CyberSource 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2009.
For the transition period from to .
Commission File Number: 000-26477
(Exact Name of Registrant as Specified in its Charter)
1295 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of Principal Executive Offices)(Zip Code)
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, If Changes Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer or smaller reporting company in Rule 12b-2 of the Exchange Act (Check one).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 23, 2009, there were 69,086,027 shares of common stock, par value $0.001 per share, outstanding.
INDEX TO REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2009
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of CyberSource Corporation and its wholly-owned subsidiaries (collectively, CyberSource or the Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys annual report filed on Form 10-K for the year ended December 31, 2008 with the Securities and Exchange Commission (SEC) on February 27, 2009, SEC File No. 000-26477.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS 123R). The Company recognized stock-based compensation expenses before income taxes in the consolidated statements of income as follows (in thousands):
Operating segments are identified as components of an enterprise about which separate discrete financial information is available that is evaluated by the chief operating decision maker or decision-making group to make decisions about how to allocate resources and assess performance. The Companys chief operating decision maker is the Chief Executive Officer (CEO). The Company views its operations as one segment, commerce transaction services and manages the business based on the revenues of this segment.
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) requires that the Company perform tests for impairment of its goodwill annually and between annual tests in certain circumstances. As of March 31, 2009, the Company had recorded goodwill in connection with its acquisition of Authorize.Net in November 2007, with a carrying value of approximately $289.3 million. The Company evaluates the goodwill related to the Authorize.Net acquisition on an annual basis as of July 31 or when indicators of impairment may exist.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) requires that the Company perform tests for impairment of its intangible assets subject to amortization annually and more frequently whenever events or circumstances suggest that its intangible assets may be impaired. As of March 31, 2009, the Company had recorded intangible assets in connection with its acquisition of Authorize.Net with a carrying value of approximately $123.0 million. The Company evaluates the intangible assets on an annual basis as of July 31 or when indicators of impairment may exist.
To evaluate potential impairment, SFAS 142 and SFAS 144 require the Company to assess whether the estimated fair value of its goodwill and intangible assets are greater than their respective carrying value at the time of the test. Accordingly, there could be significant judgment in determining the fair values attributable to goodwill and intangible assets, including the determination of reporting units, estimating future cash flows, determining appropriate discount rates and other assumptions. The Company did not recognize any goodwill or intangible asset impairment charges during the three months ended March 31, 2009.
Income taxes are calculated under the provisions of SFAS No. 109, Accounting for Income Taxes (SFAS 109) and Financial Accounting Standards Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under SFAS 109, the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liability method is used in accounting for income taxes, which includes the effects of temporary differences between financial and taxable amounts of assets and liabilities as well as the effects of net operating loss and credit carryforwards to determine deferred tax assets and liabilities. Valuation allowances are established and adjusted when necessary to reduce deferred tax assets to the amounts expected to be realized on a more likely than not basis. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109.
2. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
3. FUNDS DUE TO MERCHANTS
As of March 31, 2009, the Company was holding funds in the amount of approximately $12.0 million due to merchants. The funds are included in cash and cash equivalents and funds due to merchants on the Companys consolidated balance sheet. The Company typically holds certain funds related to certain electronic check transactions based on the contractual terms with the merchant, generally seven business days. The Company also holds certain funds related to certain credit card and automated clearing house transactions based on the contractual terms with the financial institution which processes the transactions, generally two to four business days.
In addition, the Company has $0.5 million on deposit with a financial institution to cover any deficit account balance that could occur if the amount of transactions returned or charged back exceeds the balance on deposit with the financial institution. This amount is classified as restricted cash in the Companys balance sheet. To date, the deposit has not been applied to offset any deficit balance. The deposit will be held continuously for as long as the Company utilizes certain processing services of the financial institution, and the amount of the deposit may increase as processing volume increases.
4. INTANGIBLE ASSETS, NET
The components of intangible assets, net as of March 31, 2009 are as follows (in thousands):
The amortization expense for the three months ended March 31, 2009 and 2008 was approximately $6.6 million and $7.2 million, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated future amortization expense for the intangible assets recorded on the Companys March 31, 2009 balance sheet is as follows (in thousands):
5. RESTRUCTURING CHARGES
As a result of the Companys acquisition of Authorize.Net in November 2007, the Company acquired certain restructuring accruals related to certain facilities that Authorize.Net had exited. In March 2009, the Company recorded a restructuring charge of approximately $0.9 million as a result of updating the assumptions associated with the Companys excess office space in Burlington, Massachusetts and American Fork, Utah. The expense was included in general and administrative expenses during the three months ended March 31, 2009.
