapidly and efficiently to their existing and new customers. Increased competition and the demand for a superior subscriber experience have placed significant pressure on our customers to improve customer-centric processes. CSPs are increasingly turning to transaction-based, cost effective, scalable and automated third-party solutions that can offer guaranteed levels of service delivery.
Digital Transformation and Mobile
Today nearly all businesses are involved in some form of digital transformation to drive profitability, growth, innovation and customer and employee satisfaction. According to Forrester, digital transformation budgets will edge up into the billions of dollars.We provide essential, white label technologies to help service providers realize the digital transformation that we believe drives a 2x output in immediate gratification, omni-channel personalized service and customer ease and convenience of dealing with carrier services and networks. Our enterprise customers realize similar value in meeting the expectations of their employees by offering them solutions that address productivity, enable BYOD and facilitate these employees doing business from anywhere.
Security Fraud and Cyber Threat Detection and Prevention
Every year, there is an increase in the prevalence of threats against consumers and companies from a variety of sources. The main point of attack are the user credentials that are used to access applications and commerce sites. As a result, it has become critically important to assure complete confidence in the identification and authentication of users. We believe our focus on security with respect to our products, especially our products focused on the Enterprise markets, is leading to a strong demand for our products worldwide.
Consumer Identity Verification and Authentication
Consumers today are burdened with having too many username and passwords to manage across their personal and professional lives. They are looking for simple safe and secure identity and authentication methods. Through our joint venture with Goldman Sachs, our identity and access solution supports consumers by allowing them to self-register and verify their identities, while providing non-intrusive multi-factor authentication.
Growth Strategy
Our growth objective is to establish our platforms as the de-facto industry standards for enabling mobile transformation with service provider (CSPs, MSOs, OEMs, multi-channel retailers) and enterprise customers (secure vertical markets including Financial, Telecommunications, Healthcare, Life Sciences, Government, etc.). Our strategy is to expand our customer base by vertical market using our existing platforms to enable large scale product deployments while investing in organic and/or inorganic logical extensions of our product and services portfolios. We will continue to focus our technology and development efforts around improving functionality, helping customers drive higher average revenue per customer and subscriber retention, embracing alternative channels and allowing more capabilities for ordering bundled applications and content offerings across these same complex and advanced networks.
Key elements of this strategy are:
Expand our Product Portfolio to Service Providers.
Given the explosive growth of connected mobile broadband devices and the increasing need to backup, restore and share content across those devices, our objective is to play a vital role in monetizing those devices with our Connect-Sync-Activate strategy. Methods of monetization may include licenses per device, maintenance fees, professional service fees, active user fees as well as data storage fees. Our prior acquisitions of cloud, analytics and messaging platform providers have enabled us to expand the functionality of our Synchronoss Personal Cloud, Synchronoss Messaging and Synchronoss Analytics platforms. We have also improved the scalability of these acquired platforms to offer a more robust solution to our customers. Once one of our deployments reaches critical mass, we believe we will be able to integrate other solutions to generate additional revenue creating new solutions and generating offers from service providers and other customers.
Expanding into the Enterprise Cloud.
Following up on the success of our Synchronoss Personal Cloud offering, we have also leveraged this platform to support the increased need for cloud-based document sharing and collaboration needs in the Small and Medium Business, or SMB, area. SMBs rely heavily on CSPs for support of new trends, such as BYOD. Our Synchronoss WorkSpace offering, combined with our newly-acquired Intralinks offering and our Orbit platform, which we acquired through our Goldman Sachs joint venture are ideally suited for these types of situations, as they are designed to assure an IT manager that the organization’s employees can enhance productivity by using their own mobile devices, while still complying with the organization’s internal security and other IT policies. In addition, our Intralinks business has traditionally sold products directly into both SMB and large-scale enterprise organizations and we plan to leverage these relationships to sell our enterprise solutions.
Expand Presence of Consumer Products Into New Geographic Markets.
Although the majority of our revenue has traditionally been generated in North America, we continue to expand globally, especially with our recent acquisitions of Intralinks and Openwave Messaging, which have helped expand our operations and customer engagements globally in EMEA, Latin America and the Asia Pacific region. We believe that the growth of connected devices will further drive opportunities to penetrate new geographic markets within the coming years. The Asia Pacific and Latin America regions are of particular interest, as these markets experience similar trends to those that have driven growth in North America and EMEA.
Broaden Customer Base and Expand Offering to Existing Customers.
As our existing consumer customers continue to expand into new distribution channels, such as the rapidly growing e-commerce channels, we expect that they will likely need to support new types of transactions that are well suited to being managed by our platforms. In addition, we believe our customers will require new transaction management solutions as they expand their subscriber customer bases, which will provide us with opportunities to drive increasing amounts of transaction volume over our platforms. Many of our customers purchase multiple services from us and we believe that, with our recent acquisition of Intralinks and Openwave Messaging, we are well positioned to cross-sell additional services to customers who do not currently purchase our full services portfolio.
Expand into Emerging Devices and Internet of Things Space.
Various forecasts from industry leading sources have cited explosive growth in the non-traditional connected devices space. These devices include connected cars, connected homes, health and wellness devices and the health care domain. We plan on expanding our cloud platforms (focused on storing data from the varying devices to be stored securely in the cloud), in an effort to capitalize on the growth emerging from these new opportunities.
Maintain Technology Leadership
.
We strive to continue to build upon our technology leadership by continuing to invest in research and development to increase the automation of processes and workflows and develop complementary product modules that leverage our platforms and competitive strengths. By doing this, we can drive increased interest by making it more economical for customers to use us as a third-party solutions provider. In addition, we believe our close relationships with our customers will continue to provide us with valuable insights into the dynamics that are creating demand for next-generation solutions.
Leverage and Enforce our Intellectual Property
.
We have a significant repository of granted and filed intellectual property, including over 100 issued patents. We expect to use these assets as a differentiator of our products and services in the marketplace. We rely on a combination of our patents, trademarks, copyrights and trade secrets in the United States and throughout the world, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology and our brand. We will continue to assess appropriate occasions for seeking patent and other intellectual property protections for those aspects of our technology and service that we believe constitute innovations providing significant competitive advantages.
Customers
We maintain strong and collaborative relationships with our customers, which we believe to be one of our core competencies and something that is critical to our success. For our cloud and activation businesses, we are generally the only provider of the services we offer to our customers. Contracts for our cloud and activation business extend up to 60 months from execution and include minimum transaction or revenue commitments from our customers. All of our significant cloud and activation customers may terminate their contracts for convenience upon written notice and in many cases payment of contractual penalties. The contractual penalties we received for the years ended
December 31, 2016
,
2015
, and
2014
were immaterial to our statements of income.
Each of AT&T and Verizon accounted for more than 10% of our revenues for the years ended
December 31, 2016
,
2015
, and
2014
, with AT&T and Verizon, in the aggregate, representing
62%
,
71%
and
67%
of net revenues for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
Although in December 2016, we divested our activation call center business, which included a portion of the services that we historically provided to AT&T, we will continue to generate revenue from AT&T from our activation software and professional services. We have Statements of Work for each of the Verizon and AT&T businesses that we support which typically run for 12 to 36 months. Although Intralinks has a diverse customer base and we expect that revenue from our Intralinks business will comprise a significant portion of our going forward revenue, the loss of either AT&T or Verizon as a customer would have a material negative impact on our company. We believe that if either AT&T or Verizon were to terminate their relationship with us, that they would encounter substantial costs in replacing Synchronoss' solutions.
Sales and Marketing
We continue to develop a sales and marketing capability aimed at accelerating the adoption of our solutions by expanding penetration of existing industries, capitalizing on new opportunities in underpenetrated or emerging markets and by selectively increasing our geographic coverage.
We sell our services through a mix of field representatives, a direct sales force, a referral network and a select group of strategic and channel partners. Our sales representatives have extensive experience selling technology solutions into a wide variety of industries including communications, financial services, healthcare, insurance, legal and life sciences. Our sales teams are well trained in our platforms, products and service offerings and are instrumental in working with our customers to shape the solutions that are material to the growth of our current and prospective customers’ businesses based on the market trends and conditions that they are facing. This enables our team to easily identify and qualify opportunities where deploying one or more of our platforms would be appropriate and beneficial to prospective customers.
Following each sale, we assign account managers to provide ongoing support and to identify additional sales opportunities. Typically our sales process for our solutions involves an initial consultative process that allows our customers to better assess the operating and capital expenditure benefits associated with an optimal activation, provisioning and cloud-based content management architecture. We generate leads from contacts made through trade-shows, seminars, conferences, events, market research, our Web site, customers, strategic partners and our ongoing public relations program. In addition to our direct sales force, we have established relationships with channel partners, primarily for our recently acquired Intralinks products that promote, sell and support our services in specific geographies. The channel partners for our recently acquired Intralinks business include, among others, systems integrators, resellers, referral partners, service partners and consultants that resell our Intralinks services directly or through a referral network. Our key channel partners for our Intralinks business are located in a variety of countries, including Brazil, Chile, China, India, Japan, Mexico, South Africa and a number of European countries.
We focus our marketing efforts on generating awareness of Synchronoss and its offerings by attaching brand recognition to key trends pertinent to our customers’ transformations. We do this through the creation of thematic and strategic content that is usually based on commissioned third party as well as original research for each of our market segments. We then market this research to industry editors in influential trade publications, media, thought leaders and press around the world. In addition, through our industry, product, and marketing communications functions, we also have an active public relations program to capitalize on recent news stories in key areas and industries. We also promote the launch of new capabilities such as the new European enterprise datacenter and reinforce key capabilities including the Trust Perimeter. Coverage has appeared in wide-reaching business outlets such as Bloomberg TV, Reuters, Fortune, Business Insider and Forbes.
We support these themes via direct marketing, digital marketing and conference presence throughout the year. We are active in numerous technology and industry forums and our employees regularly get invited to speak at tradeshows in which we also demonstrate our solutions. Key shows for our Communications & Media business include the Consumer Electronics Show (CES), Cellular Telecommunications Industry Association (CTIA), GSM Association (Mobile World Congress), and Mobile Future Forward Series, Additional shows for our Enterprise business include Industry and Financial Markets Association (SIFMA), RSA, Gartner enterprise forums, M&A regional associations and industry forums, and additional enterprise mobility events.
In addition, through our product marketing and marketing communications functions, we also have an active public relations program and maintain relationships with recognized trade media and industry analysts such as ABI Research, International Data Corporation (IDC), Gartner Inc., Forrester Research, Inc., Ovum, Frost & Sullivan and Yankee Group. We also manage and maintain our website, blog, social media profiles on LinkedIn, Twitter Facebook, instagram, YouTube and other channels, utilize search engine optimization and marketing, publish product related content and educational white papers, post videos and conduct seminars and user group meetings. Finally, we also actively sponsor technology-related and industry-related conferences and demonstrate our solutions at trade-shows targeted at providers of communications services.
In our enterprise business, where there are millions of potential users across many industries, we have adopted a vertical markets approach aligned to key persons to focus on use cases with new capabilities to serve the needs of the Enterprise market. We have a deep expertise in understanding how organizations in regulated industries such as financial services or life sciences can collaborate and share sensitive documents safely and compliantly.
Operations and Technology
We leverage common proprietary IT platforms to deliver carrier-grade services to our customers across communication and digital convergence market segments. Constructed using a combination of internally developed and licensed technologies, our platforms integrate our order management, gateway, workflow, cloud-based content management, and reporting into a unified system. Our platforms are secure foundations on which to build and offer additional services and maximize performance, scalability and reliability.