The following table summarizes the activity in the restructuring accrual for the three months ended March 31, 2009 (in thousands):
The Company has lease obligations related to its exited facilities which extend through the year 2012.
6. LETTER OF CREDIT
As of March 31, 2009, the Company has an unsecured letter of credit in the amount of $1.0 million per the terms of the operating lease related to the Burlington, Massachusetts office facility it acquired through the acquisition of Authorize.Net. The Company also has approximately $1.0 million on deposit with the financial institution that issued the letter of credit to the Company. This amount is classified as restricted cash in the Companys balance sheet.
7. LEGAL MATTERS
In July and August 2001, various class action lawsuits were filed in the United States District Court, Southern District of New York, against the Company, its Chairman and CEO, a former officer, and four brokerage firms that served as underwriters in its initial public offering. The actions were filed on behalf of persons who purchased the Companys stock issued pursuant to or traceable to the initial public offering during the period from June 23, 1999 through December 6, 2000. The action alleges that the Companys underwriters charged secret excessive commissions to certain of their customers in return for allocations of the Companys stock in the offering. The two individual defendants are alleged to be liable because of their involvement in preparing and signing the registration statement for the offering, which allegedly failed to disclose the supposedly excessive commissions. On December 7, 2001, an amended complaint was filed in one of the actions to expand the purported class to persons who purchased the Companys stock issued pursuant to or traceable to the follow-on public offering during the period from November 4, 1999 through December 6, 2000. The lawsuit filed against the Company is one of several hundred lawsuits filed against other companies based on substantially similar claims. On April 19, 2002, a consolidated amended complaint was filed to consolidate all of the complaints and claims into one case. The consolidated amended complaint alleges claims that are virtually identical to the amended complaint filed on December 7, 2001 and the original complaints. In October 2002, the claims against the Companys officer and a former officer that were named in the amended complaint were dismissed without prejudice. In July 2002, the Company, along with other issuer defendants in the case, filed a motion to dismiss the consolidated amended complaint with prejudice. On February 19, 2003, the district court issued a written decision denying the motion to dismiss with respect to CyberSource and the individual defendants. On July 2, 2003, a committee of the Companys Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would have provided, among other things, a release of the Company and of the individual defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from the Companys insurers regarding recovery from the underwriter defendants and other consideration from the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company regarding its underwriters. While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of focus cases rather than in all of the 310 cases that have been consolidated. The Companys case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district courts class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuit opinion, the Company informed the district court that the settlement could not be approved because the defined settlement class, like the litigation class, could not be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the focus cases and on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the district court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. Briefing on the class certification motion was filed on April 22, 2008, and briefing on these motions was completed in May 2008. On April 2, 2009, the parties to the litigation filed with the court a motion for preliminary approval of a settlement agreement entered into by the plaintiffs, issuers, individual defendants, insurers, and underwriters. Under the terms of the settlement agreement, plaintiffs will be paid approximately $600 million, in return for which all of the defendants will be released from any claims related to the subject matter of the litigation. With respect to the Company, any amounts payable to plaintiffs will be paid by the Companys then applicable insurer. The court has not yet ruled on the motion. While the Company is not aware of any factors why the court would not grant preliminary approval, the Company cannot predict how the court will decide the matter. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter.