Competition
We face different types of competitors in the markets we target that range in market share, focus and maturity.
Competition in our markets is intense and includes rapidly-changing technologies and customer requirements, as well as evolving industry standards and frequent product introductions. We compete primarily on the basis of the breadth of our domain expertise, as well as on the basis of price, time-to-market, functionality, quality and breadth of product and service offerings. We believe the most important factors making us a strong competitor include:
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breadth and depth of our transaction and content management solutions, including our exception handling technology,
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carrier grade nature and scalability of our solutions,
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quality and performance of our products,
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high-quality customer service,
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ability to implement and integrate solutions,
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overall value of our platforms
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references of our customers.
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We are aware of other software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete with our platforms. We anticipate continued growth in the communications industry and the entrance of new competitors in the order processing and transaction management solutions market and expect that the market for our products and services will remain intensely competitive.
The competition in our Cloud and Messaging markets are generally divided among three types of companies:
Over The Top Providers
Companies such as Google, Dropbox, Apple, Facebook, Yahoo, What’s App, Microsoft and others are active and successful in marketing their cloud and messaging solutions directly to customers using a B2C model on a massive, global scale. Depending on the proclivities of a region, some service providers have entered into strategic partnerships with OTT providers, with these relationships showing varying degrees of financial success. Service providers generally have a strategic interest in protecting the relationship they have with their subscribers, providing value-add relevance to their networks and driving additional revenue streams. However, OTT partnerships do not always allow for this. Instead, they may offer the service provider a service with little to no capital investment required. The tradeoff between cost and business upside is under constant examination and varies from company to company. Recent privacy issues with Yahoo as well as the proposed acquisition of Yahoo by Verizon, a service provider competitive to other North American providers, has given many operators a reason to re-assess their messaging strategy.
Small Service Providers
There remain a handful of smaller solutions providers in the white label cloud and messaging space such as Funambol and Open-Xchange. These providers compete with us for smaller accounts in different regions of the world. In most cases, these providers offer low cost entry and revenue sharing as a business model but they do not provide the scalability, security or stability that appeal to Tier 1 service providers which is our major strategic focus.
Analogous Service Providers
White label technology providers such as Amdocs, Ericsson, HP Momentum and others have a well-established strategic presence with large, Tier 1 service providers and are active in influencing their technology path as well as leading large-scale IT implementations. While these providers do not focus their businesses in the area of consumer offerings, they do have relationships with IT departments of these service providers and they often attempt to combine their offerings in other parts of their businesses. Therefore, we consider them as a factor in competitive initiatives, if not competitive offerings.
With respect to our recently acquired Intralinks business and our Enterprise offerings, the market for these solutions is highly competitive, fragmented and dynamic. We compete with a multitude of providers, including both virtual data room providers and enterprise software providers. The markets for online collaborative content workspaces and solutions for managing, distributing and protecting enterprise content are also rapidly changing, with relatively low barriers to entry. We expect competition to increase from existing competitors as well as new and emerging market entrants. In addition, as we expand our service offerings, we may face competition from new and existing competitors. We compete primarily on product functionality, service levels, security and compliance characteristics, price and reputation. Our competitors include companies that provide online products that serve as document
repositories, virtual data rooms or file sharing and collaboration solutions, together with other products or services that may result in those companies effectively selling these services at lower prices and creating downward pricing pressure for us.
We believe that the principal differentiating factors for our Intralinks business and our Enterprise offerings are primarily the ability to collaborate inside and outside firewalls while maintaining security, control, auditability and compliance standards. We believe we compete effectively based on broad capabilities across all of these factors. In particular, our Intralinks solutions are specifically designed for inter-enterprise collaboration for content and information sharing beyond the firewall. Our Intralinks platform offers enterprise class scalability and reliability, while enabling secure, auditable and compliant information exchange via a SaaS delivery model that lowers total cost of ownership. Additionally, our industry-specific expertise, global customer support, scalability and reliability to ensure uninterrupted performance, as well as price and functionality, have earned us a reputation of trust with our Intralinks customers.
Employees
We believe that our recent growth and success is attributable in large part to our employees and an experienced management team, many members of which have years of industry experience in building, implementing, marketing and selling transaction management solutions critical to business operations. We intend to continue training our employees, as well as developing and promoting our culture, and believe that these efforts provide us with a sustainable competitive advantage. We offer a work environment that enables employees to make meaningful contributions, as well as incentive programs that are designed to continue to motivate, retain and reward our employees.
As of December 31,
2016
, we had
1,765
full‑time employees. None of our employees are covered by any collective bargaining agreements.
Geographic Information
Information regarding financial data by geographic location is set forth in Note 2 - “Summary of Significant Accounting Policies - Segment and Geographic Information” to our consolidated financial statements included in Part II, Item of this Annual Report on Form 10-K.
Available Information
Our Web address is
www.synchronoss.com
. On this Web site, we post the following filings after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (SEC): our annual reports on Form 10-K, quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statement on Form 14A related to our annual stockholders' meeting and any amendment to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available on the Investor Relations portion of our Web site free of charge. The contents of our Web site are not intended to be incorporated by reference into this Form 10-K or in any other report or document we file.
The reports filed with the SEC by us and by our officers, directors and significant shareholders are available for review on the SEC’s website at
www.sec.gov
. You may also read and copy materials that we filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Synchronoss, Synchronoss Personal Cloud, Synchronoss Messaging and Intralinks and other trademarks of Synchronoss appearing in this Annual Report are the property of Synchronoss. Other trademarks or service marks that may appear in this Annual Report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Annual Report are referred to without the
®
,
™
and
SM
symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. The following are certain risk factors that could affect our business, financial results and results of operations. You should carefully consider the following risk factors in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. The risks that we have highlighted here are not the only ones that we face. If any of the risks actually occur, our business, financial condition or results of operation could be negatively affected. In that case, the trading price of our stock could decline, and our stockholders may lose part or all of their investment.
Risks Related to Our Business and Industry
We recently consummated a number of significant transactions with respect to the strategic direction of our business. There can be no guarantee that this strategy will be successful or that we will experience consistent and sustainable profitability in the future as a result of our new strategy.
We have recently made a number of major announcements, including our acquisition of Intralinks Holdings, Inc. which closed on January 19, 2017, and our divestiture of our main carrier activation business to Sequential Technology International, which closed in December 2016. These transactions signify a pivot in our strategy to focus on our cloud, analytics and enterprise businesses moving forward. In connection with the closing of our acquisition of Intralinks, we also appointed Ronald W. Hovsepian, the former President and Chief Executive Officer of Intralinks as our Chief Executive Officer.
We cannot guarantee that our strategy is the right one or that we will be effective in executing our strategy. Our strategy may not succeed for a number of reasons, including, but not limited to: general economic risks; execution risks with acquisitions; risks associated with sales not materializing based on a change in circumstances; disruption to sales; increasing competitiveness in the enterprise and mobile solutions markets; our ability to retain key personnel following acquisitions; the dynamic nature of the markets in which we operate; specific economic risks in different geographies and among different customer segments; changes in foreign currency exchange rates; uncertainty regarding increased business and renewals from existing customers; uncertainties around continued success in sales growth and market share gains; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; execution risks around new product development and introductions and innovation; product defects; unexpected costs, assumption of unknown liabilities and increased costs for any reason; potential litigation and disputes and the potential costs related thereto; distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, our model in general and by specific customer segments; competition and pricing pressure.
If one or more of the foregoing risks were to materialize, our business, results of operations and ability to achieve sustained profitability could be adversely affected.
Our outstanding indebtedness and related obligations could adversely affect our financial condition and restrict our operating flexibility.
We have substantial debt and related obligations. In August 2014, we issued $230.0 million aggregate principal amount of our 0.75% Convertible Senior Notes due in 2019, or the 2019 Notes. On January 19, 2017, we entered into a Senior Secured Credit Agreement with the lending institutions from time to time parties thereto and Goldman Sachs Bank USA, as administrative agent, collateral agent, swingline lender and a letter of credit issuer, or the 2017 Credit Agreement. Our obligations under the 2017 Credit Agreement are guaranteed by certain of our subsidiaries, including Intralinks, and secured by substantially all of our assets. The term loan lenders under the 2017 Credit Agreement have advanced to us senior secured term loans in an aggregate principal amount of $900 million with a maturity date of January 19, 2024. We refer to this facility as the 2017 Term Facility. The revolving lenders under the 2017 Credit Agreement have provided us with a revolving credit facility of up to $200 million with a maturity date of January 19, 2022. We refer to this facility as the Revolving Facility. We have not drawn down on any of the funds under the Revolving Facility. The term loans under the 2017 Term Facility will amortize at 1% per annum in equal quarterly installments with the balance payable on the final maturity date and contains certain mandatory prepayments. The 2017 Credit Agreement contains a number of customary affirmative and negative covenants and events of default, which, among other things, restrict our ability, and our subsidiaries’ ability, to incur debt, allow liens on assets, make investments, pay dividends or prepay certain other debt. The 2017 Credit Agreement also requires that we comply with certain financial maintenance covenants, including a total gross leverage ratio and an interest charge coverage ratio.
Our substantial level of debt and related obligations, including interest payments, covenants and restrictions, could have important consequences, including by:
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impairing our ability to invest in and successfully grow our business and make acquisitions;
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making it more difficult for us to satisfy our obligations with respect to our indebtedness, which could result in an event of default under the agreement governing the 2019 Notes or the 2017 Credit Facility;
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limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, debt obligations and other general corporate requirements;
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hindering our ability to raise equity capital, because, in the event of a liquidation of our business, debt holders have priority over equity holders;
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increasing our vulnerability to general economic downturns, competition and industry conditions, which could place us at a competitive disadvantage compared to competitors that are less leveraged and are therefore we may be unable to take advantage of opportunities that our leverage prevents us from exploiting;
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imposing additional restrictions on the manner in which we conduct our business, including restrictions on our ability to pay dividends, incur additional debt and sell assets; and
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placing us at a possible disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.
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The occurrence of any one of these events could have an adverse effect on our business, financial condition, operating results or cash flows and ability to satisfy our obligations under our indebtedness. Our failure to comply with the covenants under the agreements governing the 2019 Notes or the 2017 Credit Facility could result in an event of default and the acceleration of any debt then outstanding under the 2019 Notes or the 2017 Credit Facility, as the case may be. Any declaration of an event of default could significantly harm our business and prospects and could cause our stock price to decline. Insufficient funds may require us to delay, scale back or eliminate some or all of our activities.
In addition, certain of our loan agreements have a change in control provision that provides that, upon the occurrence of a change in control, all credit facility commitments shall terminate and all loans shall become due and payable. Furthermore, certain of our loan agreements require us to meet specified minimum financial measurements. The operating and financial restrictions and covenants in our loan agreements, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control and we may not be able to meet those covenants. A breach of any of the covenants under one of our loan agreements could result in a default under some or all of our loan agreements, which could cause all of the outstanding indebtedness under our loan agreements to become immediately due and payable and terminate all commitments to extend further credit, if any.
Our business may not generate sufficient cash flows from operations or future borrowings under our credit facilities or from other sources may not be available to us in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs, including capital expenditure requirements and share repurchase programs announced from time to time.
We cannot guarantee that we will be able to generate sufficient revenue or obtain enough capital to service our debt, fund our planned capital expenditures, and execute on our new business strategy. 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. If we are unable to service or repay our debt when it becomes due, our lenders could seek to accelerate payment of all unpaid principal and foreclose on our assets, and we may have to take actions such as selling assets, seeking additional equity investments or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Additionally, we may not be able to take these types of actions, if necessary, on commercially reasonable terms, or at all. The occurrence of any of these events would have a material adverse effect on our business, results of operations and financial condition.
If we fail to compete successfully with existing or new competitors, our business could be harmed.
If we fail to compete successfully with established or new competitors, it could have a material adverse effect on our results of operations and financial condition. The communications and enterprise industries are highly competitive and fragmented, and we expect competition to increase. We compete with independent providers of information systems and services and with the in-house departments of our OEMs and communications services companies' customers. Rapid technological changes, such as advancements in software integration across multiple and incompatible systems, and economies of scale may make it more economical for CSPs, MSOs or OEMs to develop their own in-house processes and systems, which may render some of our products and services less valuable or, eventually, obsolete. Our competitors include firms that provide comprehensive information systems and managed services solutions, BYOD providers, systems integrators, clearinghouses and service bureaus. Many of our
competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources and strong name recognition.
Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to address the needs of our current or prospective customers. In addition, our competitors have acquired, and may continue to acquire in the future, companies that may enhance their market offerings. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. As a result, our competitors may be able to adapt more quickly than us to new or emerging technologies and changes in customer requirements, and may be able to devote greater resources to the promotion and sale of their products. These relationships and alliances may also result in transaction pricing pressure, which could result in large reductions in the selling prices of our products and services. Our competitors or our customers' in-house solutions may also provide services at a lower cost, significantly increasing pricing pressure on us. We may not be able to offset the effects of this potential pricing pressure. Our failure to adapt to changing market conditions and to compete successfully with established or new competitors may have a material adverse effect on our results of operations and financial condition. In particular, a failure to offset competitive pressures brought about by competitors or in-house solutions developed by our customers could result in a substantial reduction in or the outright termination of our contracts with some of our customers, which would have a significant, negative and material impact on our business.
The markets in which we market and sell our products and services are highly competitive, and if we do not adapt to rapid technological change, we could lose customers or market share.
The industries we serve are characterized by rapid technological change and frequent new service offerings and are highly competitive with respect to the need for innovation. Significant technological changes could make our technology and services obsolete, less marketable or less competitive. We must adapt to these rapidly changing markets by continually improving the features, functionality, reliability and responsiveness of our products and services, and by developing new features, services and applications to meet changing customer needs and further address the markets we serve. Our ability to take advantage of opportunities in the markets we serve may require us to invest in development and incur other expenses well in advance of our ability to generate revenues from these offerings or services. We may not be able to adapt to these challenges or respond successfully or in a cost-effective way. Our failure to do so would adversely affect our ability to compete and retain customers and/or market share. In addition, as we expand our service offerings, we may face competition from new and existing competitors. It is also possible that our customers could decide to create, invest in or collaborate in the creation of competitive products that might limit or reduce their need for our products, services and solutions. Further, we may experience delays in the development of one or more features of our offerings, which could materially reduce the potential benefits to us providing these services. In addition, our present or future service offerings may not satisfy the evolving needs of the industry in which we operate. If we are unable to anticipate or respond adequately to these evolving market needs, due to resource, technological or other constraints, our business and results of operations could be harmed. In addition, the arrival of new market entrants could reduce the demand for our services or cause us to reduce our pricing, resulting in a loss of revenue and adversely affecting our business, results of operations and financial condition. Also, the use of internal technologies, developed by our customers or their advisers, could reduce the demand for our services, result in pricing pressures or cause a reduction in our revenue. If we fail to manage these challenges adequately, our business, results of operations and financial condition could be adversely affected.
The success of our business depends on our ability to achieve or sustain market acceptance of our services and solutions at desired pricing levels.
Our competitors and customers may cause us to reduce the prices we charge for our services and solutions. Our current or future competitors may offer our customers services at reduced prices or bundling and pricing services in a manner that may make it difficult for us to compete. Customers with a significant volume of transactions may attempt to use this leverage in pricing negotiations with us. Also if our prices are too high, current or potential customers may find it economically advantageous to handle certain functions internally instead of using our services. We may not be able to offset the effects of any price reductions by increasing the number of transactions we handle or the number of customers we serve, by generating higher revenue from enhanced services or by reducing our costs. If these or other sources of pricing pressure cause us to reduce the pricing of our service or solutions below desirable levels, our business and results of operations may be adversely affected.
The success of our business depends on the continued growth of consumer and business transactions related to communications services on the Internet.
The future success of our business depends upon the continued growth of consumer and business transactions on the Internet, including attracting consumers who have historically purchased wireless services and devices through traditional retail stores and attracting new enterprise customers. Specific factors that could deter consumers from purchasing wireless services and devices on the Internet include concerns about buying wireless devices without a face-to-face interaction with sales personnel and the
ability to physically handle and examine the devices.
Our business growth would be impeded if the performance or perception of the Internet was harmed by security problems such as "viruses," "worms" or other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet activity, increased costs, decreased accessibility and quality of service, or increased government regulation and taxation of Internet activity. The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, the growth of our business may be adversely affected.
The success of our business depends on the continued growth in demand for connected devices and the continued availability of high-speed access to the Internet.
The future success of our business depends upon the continued growth in demand for connected devices and on our customers having high-speed access to the Internet, as well as the continued maintenance and development of the Internet infrastructure. While we believe the market for connected devices will continue to grow for the foreseeable future, we cannot accurately predict the extent to which demand for connected devices will increase, if at all. If the demand for connected devices were to slow down or decline, our business and results of operations may be adversely affected. If for any reason the Internet does not remain a widespread communications medium and commercial platform, the demand for our services would be significantly reduced, which would harm our business, results of operations and financial condition.
To the extent the Internet continues to experience increased numbers of users, frequency of use or bandwidth requirements, the Internet may become congested and be unable to support the demands placed on it, and its performance or reliability may decline. Any future Internet outages or delays could adversely affect our business, results of operation and financial condition.
Though acceptance of cloud-based software has advanced in recent years, some businesses may still be hesitant to adopt these types of solutions.
Our cloud-based service strategy may not be successful. We enable our customers to offer their subscribers the ability to backup, restore and share content across multiple devices through a cloud-based environment. Some businesses may still be uncertain as to whether a cloud-based service like ours is appropriate for their business needs. The success of our offerings is dependent upon continued acceptance by and growth in subscribers of cloud-based services in general and there can be no guarantee of the adoption rate by these subscribers. Many organizations have invested substantial personnel and financial resources to integrate traditional enterprise software into their organizations and, therefore, may be reluctant or unwilling to migrate to a cloud-based model for storing, accessing, sharing and managing their content. Because we derive, and expect to continue to derive, a substantial portion of our revenue and cash flows from sales of our cloud-based solutions, our success will depend to a substantial extent on the widespread adoption of cloud computing for companies in general. Our cloud strategy will continue to evolve and we may not be able to compete effectively, generate significant revenues or maintain profitability. While we believe our expertise, investments in infrastructure, and the breadth of our cloud-based services provides us with a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. In addition to software development costs, we incur costs to build and maintain infrastructure to support cloud-based services. It is difficult to predict customer adoption rates and demand for our services, the future growth rate and size of the cloud computing market or the entry of competitive services. The expansion of a cloud-based enterprise software market depends on a number of factors, including the cost, performance and perceived value associated with cloud computing, as well as the ability of companies that provide cloud-based services to address security and privacy concerns. If we or other providers of cloud-based services experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based services as a whole, including our services, may be negatively affected. If there is a reduction in demand for cloud-based services caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, we could experience decreased revenue, which could harm our growth rates and adversely affect our business and operating results.
Government regulation of the Internet and e-commerce and of the international exchange of certain information is subject to possible unfavorable changes, and our failure to comply with applicable regulations could harm our business and operating results.
As Internet commerce continues to evolve, increasing regulation by federal, state, local and foreign governments becomes more likely. For example, we believe increased regulation is likely in the area of data privacy. Further, laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers' ability to use and
share data, potentially reducing demand for our products and services. In addition, taxation of products and services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting the exchange of information over the Internet could result in reduced growth or a decline in the use of the Internet and could diminish the viability of our Internet-based services, which could harm our business and operating results.
Our business depends substantially on customers renewing and expanding their subscriptions for our services. Any decline in our customer renewals and expansions would harm our future operating results.
We enter into subscription agreements with certain of our customers that are generally one to two years in length. As a result, maintaining the renewal rate of those subscription agreements is critical to our future success. We cannot provide assurance that any of our customer agreements will be renewed, as our customers have no obligation to renew their subscriptions for our services after the expiration of the initial term of their agreements. The loss of any customers that individually or collectively account for a significant amount of our revenues would have a material adverse effect on our results of operations or financial condition. If our renewal rates are lower than anticipated or decline for any reason, or if customers renew on terms less favorable to us, our revenue may decrease and our profitability and gross margin may be harmed, which would have a material adverse effect on our business, results of operations and financial condition.
If we do not maintain the compatibility of our services with third-party applications that our customers use in their business processes or if we fail to adapt our services to changes in technology or the marketplace, demand for our services could decline.
Our solutions can be used alongside a wide range of other systems such as email and enterprise software systems used by our customers in their businesses. If we do not support the continued integration of our products and services with third-party applications, including through the provision of application programming interfaces that enable data to be transferred readily between our services and third-party applications, demand for our services could decline and we could lose sales or experience declining renewal rates. We will also be required to make our products and services compatible with new or additional third-party applications that are introduced to the markets that we serve and, if we are not successful, we could experience reduced demand for our services. In addition, prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer and that would be difficult for them to develop and integrate within our services, then the market for our products and services may be adversely affected.
We may not currently or in the future appropriately leverage advances in technology to achieve or sustain a competitive advantage in products, services, information and processes. Our customers and users regularly adopt new technologies and industry standards continue to evolve. The introduction of products or services and the emergence of new industry standards can render our existing services obsolete and unmarketable in short periods of time. We expect others to continue to develop, introduce new and enhance existing products and services that will compete with our services. Our future success will depend, in part, on our ability to enhance our current services and to develop and introduce new services that keep pace with technological developments, emerging industry standards and the needs of our customers. We cannot assure that we will be successful in cost-effectively developing, marketing and selling new services or service enhancements that meet these changing demands on a timely basis, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these services, or that our new service and service enhancements will adequately meet the demands of the marketplace and achieve market acceptance. We also cannot assure that the features that we believe will drive purchasing decisions will in fact be the features that our potential customers consider most significant.
Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations and financial condition.
Our business is directly affected by the length of our sales cycles. Our customers' businesses are relatively complex and their purchase of the types of services that we offer generally involve a significant financial commitment, with attendant delays frequently associated with large financial commitments and procurement procedures within an organization. In addition, as we continue to further penetrate the enterprise and the size and complexity of our sales opportunities continue to expand, we have seen an increase in the average length of time in our sales cycles. The purchase of the types of services that we offer typically also requires coordination and agreement across many departments within a potential customer's organization. Delays associated with such timing factors could have a material adverse effect on our results of operations and financial condition. In periods of economic slowdown our typical sales cycle lengthens, which means that the average time between our initial contact with a prospective customer and the signing of a sales contract increases. The lengthening of our sales cycle could reduce growth in our revenue. In addition, the lengthening of our sales cycle contributes to an increased cost of sales, thereby reducing our profitability.