On August 11, 2004, the Company filed suit in the Northern District of California against Retail Decisions, Inc. (ReD US) and Retail Decisions Plc (ReD UK) (collectively, ReD), Case No. 3:04-CIV-03268, alleging that ReD infringes the Companys U.S. Patent No. 6,029,154 (the 154 Patent). The Company served ReD US with the complaint on August 12, 2004, and the Company served ReD UK with the complaint on August 13, 2004. On September 30, 2004, ReD responded to the Companys complaint. ReD filed a motion to stay the case for 90 days pending a determination by the U.S. Patent and Trademark Office (PTO) as to whether it will grant ReDs request that the PTO re-examine the 154 Patent. ReD also filed a motion for a more definite statement by the Company with respect to its allegation that ReD is willfully infringing the 154 Patent. In addition, ReD UK filed a motion to dismiss the action against it on the ground that it is not subject to personal jurisdiction in the Northern District of California. On October 27, 2004, ReD filed a request for re-examination with the PTO, based on prior art ReD discovered that allegedly invalidates the Patent. On October 28, 2004, the Company filed an opposition to ReDs motion to stay the case for 90 days and an opposition to ReDs motion for a more definite statement with respect to willful infringement. Based on ReD UKs representation that ReD US is the sole entity that develops, operates, and distributes the eBitGuard service, the Company agreed to dismiss ReD UK while reserving the right to reinstitute action against ReD UK in the event the Company later discovers that ReD UK is subject to the courts personal jurisdiction. In return, ReD UK agreed that if the Company later establishes that personal jurisdiction existed, the Company could re-file against ReD UK in this action without prejudice to its damages claim. The Company also filed an amended complaint, removing ReD UK as a named defendant and restating the willful infringement claim. On November 16, 2004, the court granted ReDs motion to stay the proceedings pending the PTOs decision as to whether it will grant ReDs request for re-examination. On December 30, 2004, the PTO granted ReDs request for a re-examination. On January 19, 2005, ReD filed a motion to dismiss the case without prejudice or to extend the stay until completion of the re-examination process. On January 24, 2005, the court extended the stay pending the re-examination process, vacated ReDs motion to dismiss, and ordered quarterly updates as to the status of the re-examination process. On April 25, 2005, the parties filed a joint status report that was approved by the court. On June 20, 2005, the PTO issued a preliminary office action rejecting all of the claims of the 154 Patent based on one of the prior art references cited by ReD. On July 14, 2005, the Company met with the PTO examiner handling the re-examination to distinguish the prior art from the claims of the 154 Patent. On August 9, 2006, the PTO issued a final office action rejecting all of the claims of the 154 Patent. On September 7, 2006, the Company filed a response to the office action requesting certain amendments to the claims. On October 10, 2006, the PTO filed a response rejecting the amendments and extending the Companys deadline to file a notice of appeal. On October 30, 2006, the Company filed a notice of appeal. On December 22, 2006, the Company filed the appeal brief. On May 3, 2007, the PTO issued a Notice of Intent to Issue Reexam Certificate, reversing its action of August 9, 2006. On August 5, 2008, the PTO issued the Ex Parte Reexamination Certificate. Accordingly, the patent has been re-validated. On April 25, 2008, litigation proceedings in the case were reinstated. On July 14, 2008, a case management conference was held, at which time the parties agreed to participate in a settlement conference. The settlement conference was held on August 15, 2008, but no agreement was reached. In October 2008, ReD filed two motions for summary judgment. On November 24, 2008, the Court denied one of the motions and ruled that the other motion was premature. On January 26, 2009, ReD filed three additional motions for summary judgment. On March 27, 2009, the Court granted summary judgment, finding the Companys patent claims invalid based on the patentability standard articulated in In re Bilski. The Company plans to appeal the Courts ruling with the Federal Circuit. While there can be no assurances as to the outcome of an appeal, the Company does not presently believe that the continuation of this lawsuit would have a material effect on its financial condition, results of operations, or cash flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On June 25, 2008, the Company filed suit in the Supreme Court of the State of New York against VeriSign, Inc. (VeriSign), Case No. 650207/2008, seeking declaratory judgment to order the release of $1.725 million held in escrow (Escrow Funds) to CyberSource. The Escrow Funds constitute a portion of the purchase price paid by VeriSign to Lightbridge, Inc. for certain assets of Lightbridge related to Lightbridges Intelligent Network Systems business unit, including Lightbridges Prepay IN software, which was acquired by VeriSign in April 2005, pursuant to an Asset Purchase Agreement (APA). Lightbridge, Inc., which later became Lightbridge Holdings, Inc. and then Authorize.Net Holdings, Inc. (collectively Lightbridge), was acquired by the Company on November 1, 2007. On December 12, 2006, Lightbridge received a letter from VeriSign asserting that Lightbridge is obliged to indemnify VeriSign with respect to a lawsuit filed against VeriSign on November 30, 2006 by Freedom Wireless, Inc. (Freedom Wireless), in the Eastern District of Texas (Marshall Division), which alleged that VeriSign is infringing certain patents of Freedom Wireless. VeriSign asserts that Lightbridges obligation to indemnify it arises in connection with certain assets purchased by VeriSign under the APA. Lightbridge objected to VeriSigns claim in a letter dated December 15, 2006 and asked for additional information. Lightbridge received no further correspondence from VeriSign. On March 14, 2008, the Company received a letter from VeriSign advising that it was engaged in settlement discussions with Freedom Wireless. On April 14, 2008, the Company sent a letter to VeriSign denying any indemnification obligations and demanding release of the Escrow Funds. Neither Lightbridge nor the Company was ever a party to the litigation by Freedom Wireless at any time. In May 2008, VeriSign entered into a settlement with Freedom Wireless. On June 9, 2008, the Company sent another letter demanding release of the Escrow Funds. On June 19, 2008, VeriSign responded to the Companys letter of April 14, 2008 and reiterated its position on indemnification. The indemnification obligation under the APA is limited to a maximum of $5 million. The Company filed the suit asking the court to declare that VeriSign is not entitled to indemnification under the APA and to order the escrow agent to release the Escrow Funds to CyberSource. On August 15, 2008, VeriSign filed an answer and counterclaim. Each party has served the other party with discovery demands but responses have been postponed temporarily by mutual agreement of the parties. On May 8, 2009, the Company and VeriSign entered into a settlement agreement pursuant to which each party will receive a certain portion of the Escrow Fund and each party fully releases the other party from any and all claims. Upon receipt of each partys respective share of the Escrow Fund, the parties will file a stipulation with the Court dismissing all claims and counterclaims with prejudice.