We traditionally have had substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenues.
Each of AT&T and Verizon accounted for more than 10% of our revenues for the years ended December 31,
2016
and
2015
. AT&T and Verizon in the aggregate accounted for
62%
and
71%
of our revenues for the years ended December 31,
2016
and
2015
, respectively. Although, as described above, in December 2016, we divested a portion of our AT&T Activation business related to our exception handling business, which will reduce our customer concentration with one of our top revenue-generating customers, there are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services that will be generated by these customers or the future demand for the products and services of these customers in the end-user marketplace. In addition, revenues from these larger customers may fluctuate from time to time based on the commencement and completion of projects, the timing of which may be affected by market conditions or other factors, some of which may be outside of our control. Further, some of our contracts with these larger customers permit them to terminate our services at any time (subject to notice and certain other provisions). If any of our major customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our services or we could lose the customer. Any such development could have an adverse effect on our margins and financial position, and would negatively affect our revenues and results of operations and/or trading price of our common stock. Although the recently acquired Intralinks business has a diverse customer base and we expect that revenue from our Intralinks business will comprise a significant portion of our going forward revenue, there can be no assurance that our revenues will not continue to be sufficiently concentrated among a limited number of customers.
As we continue to pursue new enterprise customers, our sales cycle, forecasting processes and deployment processes may be less predictable and require greater time and expense.
As an increasing portion of our business is focused on the enterprise market, our sales cycles may lengthen. Enterprise customers may undertake a significant evaluation process in regard to enterprise software, which can last from several months to a year or longer. Our enterprise sales efforts often require us to educate our customers about the use and benefit of our services, including the technical capabilities and potential cost savings to an organization. In this market segment, in order to make sales, we may need to provide greater levels of customer education regarding the uses and benefits of our services, as well as regarding security, privacy, and data protection laws and regulations, especially for those customers in more heavily regulated industries or those with significant international operations. If our sales cycles were to lengthen, events may occur during the sales cycle that could affect the size or timing of a purchase or even cause cancellations, and this may lead to more unpredictability in our business and operating results. Additionally, sales cycles for sales of certain of our products and services tend to be longer, ranging from three to 12 months or more, which may make forecasting more complex and uncertain. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases by large enterprises are frequently subject to budget constraints, multiple approvals, and unplanned administrative processing and other delays. Finally, large enterprises may have longer implementation cycles, require greater product functionality and scalability and a broader range of services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility from vendors. All of these factors can add further risk to business conducted with these customers. If we fail to realize an expected sale from a large end-customer in a particular quarter or at all, our business, operating results, and financial condition could be materially and adversely affected. Further, where we make sales to enterprise customers on a subscription basis, there may be a delay between when we make the sale and when we start to recognize revenue from that customer. In addition, where we provide professional services, we are required to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.
We may also face unexpected deployment challenges with enterprise customers or more complicated installations of our products. It may be difficult to deploy our software products if the customer has unexpected database, hardware or software technology issues. Additional deployment complexities may occur if a customer hires a third party to deploy our products and services. Any difficulties or delays in the initial implementation could cause customers to reject our software or lead to the delay or non-receipt of future orders, in which case our business, operating results and financial condition would be harmed.
If we do not meet our revenue forecasts, we may be unable to reduce our expenses in a timely fashion to avoid or minimize harm to our results of operations.
Our revenues are difficult to forecast and are likely to fluctuate significantly from period to period, particularly as we continue to implement our business strategy. We base our operating expense and capital investment budgets on expected sales and revenue trends, and many of our expenses, such as office and equipment leases and personnel costs, will be relatively fixed in the short term and will increase over time as we make investments in our business. Our estimates of sales trends may not correlate with actual revenues in a particular quarter or over a longer period of time. Variations in the rate and timing of conversion of our sales prospects into sales and actual revenues could cause us to plan or budget inaccurately and those variations could adversely affect
our financial results. In particular, delays, reductions in amount or cancellation of customers' contracts would adversely affect the overall level and timing of our revenues, and our business, results of operations and financial condition could be harmed. Due to the relatively fixed nature of many of our expenses, we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. In the event we are unable to collect on our accounts receivable, it could negatively affect our cash flows, operating results and business.
Because we recognize revenue for certain of our products and services ratably over the term of our customer agreements, downturns or upturns in the value of signed contracts will not be fully and immediately reflected in our operating results.
We offer certain of our products and services primarily through fixed commitment contracts and recognize revenue ratably over the related service period, which typically ranges from twelve to twenty-four months. As a result, some portion of the revenue we report in each quarter is revenue from contracts entered into during prior periods. Consequently, a decline in signed contracts in any quarter will not be fully and immediately reflected in revenue for that quarter, but will instead negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to offset this reduced revenue. Similarly, revenue attributable to an increase in contracts signed in a particular quarter will not be fully and immediately recognized, as revenue from new or renewed contracts is recognized ratably over the applicable service period. Because we incur sales commissions at the time of sale, we may not recognize revenues from some customers despite incurring considerable expense related to our sales processes. Timing differences of this nature could cause our margins and profitability to fluctuate significantly from quarter to quarter.
Our offerings of new services or products may be subject to complex revenue recognition standards, which could materially affect our financial results.
As we introduce new services or products, revenue recognition could become increasingly complex and require additional analysis and judgment. Additionally, we may negotiate and revise terms and conditions of our contracts with customers and channel partners, which may also cause us to revise our revenue recognition policies. As our arrangements with customers evolve, we may be required to defer a greater portion of revenue into future periods, which could materially and adversely affect our financial results.
Failure to maintain the confidentiality, integrity and availability of our systems, software and solutions could seriously damage our reputation and affect our ability to retain customers and attract new business.
Maintaining the confidentiality, integrity and availability of our systems, software and solutions is an issue of critical importance for us and for our customers and users who rely on our systems to store and exchange large volumes of information, much of which is proprietary and confidential. There appears to be an increasing number of individuals, governments, groups and computer "hackers" developing and deploying a variety of destructive software programs (such as viruses, worms and other malicious software) that could attack our computer systems or solutions or attempt to infiltrate our systems. We make significant efforts to maintain the confidentiality, integrity and availability of our systems, solutions and source code. Despite significant efforts to create security barriers, it is virtually impossible for us to mitigate this risk entirely because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not recognized until launched against a target. Like all software solutions, our software is vulnerable to these types of attacks. An attack of this type could disrupt the proper functioning of our software solutions, cause errors in the output of our customers' work, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers and other destructive outcomes. If an actual or perceived breach of our security were to occur, our reputation could suffer, customers could stop buying our solutions and we could face lawsuits and potential liability, any of which could cause our financial performance to be negatively impacted. Though we maintain professional liability insurance that may be available to provide coverage if a cybersecurity incident were to occur, there can be no assurance that insurance coverage will be available or that available coverage will be sufficient to cover losses and claims related to any cybersecurity incidents we may experience.
There is also a danger of industrial espionage, cyber attacks, misuse or theft of information or assets (including source code), or damage to assets by people who have gained unauthorized access to our facilities, systems or information, which could lead to the disclosure of portions of our source code or other confidential information, improper usage and distribution of our solutions without compensation, illegal or inappropriate usage of our systems and solutions, jeopardizing of the security of information stored in and transmitted through our computer systems, manipulation and destruction of data, defects in our software and downtime issues. Although we actively employ measures to combat unlicensed copying, access and use of our facilities, systems, software and intellectual property through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. The occurrence of an event of this nature could adversely affect our financial results or could result in significant claims against us for damages. Further, participating in either a lawsuit to protect against unauthorized access to, usage of or disclosure
of any of our solutions or any portion of our source code or the prosecution of an individual in connection with a cybersecurity breach could be costly and time-consuming and could divert management's attention and adversely affect the market's perception of us and our solutions.
A number of core processes, such as software development, sales and marketing, customer service and financial transactions, rely on our IT, infrastructure and applications. Defects or malfunctions in our IT infrastructure and applications could cause our service offerings not to perform as our customers expect, which could harm our reputation and business. In addition, malicious software, sabotage and other cybersecurity breaches of the types described above could cause an outage of our infrastructure, which could lead to a substantial denial of service and ultimately downtimes, recovery costs and customer claims, any of which could have a significant negative impact on our business, financial position, profit and cash flows.
We rely upon our customers and users of our solutions to perform important activities relating to the security of the data maintained on our platforms, particularly the Intralinks platform in the case of our recently acquired Intralinks business, such as assignment of user access rights and administration of document access controls. Because we do not control the access provided by our customers to third parties with respect to all the data on our systems, we cannot ensure the complete integrity or security of this data. Errors or wrongdoing by users resulting in security breaches could be attributed to us. Because many of the engagements in our business, particularly our Intralinks business, involve business-critical projects for financial institutions and their customers and for other types of customers where confidentiality is of paramount importance, a failure or inability to meet our customers' expectations with respect to security and confidentiality could seriously damage our reputation and affect our ability to retain customers and attract new business.
The confidentiality, integrity and availability of our systems could also be jeopardized by a breach of our internal controls and policies by our employees, consultants or subcontractors having access to our systems. If our systems fail or are breached as a result of a third-party attack or an error, violation of internal controls or policies or a breach of contract by an employee, consultant or subcontractor that results in the unauthorized use or disclosure of proprietary or confidential information or customer data (including information about the existence and nature of the projects and transactions our customers are engaged in), we could lose business, suffer irreparable damage to our reputation and incur significant costs and expenses relating to the investigation and possible litigation of claims relating to such event. We could be liable for damages, penalties for violation of applicable laws or regulations and costs for remediation and efforts to prevent future occurrences, any of which liabilities could be significant. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular claim. We also cannot assure that our existing general liability insurance coverage, coverage for errors and omissions and cyber liability insurance will continue to be available on acceptable terms in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, litigation, regardless of its outcome, could result in a substantial cost to us and divert management's attention from our operations. Any significant claim against us or litigation involving us could have a material adverse effect on our business, financial condition and results of operations.
We have implemented a number of security measures designed to ensure the security of our information, IT resources and other assets. Nonetheless, unauthorized users could gain access to our systems through cyber attacks and steal, use without authorization and sabotage our intellectual property and confidential data. Any security breach, misuse of our IT systems or theft of our or our customers' intellectual property or data could lead to customer losses, non-renewal of customer agreements, loss of production, recovery costs or litigation brought by customers or business partners, any of which could adversely impact our cash flows and reputation and could have an adverse impact on our disclosure controls and procedures.
Undetected errors or failures found in our products and services may result in loss of or delay in market acceptance of our products and services that could seriously harm our business.
Our products and services may contain undetected errors or scalability limitations at any point in their lives, but particularly when first introduced or as new versions are released. We frequently release new versions of our products and different aspects of our platforms are in various stages of development. Despite testing by us and by current and potential customers, errors may not be found in new products and services until after commencement of commercial availability or use, resulting in a loss of or a delay in market acceptance, damage to our reputation, customer dissatisfaction and reductions in revenues and margins, any of which could seriously harm our business. Additionally, our agreements with customers that attempt to limit our exposure to liability claims may not be enforceable in jurisdictions where we operate, particularly in certain markets outside the United States.
Compliance with changing European privacy laws could require us to incur significant costs or experience significant business disruption and failure to so comply could result in an adverse impact on our business.
Our solutions provide our customers, for example, with access to websites to conduct e-commerce transactions or access important data and central locations where they can post information and make it accessible to any parties they authorize to access that information. In connection with offering our solutions to customers and their invited guests, we collect user information related to the individuals who access our software solutions.
Europe Directive 95/46/EC, which covers the protection of individuals with regard to the processing of personal data and on the free movement of such data, or the Directive, has required European Union member states to implement data protection laws to meet the strict privacy requirements of the Directive. Among other requirements, the Directive regulates transfers of personally identifiable data that is subject to the Directive, or Personal Data, to third countries, outside the European Economic Area, or the EEA, such as the United States, that have not been found to provide adequate protection to such Personal Data. We have in the past relied upon adherence to the U.S. Department of Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU Framework as agreed to and set forth by the U.S. Department of Commerce and the European Union, which established a means for legitimating the transfer of Personal Data by data controllers in the EEA to the United States. As a result of the October 6, 2015 European Union Court of Justice, or ECJ, opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) regarding the adequacy of the U.S.-EU Safe Harbor Framework, the U.S.-EU Safe Harbor Framework is no longer deemed to be a valid method of compliance with requirements set forth in the Directive (and member states’ implementations thereof) regarding the transfer of Personal Data outside of the EEA.
The successor to the Safe Harbor framework, the EU-US Privacy Shield, was adopted in July 2016. We certified to adhere to this framework in October 2016. The adequacy of this framework, however, is currently being challenged in European courts. We cannot rely on the fact that the framework will not follow the path of the Safe Harbor framework and as such we will continue to face uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. If we are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by European data protection authorities could have a negative effect on our existing business and on our ability to attract and retain new customers.
We have undertaken efforts to conform transfers of Personal Data from the EEA based on current regulatory obligations, the guidance of data protection authorities and evolving best practices. Despite these efforts, we may be unsuccessful in establishing conforming means of transferring such data from the EEA, including due to ongoing legislative activity, which may vary the current data protection landscape.
We may also experience hesitancy, reluctance or refusal by European or multi-national customers to continue to use our services due to the potential risk exposure that these customers might face as a result the current data protection obligations imposed on them by certain data protection authorities. These customers may also view any alternative approaches to compliance as being too costly, too burdensome, too legally uncertain or otherwise objectionable and therefore decide not to do business with us.
We and our customers are at risk of enforcement actions taken by certain EU data protection authorities until such time as we may be able to ensure that all transfers of Personal Data to us from the EEA are conducted in compliance with all applicable regulatory obligations, the guidance of data protection authorities and evolving best practices. We may find it necessary to establish systems to maintain Personal Data originating from the EU in the EEA, which may involve substantial expense and may cause us to need to divert resources from other aspects of our business, all of which may adversely affect our business.
The Directive will be replaced in time with the pending European General Data Protection Regulation, which will impose additional obligations and risk upon our business and which may increase substantially the penalties to which we could be subject in the event of any non-compliance. We may incur substantial expense in complying with the new obligations to be imposed by the European General Data Protection Regulation and we may be required to make significant changes in our business operations, all of which may adversely affect our revenues and our business overall.
Compromises to our privacy safeguards or disclosure of confidential information could impact our reputation.
Names, addresses, telephone numbers, credit card data and other personal identification information, or PII, are collected, processed and stored in our systems. Our treatment of this kind of information is subject to contractual restrictions and federal, state and foreign data privacy laws and regulations. We have implemented steps designed to protect against unauthorized access to such information, and comply with these laws and regulations. Because of the inherent risks and complexities involved in protecting this information, the steps we have taken to protect PII may not be sufficient to prevent the misappropriation or improper disclosure of such PII. If misappropriation or disclosure of PII were to occur, our business could be harmed through reputational
injury, litigation and possible damages claimed by the affected end customers, including in some cases costs related to customer notification and fraud monitoring, or potential fines from regulatory authorities. We may need to incur significant costs or modify our business practices and/or our services in order to comply with these data privacy and protection laws and regulations in the future. Even the mere perception of a security breach or inadvertent disclosure of PII could adversely affect our business and results of operations. In addition, third party vendors that we engage to perform services for us may unintentionally release PII or otherwise fail to comply with applicable laws and regulations. Our insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify us for all liability that may be imposed. Concerns about the security of online transactions and the privacy of PII could deter consumers from transacting business with us on the Internet. The occurrence of any of these events could have an adverse effect on our business, financial position, and results of operations.
We intend to reserve from time to time a certain amount of cash in order to satisfy the obligations relating to our debt, which could adversely affect the amount or timing of investments to grow our business.
The 2019 Notes are unsecured debt and are not redeemable by us prior to the maturity date. Holders of the 2019 Notes may require us to purchase all or any portion of their 2019 Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change, which is generally defined to include a merger involving us, an acquisition of a majority of our outstanding common stock and the change of a majority of our board without the approval of the board. In addition, to the extent we pursue and complete a monetization transaction, the structure of that transaction may qualify as a fundamental change under the 2019 Notes, which could trigger the put rights of the holders of the 2019 Notes, in which case we would be required to use a portion of the net proceeds from that transaction to repurchase any 2019 Notes put to us, which could adversely affect the amount or timing of any distributions to our stockholders.
We intend to reserve from time to time a certain amount of cash in order to satisfy these obligations relating to the 2019 Notes, which could materially affect the amount or timing of any investments to grow our business. If any or all of the 2019 Notes are not converted into shares of our common stock before the maturity date, we will have to pay the holders the full aggregate principal amount of the 2019 Notes then outstanding. Any of the above payments could have a material adverse effect on our cash position. If we fail to satisfy these obligations, it may result in a default under the indenture, which could result in a default under certain of our other debt instruments, if any. Any such default would harm our business and the price of our securities could fall.
Downgrades in our credit ratings may increase our future borrowing costs, limit our ability to raise capital, cause our stock price to decline or reduce analyst coverage, any of which could have a material adverse impact on our business.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each of the rating agencies may be subject to revision at any time. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, our financial position, conditions in and periods of disruption in any of our principal markets and changes in our business strategy. If weak financial market conditions or competitive dynamics cause any of these factors to deteriorate, we could see a reduction in our corporate credit rating. Since investors, analysts and financial institutions often rely on credit ratings to assess a company's creditworthiness and risk profile, make investment decisions and establish threshold requirements for investment guidelines, our ability to raise capital, our access to external financing, our ability to refinance our indebtedness, our stock price and analyst coverage of our stock could be negatively impacted by a downgrade to our credit rating.
Changes in laws, regulations or governmental policy applicable to our customers or potential customers may decrease the demand for our solutions or increase our costs.
The level of our customers' and potential customers' activity in the business processes our services are used to support is sensitive to many factors beyond our control, including governmental regulation and regulatory policies. Many of our customers and potential customers in the telecommunications, life sciences, energy, utilities, insurance, financial and other industries are subject to substantial regulation and may be the subject of further regulation in the future. Accordingly, significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and could cause the demand for and sales of our solutions to decrease. For example, many products developed by our customers in the life sciences industry require approval of the United States Food and Drug Administration, or FDA, and other similar foreign regulatory agencies before they can market their products. The processes for filing and obtaining FDA approval to market these products are guided by specific protocols that our services help support, such as United States 21 CFR Part 11, which provides the criteria for acceptance by the FDA of electronic records. If new government regulations from future legislation or administrative action or from changes in FDA or foreign regulatory policies occur in the future, the services we currently provide may no longer support these life science processes and protocols, and we may lose customers in the life sciences industry. Any change in the scope of applicable regulations that either decreases the volume of transactions that our customers or potential
customers enter into or otherwise negatively impacts their use of our solutions would have a material adverse effect on our revenues or gross margins, or both. Moreover, complying with increased or changed regulations could cause our operating expenses to increase as we may have to reconfigure our existing services or develop new services to adapt to new regulatory rules and policies, either of which would require additional expense and time. Additionally, the information provided by, or residing in, the software or services we provide to our customers could be deemed relevant to a regulatory investigation or other governmental or private legal proceeding involving our customers, which could result in requests for information from us that could be expensive and time consuming for us to address or harm our reputation since our customers rely on us to protect the confidentiality of their information. These types of changes could adversely affect our business, results of operations and financial condition.
Fraudulent Internet transactions could negatively impact our business.
Our business may be exposed to risks associated with Internet credit card fraud and identity theft that could cause us to incur unexpected expenditures and loss of revenues. Under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder's signature. Although our customers currently bear the risk for a fraudulent credit card transaction, in the future we may be forced to share some of that risk and the associated costs with our customers. To the extent that technology upgrades or other expenditures are required to prevent credit card fraud and identity theft, we may be required to bear the costs associated with such expenditures. In addition, to the extent that credit card fraud and/or identity theft cause a decline in business transactions over the Internet generally, both the business of our customers and our business could be adversely affected.
Consolidation in the communications industry, the commercial or investment banking industries or the other industries that we serve can reduce the number of actual and potential customers and adversely affect our business.
There has been, and there continues to be, merger, acquisition, alliance and consolidation activity among our customers. Mergers, acquisitions, alliances or consolidations of companies in the communications industry or banks and financial institutions, in particular, have reduced and may continue to reduce the number of our customers and potential customers for our solutions, resulting in a smaller market for our services, which could have a material adverse impact on our business and results of operations. In addition, it is possible that the larger institutions that result from mergers or consolidations could themselves perform some or all of the services that we currently provide or could provide in the future. Should one or more of our significant customers acquire, consolidate or enter into an alliance with an entity or decide to either use a different service provider or to manage its transactions internally, this could have a negative material impact on our business. Any such consolidations, alliances or decisions to manage transactions internally may cause us to lose customers or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our customer base to make up any revenue declines if we lose customers or if our transaction volumes decline.
Failures or interruptions of our systems and services could materially harm our revenues, impair our ability to conduct our operations and damage relationships with our customers.
Our success depends on our ability to provide reliable services to our customers and process a high volume of transactions in a timely and effective manner. Although we operate disaster recovery solutions our network operations are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks and similar events. We could also experience failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of, among other things:
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damage to or failure of our computer software or hardware or our connections and outsourced service arrangements with third parties;
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errors in the processing of data by our systems;
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computer viruses or software defects;
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physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;
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fire, cybersecurity attack, terrorist attack or other catastrophic event;
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increased capacity demands or changes in systems requirements of our customers; or
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errors by our employees or third-party service providers. We rely on various systems and applications to support our internal operations, including our billing, financial reporting and customer contracting functions. The availability of these systems and applications is essential to us and delays, disruptions or performance problems may adversely impact our ability to accurately bill our customers, report financial information and conduct our business. Additionally, we may choose to replace or implement changes to these systems, including substituting traditional systems with cloud-based solutions, which could be time-consuming and expensive and which could result in delays in the ongoing operational processes these software solutions support. Further, our cloud-based solutions may experience disruptions and outages
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that are beyond our control as we rely on third party vendors to support these solutions and assure their continued availability. We have also acquired a number of companies, products, services and technologies over the last several years. While we make significant efforts to address any IT security issues with respect to our acquisitions, we may still inherit certain risks when we integrate these acquisitions. In addition, our business interruption insurance may be insufficient to compensate us for losses or liabilities that may occur. Any interruptions in our systems or services could damage our reputation and substantially harm our business and results of operations.
The quality of our support and services offerings is important to our customers and if we fail to meet our service level obligations under our service level agreements or otherwise fail to offer quality support and services, we would be subject to penalties and could lose customers.
Our customers generally depend on our service organization to resolve issues relating to the use of our solutions. A high level of support is critical for the successful marketing and sale of our solutions. If we are unable to provide a level of support and service to meet or exceed the expectations of our customers, we could experience:
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loss of customers and market share;
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difficulty attracting or the inability to attract new customers, including in new geographic regions; and
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increased service and support costs and a diversion of resources.
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Any of the above results would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.
In addition, we have service level agreements with many of our customers under which we guarantee specified levels of service availability. These arrangements involve the risk that we may not have adequately estimated the level of service we will in fact be able to provide. The importance of high quality customer support will increase as we expand our business and pursue new enterprise customers. If we fail to meet our service level obligations under these agreements, we would be subject to penalties, which could result in higher than expected costs, decreased revenues and decreased operating margins. We could also lose customers.
The financial and operating difficulties in the telecommunications sector may negatively affect our customers and our company.
The telecommunications sector has at times faced significant challenges resulting from significant changes in technology and consumer behavior, excess capacity, poor operating results and financing difficulties. The sector's financial status has also at times been uncertain and access to debt and equity capital has been seriously limited. The impact of these events on us could include slower collection on accounts receivable, higher bad debt expense, uncertainties due to possible customer bankruptcies, lower pricing on new customer contracts, lower revenues due to lower usage by the end customer and possible consolidation among our customers, which will put our customers and operating performance at risk. In addition, because we operate in the communications sector, we may also be negatively impacted by limited access to debt and equity capital.
Our performance and growth depend on our ability to generate customer referrals and to develop referenceable customer relationships that will enhance our sales and marketing efforts. A failure to accomplish these objectives could materially harm our business.
In our business, we depend on end-users of our solutions to generate customer referrals for our services. We depend in part on members of the communications industry, financial institutions, legal service providers and other third parties who use our services to recommend them to a larger customer base than we can reach through our direct sales and internal marketing efforts. For instance, a significant portion of our revenue from our recently acquired Intralinks mergers and acquisitions, or M&A, solutions is derived from referrals by investment banks, financial advisors and law firms that have utilized these services in connection with prior transactions. These referrals are an important source of new customers for our services and generally are made without expectation of compensation. We intend to continue to focus our marketing efforts on these referral partners in order to expand our reach and improve the efficiency of our sales efforts.
We also recognize that having respected, well known, market-leading customers who have committed to deploy our solutions within their organizations will support our marketing and sales efforts, as these customers can act as references for us and our product offerings. Our ability to establish and maintain these customer relationships is important to our future profitability. The willingness of these types of customers to provide referrals or serve as anchor or reference customers depends on a number of factors, including the performance, ease of use, reliability, reputation and cost-effectiveness of our services as compared to those offered by our competitors, as well as the internal policies of these customers. We may not be able to cultivate or maintain the strong relationships with customers that are necessary to develop those customer relationships into referenceable accounts.
The loss of any of our significant referral sources, including our anchor customers, or a decline in the number of referrals we receive or anchor customers that we generate could require us to devote substantially more resources to the sales and marketing of our services, which would increase our costs, potentially lead to a decline in our revenue, slow our growth and generally have a material adverse effect on our business, results of operations and financial condition. In addition, the revenue we generate from our referral and anchor relationships may vary from period to period.
We rely in part on strategic relationships with third parties to sell and deliver our solutions. If we are unable to successfully develop and maintain these relationships, our business may be harmed.
In addition to generating customer referrals through third-party users of our solutions, we intend to pursue relationships with other third parties such as technology and content providers and implementation and distribution partners. Our future growth will depend, at least in part, on our ability to enter into and maintain successful strategic relationships with these third parties. Identifying partners and negotiating and documenting relationships with them requires significant time and resources, as does integrating third-party content and technology. Some of the third parties with whom we have strategic relationships have entered and may continue to enter into strategic relationships with our competitors. Further, these third parties may have multiple strategic relationships and may not regard us as significant for their businesses. As a result, they may choose to offer their services on terms that are unfavorable to us, terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire services or solutions that compete with ours. Our relationships with strategic partners could also interfere with our ability to enter into desirable strategic relationships with other potential partners in the future. If we are unsuccessful in establishing or maintaining relationships with strategic partners on favorable economic terms, our ability to compete in the marketplace or to grow our revenue could be impaired, and our business, results of operations and financial condition would suffer. Even if we are successful, we cannot provide assurance that these relationships will result in increased revenue or customer usage of our solutions or that the economic terms of these relationships will not adversely affect our margins.
We are exposed to our customers' credit risk.
We are subject to the credit risk of our customers and customers with liquidity issues may lead to bad debt expense for us. Most of our sales are on an open credit basis, with typical payment terms between 45 and 60 days in the United States and, because of local customs or conditions, longer payment terms in some markets outside the United States. We use various methods to screen potential customers and establish appropriate credit limits, but these methods cannot eliminate all potential bad credit risks and may not prevent us from approving applications that are fraudulently completed. Moreover, businesses that are good credit risks at the time of application may become bad credit risks over time and we may fail to detect this change. We maintain reserves we believe are adequate to cover exposure for doubtful accounts. If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expense. A decrease in accounts receivable resulting from an increase in bad debt expense could adversely affect our liquidity. Our exposure to credit risks may increase if our customers are adversely affected by a difficult macroeconomic environment, or if there is a continuation or worsening of the economic environment. Although we have programs in place that are designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, there can be no assurance that these programs will be effective in reducing our credit risks or preventing us from incurring additional losses. Future and additional losses, if incurred, could harm our business and have a material adverse effect on our business operating results and financial condition. Additionally, to the degree that the current or future credit markets makes it more difficult for some customers to obtain financing, those customers' ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
Our reliance on third-party providers for communications software, services, hardware and infrastructure exposes us to a variety of risks we cannot control.
Our success depends on software, equipment, network connectivity and infrastructure hosting services supplied by, or leased from, our vendors and customers. In addition, we rely on third-party vendors to perform a substantial portion of our exception handling services. We may not be able to continue to purchase the necessary software, equipment and services from vendors on acceptable terms or at all. If we are unable to maintain current purchasing terms or ensure service availability with these vendors and customers, we may lose customers and experience an increase in costs in seeking alternative supplier services. Further, any changes in our third-party vendors could detract from management’s ability to focus on the ongoing operations of our business or could cause delays in the operations of our business.
Our business also depends upon the capacity, reliability and security of the infrastructure owned and managed by third parties, including our vendors and customers that are used by our technology interoperability services, network services, number portability services, call processed services and enterprise solutions. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure and whether those third parties will upgrade or improve their software, equipment and
services to meet our and our customers' evolving requirements. We depend on these companies to maintain the operational integrity of our services. If one or more of these companies is unable or unwilling to supply or expand its levels of services to us in the future, our operations could be severely interrupted. In addition, rapid changes in the communications industry have led to industry consolidation. This consolidation may cause the availability, pricing and quality of the services we use to vary and could lengthen the amount of time it takes to deliver the services that we use.
Any damage to, or failure or capacity limitations of, our systems and our related network could result in interruptions in our service that could cause us to lose revenue, issue credits or refunds or could cause our customers to terminate their subscriptions for our services, in each case adversely affecting our renewal rates. Since our customers use our service for important aspects of their businesses, any errors, defects, disruptions in service or other performance problems could hurt our reputation and may damage our customers' businesses. As a result, we may lose revenue, issue credits or refunds or customers could elect not to renew our services or delay or withhold payments to us. We could also lose future sales or customers may make claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense or risk of litigation.
Additionally, third-party software underlying our services can contain undetected errors or bugs. We may be forced to delay commercial release of our services until any discovered problems are corrected and, in some cases, may need to implement enhancements or modifications to correct errors that we do not detect until after deployment of our services. In addition, problems with the third party software underlying our services could result in:
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damage to our reputation;
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loss of or delayed revenue;
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warranty claims or litigation;
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loss of or delayed market acceptance of our services; or
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unexpected expenses and diversion of resources to remedy errors.
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We are participants in two joint ventures, which may subject us to certain risks relating to our ability to perform our obligations under the joint ventures, including funding future joint venture capital requirements.
Entering into joint ventures and alliances entails risks, including difficulties in developing and expanding the business of a newly formed joint venture, funding capital calls for the joint venture, exercising influence over the management and activities of joint venture, quality control concerns regarding joint venture products and services and potential conflicts of interest with the joint venture and our joint venture partner. We cannot guarantee that the joint venture operations will be successful. Any inability to meet our obligations as a joint venture partner under the joint ventures could result in penalties and reduced percentage interest in the joint venture for our company. Also, we could be disadvantaged in the event of disputes and controversies with a joint venture partner, since one of our joint venture partner is a relatively significant customer of our products and services and future product and services of the joint venture.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. We also regularly file patent applications to protect inventions arising from our research and development, and have obtained a number of patents in the United States and other countries. There can be no assurance that our patent applications will be approved, that any issued patents will adequately protect our intellectual property, or that our patents will not be challenged by third parties. Also, much of our business and many of our solutions rely on key technologies developed or licensed by third or other parties and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This type of litigation could result in substantial costs and diversion of management resources, either of which could materially harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
Claims by others that we infringe their proprietary technology could harm our business.
Third parties could claim that our current or future products or technology infringe their proprietary rights. We expect that software developers will increasingly be subject to infringement claims as the number of products and competitors providing software and services to the communications industry increases and overlaps occur. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making a claim of this nature, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our products or services. Any of these events could seriously harm our business.
We are generally obligated to indemnify our customers if our services infringe the proprietary rights of third parties and certain of our agreements with customers and partners include indemnification provisions under which we have agreed to indemnify the counter-party for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for financial and other damages caused by us to property or persons. Third parties may assert infringement claims against our customers or partners. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers or partners, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or partners.
If anyone asserts a claim against us relating to proprietary technology or information, while we might seek to license their intellectual property, we might not be able to obtain a license on commercially reasonable terms or on any terms. In addition, any efforts to develop non-infringing technology could be unsuccessful. Our failure to obtain the necessary licenses or other rights or to develop non-infringing technology could prevent us from offering our services and could therefore seriously harm our business.
We may seek to acquire companies or technologies, form joint ventures or make investments in other companies or technologies, which could disrupt our ongoing business, disrupt our management and employees, dilute our stockholders’ ownership, increase our debt, and adversely affect our results of operations.
We have made, and in the future intend to form joint ventures, make acquisitions of and investments in companies, technologies or products in existing, related or new markets for us that we believe may enhance our market position or strategic strengths. However, we cannot be sure that any acquisition or investment will ultimately enhance our products or strengthen our competitive position. Acquisitions involve numerous risks, including but not limited to:
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diversion of management's attention from other operational matters;
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inability to identify acquisition candidates on terms acceptable to us or at all, or inability to complete acquisitions as anticipated or at all;
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inability to realize anticipated benefits or commercialize purchased technologies;
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exposure to operational risks, rules and regulations to the extent such activities are located in countries where we have not historically done business;
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unknown, underestimated and/or undisclosed commitments or liabilities;
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incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill;
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dilution of ownership of our current stockholders if we issue shares of our common stock;
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higher than expected transaction costs; and
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ineffective integration of operations, technologies, products or employees of the acquired companies.
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In addition, acquisitions may disrupt our ongoing operations, increase our expenses and/or harm our results of operations or financial condition. Future acquisitions could also result in potentially dilutive issuances of equity securities, the incurrence of debt (which may reduce our cash available for operations and other uses), an increase in contingent liabilities or an increase in amortization expense related to identifiable assets acquired, each of which could materially harm our business, financial condition and results of operations.
Specifically, in regards to our recent acquisition of Intralinks, in addition to the risks described above, we may not be able to effectively and efficiently integrate Intralinks into our company. For example, many of Intralinks’ contracts with its customers are entered into in connection with discrete one-time financial and strategic business transactions and projects, such as M&A transactions. These transactional agreements typically have initial terms of six to twelve months depending on the type of transaction and related purpose of the Intralinks exchange. On the other hand, the relationships with our customers are generally longer term, usually ranging from twelve to sixty months. This difference in our business models may create issues with our integration of the Intralinks business.
We make significant investments in new products and services that may not be profitable or align with our established company vision.
We intend to continue to make investments to support our business growth, including expenditures to develop new services or enhance our existing services, enhance our operating infrastructure, market and sell our product offerings and acquire complementary businesses and technologies. These endeavors may involve significant risks and uncertainties, including failures to align new initiatives with our established corporate vision and direction, which could lead to a misapplication of our resources. These new investments are inherently risky and may involve distracting management from current operations, create greater than expected liabilities and expenses, provide us with an inadequate return on capital, include other unidentified risks and, ultimately, may generally not be successful. Further, our ability to effectively integrate new services and investments into our business may affect our profitability. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue and financial performance.
Interruptions or delays in our service due to problems with our third-party web hosting facilities or other third-party service providers could adversely affect our business.
We rely on third parties for the maintenance of certain of the equipment running our solutions and software at geographically dispersed hosting facilities with third parties. If we are unable to renew, extend or replace our agreements with any of our third party hosting facilities, we may be unable to arrange for replacement services at a similar cost and in a timely manner, which could cause an interruption in our service. We do not control the operation of these third party facilities, each of which may be subject to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures or similar events. These facilities may also be subject to break-ins, sabotage, intentional acts of vandalism or similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster, cessation of operations by our third-party web hosting provider or a third party's decision to close a facility without adequate notice or other unanticipated problems at any facility could result in lengthy interruptions in our service. In addition, the failure by these facilities to provide our required data communications capacity could result in interruptions in our service.
Our growth may strain our management, information systems and resources.
Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to expand our overall business, customer base, headcount and operations both domestically and internationally. Growing a global organization and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our IT infrastructure, reporting systems and procedures, and operational and financial controls, as well as manage expanded operations in geographically distributed locations. Our expected additional growth will increase our costs, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to manage our growth successfully we will be unable to execute our business plan successfully, which could have a negative impact on our business, financial condition and results of operations. In addition, if we fail to develop and implement appropriate operating practices, our performance may suffer in terms of quality, cost and cycle time.
Our expansion into international markets may be subject to uncertainties that could increase our costs to comply with regulatory requirements in foreign jurisdictions, disrupt our operations and require increased focus from our management.
Our growth strategy includes the growth of our operations in foreign jurisdictions. International operations and business expansion plans are subject to numerous additional risks, including economic and political risks in foreign jurisdictions in which we operate or seek to operate, potential additional costs due to localization and other geographic specific costs, difficulty in enforcing contracts and collecting receivables through some foreign legal systems, unexpected changes in legal and regulatory requirements, differing technology standards and pace of adoption, fluctuations in currency exchange rates, varying regional and geopolitical business conditions and demands. The difficulties associated with managing a large organization spread throughout various countries and potential tax issues, including restrictions on repatriating earnings and multiple conflicting, changing and complex tax laws and regulations, and the differences in foreign laws and regulations, including foreign tax, data privacy requirements, anti-competition, intellectual property, labor, contract, trade and other laws. Additionally, compliance with international and U.S. laws and regulations that apply to our international operations may increase our cost of doing business in foreign jurisdictions. Violation of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, or prohibitions on the conduct of our business. As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.
Fluctuations in foreign currency exchange rates could result in foreign currency transaction losses, which could harm our operating results and financial condition.
We consider the U.S. dollar to be our functional currency. However, given our international operations, which we expect to expand following our recent acquisition of Intralinks, we currently have, and expect to have in the future, revenue and expenses and related assets and liabilities denominated in foreign currencies. Foreign currency transaction exposure results primarily from transactions with customers or vendors denominated in currencies other than the functional currency of the entity in which we record the transaction. Any fluctuation in the exchange rate of these foreign currencies may positively or negatively affect our business, financial condition and operating results.
We face exposure to movements in foreign currency exchange rates due to the fact that we have non-U.S. dollar denominated revenue worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of our foreign currency denominated revenue and positively affects the U.S. dollar value of our foreign currency denominated expenses. If foreign currencies were to weaken or strengthen relative to the U.S. dollar, we might elect to raise or lower our international pricing, which could potentially impact demand for our services. Alternatively, we might opt not to adjust our international pricing as a result of fluctuations in foreign currency exchange rates, which could potentially have a positive or negative impact on our results of operations and financial condition.
Similarly, our financial performance may be impacted by fluctuations in currency exchange rates when it comes to our non-U.S. dollar denominated expenses. The third party vendors and suppliers to whom we owe payments for non-U.S. dollar denominated expenses may, or may not, decide to increase or decrease their pricing to reflect fluctuations in foreign currency exchange rates.
If there continues to be volatility in foreign currency exchange rates, we will continue to experience fluctuations in our operating results due to revaluing our assets and liabilities that are not denominated in the functional currency of the entity that recorded the asset or liability. Further, as foreign currency exchange rates change, the translation of our non-U.S. denominated revenue and expenses into U.S. dollars affects the year-over-year comparability of our operating results.
We must recruit and retain our key management and other key personnel and our failure to recruit and retain qualified employees could have a negative impact on our business.
We believe that our success depends in part on the continued contributions of our senior management and other key personnel to generate business and execute programs successfully. In addition, the relationships and reputation that these individuals have established and maintain with our customers and within the industries in which we operate contribute to our ability to maintain good relations with our customers and others within those industries. The loss of any members of senior management or other key personnel could materially impair our ability to identify and secure new contracts and otherwise effectively manage our business. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. If we do not obtain the stockholder approval needed to continue granting equity compensation in a competitive manner, our ability to attract, retain, and motivate executives and key employees could be weakened. Further, in the technology industry, there is substantial and continuous competition for highly skilled business, product development, technical and other personnel. Competition for qualified personnel at times can be intense and as a result we may not be successful in attracting and retaining the personnel we require, which could have a material adverse effect on our ability to meet our commitments and new product delivery objectives. If we are unable to maintain or expand our direct sales capabilities, we may not be able to generate anticipated revenues. In addition, if we are unable to maintain or expand our product development capabilities, we may not be able to meet our product development goals.
Further, we rely on the expertise and experience of our senior management team. Although we have employment agreements with our executive officers, none of them or any of our other management personnel is obligated to remain employed by us. The loss of services of any key management personnel could lower productive output, interrupt our strategic vision and make it more difficult to pursue our business goals successfully.
Our employee retention and hiring may be adversely impacted by immigration restrictions and related factors.
Competition for skilled personnel is intense in our industry and any failure on our part to hire and retain appropriately skilled employees could harm our business. Our ability to hire and retain skilled employees is impacted, at least in part, by the fact that a portion of our professional workforce in the United States is comprised of foreign nationals who are not United States citizens. In order to be legally allowed to work for us, these individuals generally hold immigrant visas (which may or may not be tied to their employment with us) or green cards, the latter of which makes them permanent residents in the United States.
The ability of these foreign nationals to remain and work in the United States is impacted by a variety of laws and regulations, as well as the processing procedures of various government agencies. Changes in applicable laws, regulations or procedures could adversely affect our ability to hire or retain these skilled employees and could affect our costs of doing business and our ability to deliver services to our customers. In addition, if the laws, rules or procedures governing the ability of foreign nationals to work in the United States were to change or if the number of visas available for foreign nationals permitted to work in the United States were to be reduced, our business could be adversely affected, if, for example, we were unable to hire or no longer able to retain a skilled worker who is a foreign national.
Employing foreign nationals may require significant time and expense and our foreign national employees may choose to leave after we have made this investment. While a foreign national who is working under an immigrant visa tied to his or her employment by us may be less likely to choose to leave our Company than a similarly situated employee who is a United States national or a green card holder (as leaving our employ could mean also having to leave the United States), this may not always be the case. Additionally, many of our foreign national employees hold green cards, which means that they have greater flexibility to leave our Company without facing the risk of also having to leave the United States.
Our use of “open source” software could negatively affect our ability to sell our services and subject us to possible litigation.
A portion of the technologies licensed by us incorporates "open source" software, and we may incorporate open source software in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer any of our services that incorporate the open source software at no cost. Additionally, we may be required to make publicly available any source code for modifications or derivative works we create based upon, incorporating or using the open source software and/or license those modifications or alterations on terms that are unfavorable to us. If an author or other third party that distributes open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from selling those of our services that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our services.
In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide technology support, maintenance, warranties or assurance of title or controls on the origin of the software.
Our inability 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 could harm our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products and enhancements to our platforms or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. In addition, the terms of any future issued equity securities could entitle the holders of those equity securities to rights, preferences and privileges superior to those of holders of our common stock. Furthermore, if we engage in debt financing, the holders of debt might have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness, including restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations, and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
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develop or enhance our products and platforms;
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acquire complementary technologies, products or businesses;
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expand operations, in the United States or internationally; or
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respond to competitive pressures or unanticipated working capital requirements.
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If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
We continue to incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new and ongoing compliance initiatives.
We operate as a public company, and will continue to incur significant legal, accounting and other expenses as we comply with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and other public company disclosure and corporate governance requirements, as well as any new rules that may subsequently be implemented by the Securities and Exchange Commission and/or the NASDAQ Stock Market, or Nasdaq, the exchange on which our common stock is listed (Nasdaq: SNCR). These rules impose various requirements on public companies, including requirements related to disclosures, corporate governance and internal controls. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly and place significant strain on our personnel, systems and resources.
Our management and other personnel will continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, we expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to refine our disclosure controls and other procedures that are designed to ensure that the information that we are required to disclose in the reports that we will file with the Securities and Exchange Commission is properly recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting. Further, Section 404 of Sarbanes-Oxley requires that we include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited financial statements as of the end of each fiscal year. We successfully completed our assessment of our internal control over financial reporting as of
December 31, 2016
. Our continued compliance with Section 404 will require that we continue to incur substantial expense and expend significant management time on compliance related issues.
Our current controls and any new controls that we develop in the future may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will be required to include in our periodic reports that will be filed with the SEC. If we were to have ineffective disclosure controls and procedures or internal control over financial reporting, our investors could lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock. As a result, we may face a loss of public confidence, the market price of our stock could decline and we could be subject to regulatory sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would require additional financial and management resources. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations.
Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles, or their interpretation, could have a significant effect on our reported results and may even retroactively affect previously reported results. Our accounting principles that recently have been or may be affected by changes in accounting principles are: (i) accounting for stock-based compensation; (ii) accounting for income taxes; (iii) accounting for business combinations and goodwill; (iv) revenue recognition guidance; and (v) accounting for foreign currency translation.
Changes in, or interpretations of, tax rules and regulations, could adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be
unfavorably affected by changes in tax laws or the interpretation of tax laws or by changes in the valuation of our deferred tax assets and liabilities. It is possible that future requirements, including the recently proposed implementation of International Financial Reporting Standards, or IFRS, could change our current application of GAAP, resulting in a material adverse impact on our financial position or results of operations. In addition, we are subject to the continued examination of our income tax returns by the Internal Revenue Service, or IRS, and other tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations, if any, to determine the adequacy of our provision for income taxes. We believe our estimates to be reasonable, but there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.
If we are required to collect sales and use taxes on the services we sell in additional jurisdictions, we may be subject to liability for past sales and our future sales could decrease.
We currently collect sales or use tax on our services in most states. Historically, with a few exceptions, we have not charged or collected value added tax on our services anywhere in the world. We may lose sales or incur significant expenses should tax authorities in other jurisdictions where we do business be successful in imposing sales and use taxes, value added taxes or similar taxes on the services we provide. A successful assertion by one or more tax authorities that we should collect sales or other taxes on the sale of our services could result in substantial tax liabilities for past sales, including interest and penalty charges, and could discourage customers from purchasing our services and otherwise harm our business. Further, we may conclude based on our own review that our services may be subject to sales and use taxes in other areas where we do business. Under these circumstances, we may voluntarily disclose our estimated liability to the respective tax authorities and initiate activities to collect taxes going forward.
It is not clear that our services are subject to sales and use tax in certain jurisdictions. States and certain municipalities in the United States, as well as countries outside the United States, have different rules and regulations governing sales and use taxes. These rules and regulations are subject to varying interpretations that may change over time and, in the future, our services may be subject to such taxes. Although our customer contracts typically provide that our customers are responsible for the payment of all taxes associated with the provision and use of our services, customers may decline to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes. In certain cases, we may elect not to request customers to pay back taxes. If we are required to collect and pay back taxes and associated interest and penalties, and if our customers fail or refuse to reimburse us for all or a portion of these amounts, or if we elect not to seek payment of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on our services going forward will effectively increase the cost of our services to our customers, and may adversely affect our ability to retain existing customers or gain new customers in jurisdictions in which such taxes are imposed. Any of the foregoing could have a material adverse effect on our business, results of operation or financial condition.
Economic, political and market conditions can adversely affect our business, results of operations and financial condition.
Our business is influenced by a range of factors that are beyond our control and that we have no comparative advantage in forecasting. These include but are not limited to general economic and business conditions, the overall demand for cloud-based products and services, general political developments and currency exchange rate fluctuations. Economic uncertainty may exacerbate negative trends in consumer spending and may negatively impact the businesses of certain of our customers, which may cause a reduction in their use of our platforms or increase their likelihood of defaulting on their payment obligations, and therefore cause a reduction in our revenues. These conditions and uncertainty about future economic conditions may make it challenging for us to forecast our operating results, make business decisions and identify the risks that may affect our business, financial conditions and results of operations. In addition, these factors could result in quarterly fluctuations in our business performance. Finally, changes in these conditions may result in a more competitive environment, resulting in possible pricing pressures.
Catastrophic events may disrupt our business.
A natural disaster, telecommunications failure, power outage, cybersecurity attack, war, terrorist attack, or other catastrophic event could cause us to suffer system interruptions, reputational harm, delays in product development, breaches of data security and loss of critical data. An event of this nature could also prevent us from fulfilling customer orders or maintaining certain service level requirements, particularly in respect of our SaaS and hosted offerings. While we have developed certain disaster recovery plans and maintain backup systems to reduce the potentially adverse effect of these types of events, a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our business, operating results and financial condition could be adversely affected.
Risks Related to Our Recently Acquired Intralinks Business
A substantial portion of our Intralinks business revenue is derived from contracts that provide for the use of Intralinks solutions for a fixed duration. Our inability to enter into new contracts as existing ones expire could negatively impact our overall financial performance.
Many of our contracts with Intralinks customers are entered into in connection with discrete one-time financial and strategic business transactions and projects such as mergers and acquisitions, or M&A, transactions. During the fiscal years ended December 31, 2014, 2015 and 2016, revenue generated from transactional contracts constituted a substantial portion of Intralinks’ total revenue. These transactional agreements typically have initial terms of six to twelve months depending on the type of transaction and related purpose of the Intralinks exchange. Accordingly, our business depends on our ability to replace these transactional agreements as they expire. Our inability to enter into new contracts with existing customers or find new customers to replace these contracts could have a material adverse effect on our business, results of operations and financial condition.
We may not successfully develop, introduce or integrate new services or enhancements to our Intralinks Platform or our application solutions and this could harm our reputation, revenues and operating income.
Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing Intralinks platform, including our application solutions, and to introduce new functionality either by acquisition or internal development. Our operating results would suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market opportunities or are not brought to market effectively. In addition, it is possible that our assumptions about the features that we believe will drive purchasing decisions for our potential customers or renewal decisions for our existing customers could be incorrect. In the past, we have experienced delays in the planned release dates of new features and upgrades and have discovered defects in new services after their introduction. There can be no assurance that new services or upgrades will be released on schedule or that, when released, they will not contain defects as a result of poor planning, execution or other factors during the product development lifecycle. In addition, we could experience challenges, delays or quality issues in our product development efforts due to the demands of the Agile development methodology our Intralinks’ business relies upon. If any of these situations were to arise, we could suffer adverse publicity, damage to our reputation, loss of revenue, delay in market acceptance or claims by customers brought against us, all of which could have a material adverse effect on our business, results of operations and financial condition. Moreover, upgrades and enhancements to our Intralinks platform may require substantial investment and there can be no assurance that our investments will prove to help us achieve or sustain a durable competitive advantage in products, services and processes. If customers do not widely adopt our solutions or new innovations to our solutions, we may not be able to justify the investments we have made. If we are unable to develop, license or acquire new solutions or enhancements to existing services on a timely and cost-effective basis, or if our new or enhanced solutions do not achieve market acceptance, our business, results of operations and financial condition will be materially adversely affected.
If we are unable to increase our penetration in the existing principal markets for our business, develop, market and sell new solutions or expand into additional markets, we will be unable to grow our business and increase our revenue.
We currently market our Intralinks solutions for a wide range of business processes. These include:
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due diligence for M&A, public offerings and other strategic transactions;
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loan syndication and other debt capital markets transactions;
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board of directors reporting;
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secure mobile access to content;
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safety information exchange and drug development and licensing for the life sciences industry;
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private equity fundraising, hedge fund marketing and investor reporting;
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energy exploration and production ventures for the oil and gas industry;
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contract and vendor management; and
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collaboration and sharing within and outside of organizations.
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We intend to continue to focus our sales and marketing efforts in these markets to grow our business. In addition, we believe our future growth depends not only on increasing our penetration into the principal markets in which our services are currently used, but also on identifying and expanding the number of industries, communities and markets that use or could use our services and expanding the solutions we offer to customers in those markets. Efforts to expand our service offerings beyond the markets that we currently serve or to develop, market and sell new service offerings, however, may divert management resources from existing operations, expose us to increased competition from new and existing competitors and require us to commit significant financial resources to an unproven business, any of which could significantly impair our operating results. Moreover, efforts to expand beyond our existing markets and solutions may never result in new services that achieve market acceptance, create additional
revenue or become profitable, particularly if a new target market turns out to be substantially less attractive than we envision due to overestimates in the number of potential customers, the speed at which the market will evolve or grow, the price potential customers are willing to pay for our solutions or the rate at which they are ready to adopt new products or approaches. Our inability to further penetrate our existing markets, successfully launch new solutions or identify additional markets and achieve acceptance of our services in these additional markets could adversely affect our business, results of operations and financial condition.
A significant part of our Intralinks business is derived from the use of Intralinks application solutions in connection with financial and strategic business transactions. Economic trends that affect the volume of these transactions may negatively impact the demand for our services.
A significant portion of our revenue from the Intralinks business depends on the purchase of our services by parties involved in financial and strategic business transactions such as M&A transactions, loan syndications and other debt capital markets, or DCM, transactions. The volume of these types of transactions drives demand for our services. Downturns in the global economy or in the economies of the geographies in which we do business, rising unemployment and reduced equity valuations all create risks that could harm our business. We are not able to predict the impact any potential worsening of macroeconomic conditions could also have on our results of operations. The level of activity in the financial services industry, including the financial transactions our services are used to support, is sensitive to many factors beyond our control, including interest rates, regulatory policies, general economic conditions, our customers' competitive environments, business trends, terrorism and political change. Unfavorable conditions or changes in any of these factors could adversely affect our business, operating results and financial condition.
Risks Related to Our Common Stock
Our stock price may continue to experience significant fluctuations and could subject us to litigation.
Our stock price, like that of other technology companies, continues to fluctuate greatly. Our stock price, and demand for our stock, can be affected by many factors, such as quarterly increases or decreases in our earnings, speculation in the investment community about our financial condition or results of operations and changes in revenue or earnings estimates, announcement of new services, technological developments, alliances, or acquisitions by us. Additionally, the price of our common stock may continue to fluctuate greatly in the future due to factors that are non-company specific, such as the decline in the United States and/or international economies, acts of terror against the United States or other jurisdictions where we conduct business, war or due to a variety of company specific factors, including quarter to quarter variations in our operating results, shortfalls in revenue, gross margin or earnings from levels projected by securities analysts and the other factors discussed in these risk factors. In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition.
Fluctuation in market price and demand for our common stock may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. Causes of volatility in the market price of our stock could subject us to securities class action litigation. We are currently, and may in the future be, the subject of lawsuits that could require us to incur substantial costs defending against those lawsuits and divert the time and attention of our management.
If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have research coverage by securities and industry analysts, though we do not control these analysts and have no ability to ensure that they will continue to cover our common stock. If one or more of the analysts who covers us downgrades our stock or states a view that our business prospects are reduced, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, interest in the purchase of our stock could decrease, which could cause our stock price or trading volume, or both, to decline.
We may face shareholder lawsuits and other potential liabilities that could materially adversely impact our business, financial condition and results of operations.
We may in the future be the subject of various lawsuits, proceedings and investigations. The outcome and amount of resources needed to respond to, defend or resolve lawsuits or regulatory actions or requests is unpredictable and may remain unknown for long periods of time. Our exposure under these matters may also include our indemnification obligations, to the extent we have any, to current and former officers and directors and, in some cases former underwriters, against losses incurred in connection with these matters, including reimbursement of legal fees and other expenses. Although we maintain insurance for claims of this
nature, our insurance coverage does not apply in all circumstances and may be denied or insufficient to cover the costs related to the class action and stockholder derivative lawsuits. In addition, these matters or future lawsuits or investigations involving us may increase our insurance premiums, deductibles or co-insurance requirements or otherwise make it more difficult for us to maintain or obtain adequate insurance coverage on acceptable terms, if at all. Moreover, adverse publicity associated with regulatory actions and investigations and negative developments in pending legal proceedings could decrease customer demand for our services. As a result, the pending lawsuits and any future lawsuits or investigations involving us or our officers or directors could have a material adverse effect on our business, reputation, financial condition, results of operations, liquidity and the trading price of our common stock.
We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.
We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be a shareholders's sole source of gain for the foreseeable future. Consequently, in the foreseeable future, a shareholder will likely only experience a gain from your investment in our common stock if the price of our common stock increases.
Delaware law and provisions in our restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, therefore depressing the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws and credit agreements may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and bylaws:
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authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
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prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of the stock to elect some directors;
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establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election;
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require that directors only be removed from office for cause;
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provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office;
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limit who may call special meetings of stockholders;
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prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
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establish advance notice requirements for nominating candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
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The affirmative vote of the holders of at least two-thirds of the voting power of all of the then outstanding shares of our capital stock is generally necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of a majority of our shares of capital stock entitled to vote.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.