The Company is currently party to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
8. STOCK OPTIONS
Stock options to purchase the Companys common stock are granted at prices equal to the fair market value on the grant date. Options generally vest monthly over a four year period beginning from the grant date, and generally expire six to ten years from the grant date. Options granted to non-employee directors generally become vested nine to twelve months from the grant date. Nearly all outstanding stock options are non-qualified stock options.
A summary of the Companys stock option activity during the three months ended March 31, 2009 is as follows:
During the three months ended March 31, 2009 and 2008, the total intrinsic value of stock options exercised was approximately $0.9 million and $2.9 million, respectively. As of March 31, 2009, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $24.2 million, which is expected to be recognized over a weighted average period of approximately 2.87 years. During the three months ended March 31, 2009 and 2008, the total cash received from the exercise of stock options was approximately $0.8 million and $1.7 million, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For stock options granted during the three months ended March 31, 2009 and 2008, the Company determined the fair value at the grant date using the Black-Scholes option valuation model and the following weighted average assumptions which are evaluated and revised, as necessary, to reflect market conditions and the Companys experience:
The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Companys stock over the expected life of the options. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues with an equivalent remaining expected life. The Company has not paid dividends in the past and does not expect to pay any dividends in the near future.
The weighted average fair value of options granted was $5.34 and $4.87 per share for options granted during the three months ended March 31, 2009 and 2008, respectively.
As of March 31, 2009, the Company had 100,000 restricted shares outstanding, none of which have vested.
9. COMMON STOCK REPURCHASE PROGRAM
On November 21, 2008, the Board of Directors authorized management to use up to $15.0 million to repurchase shares of the Companys common stock through March 31, 2009. During the period beginning November 21, 2008 and ending December 31, 2008, the Company repurchased 88,781 shares at an average price of $7.95 per share, including repurchase costs. No shares were repurchased during the three months ended March 31, 2009. All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.
From time to time, the Company enters into certain types of contracts that require the Company to indemnify parties against third-party claims on a contingent basis. These contracts primarily relate to: (i) licenses for software and services; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Companys use of the applicable premises; and (iii) certain agreements with the Companys officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of March 31, 2009.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. NET INCOME PER SHARE
The components of basic and diluted net income per share are as follows (in thousands, except per share data):
The computation of diluted net income per share excluded approximately 4.1 million and 902,000 options to purchase shares of common stock for the three months ended March 31, 2009 and 2008, respectively, because the effect would have been antidilutive.
12. INCOME TAXES
As part of the process of preparing the unaudited condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the current tax liability under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the unaudited condensed consolidated balance sheets.
Income tax expense for the three months ended March 31, 2009 was $0.6 million, or 38% of pre-tax income, compared to $0.2 million, or 29% of pre-tax income for the three months ended March 31, 2008. The effective tax rate for the three months ended March 31, 2009 differs from the U.S. federal statutory rate primarily due to the unfavorable impact of stock-based compensation and state income taxes. The effective tax rate for the first quarter of 2008 differs from the U.S. federal statutory rate of 35% primarily due to foreign operation tax benefits.
As of March 31, 2009, the Companys total gross unrecognized tax benefits did not change compared with the balance as of December 31, 2008. Of the total gross unrecognized tax benefits, $2.0 million, if recognized, would reduce the Companys effective tax rate in the period of recognition. Interest and penalties of $0.5 million are included in the unrecognized tax benefits.
13. FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
The adoption of this statement did not have a material impact on the Companys consolidated results of operations and financial condition. Level 1 financial assets measured at fair value on a recurring basis consist of cash accounts of approximately $39.6 million and money market funds (cash equivalents) of approximately $39.6 million as of March 31, 2009. The Company has no Level 2 or Level 3 financial assets measured at fair value on a recurring basis as of March 31, 2009.
Statement Regarding Forward-Looking Statements
This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking, including statements regarding our expectations, objectives, anticipations, estimations, intentions, plans, hopes, beliefs or strategies regarding the future. Such forward-looking statements include, but are not limited to statements regarding dividend payments, changes in revenue and expense levels, sufficiency of cash resources and liquidity, realization of goodwill, impact of acquisitions, valuation determinations, the effect of competition, growth levels, fraud-prevention in connection with our services and platform, intellectual property protection, legal proceedings, and regulatory impact. Such forward looking statements include, but are not limited to our expectations:
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. These risks and uncertainties include, among others, those discussed in Part II Item 1A. Risk Factors, of this Quarterly Report on Form 10-Q as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
You should read the following in conjunction with the audited consolidated financial statements and the notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on February 27, 2009 (SEC File No. 000-26477).
CyberSource Corporation provides electronic payment and risk management solutions. CyberSource solutions enable electronic payment processing for Web, call center, and point-of-sale environments. We partner with and connect to a large network of payment processors and other payment service providers to offer merchants a single source solution that simplifies electronic payment management. Our payment solutions allow eCommerce merchants to accept a wide range of online payment options, from credit cards and electronic checks, to global payment options and emerging payment types. We also offer industry leading risk management solutions to help online merchants address complexities such as credit card fraud, online tax requirements, and export controls. Our professional services help to design, integrate, and optimize commerce transaction processing systems for merchants.
We primarily derive our revenues from monthly commerce transaction processing fees and global acquiring fees, and support service fees. Transaction and global acquiring revenues are recognized in the period in which the transactions occur and support service fees are recognized as the related services are provided and costs are incurred.
CRITICAL ACCOUNTING POLICIES
Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. A full discussion of the following accounting policies is included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission and we refer you to that discussion. There were no material changes in the application of critical accounting policies during the three months ended March 31, 2009.
RESULTS OF OPERATIONS
The following table sets forth certain items in our condensed consolidated statements of income expressed as a percentage of revenue for the periods indicated:
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Revenues. Revenues were $60.5 million for the three months ended March 31, 2009, as compared to $53.4 million for the three months ended March 31, 2008, an increase of approximately $7.1 million or 13.2%. The increase in revenues was primarily from new customers as well as an increase in total transactions processed. Revenues from new customers that entered into contracts during the twelve months ended March 31, 2009 represented approximately 16% of total revenues for the three months ended March 31, 2009; while revenues from existing customers represented approximately 84% of total revenues for the three months ended March 31, 2009. Revenues from new customers that entered into contracts during the twelve months ended March 31, 2008 represented approximately 14% of total revenues for the three months ended March 31, 2008; while revenues from existing customers represented approximately 86% of total revenues for the three months ended March 31, 2008. We processed approximately 553 million transactions during the three months ended March 31, 2009, as compared to approximately 445 million transactions processed during the three months ended March 31, 2008, an increase of approximately 24%. Global acquiring revenues represented 31.4% of our revenues for the three months ended March 31, 2009, as compared to 31.9% for the three months ended March 31, 2008. Our global acquiring revenue may also include fees generated for gateway services as it is becoming more common to charge the customer a bundled price for global acquiring and gateway services.
Cost of Revenues. Cost of revenues consist primarily of costs incurred in the delivery of eCommerce transaction services, including personnel costs in our operations and customer support functions, processing and interchange fees paid relating to our global acquiring services, other third-party fees, depreciation of capital equipment used in our network infrastructure and costs related to the hosting of our servers at third-party hosting centers in the United States and the United Kingdom. Cost of revenues was $28.0 million or 46.3% of revenues for the three months ended March 31, 2009, as compared to $25.8 million or 48.3% of revenues for the three months ended March 31, 2008. The increase in absolute dollars is primarily due to higher processing fees paid to third parties such as the credit card issuing banks, payment processors and card associations related to our global acquiring services. These costs are variable and increase in absolute dollars as the related revenue increases and decrease as the related revenue decreases. The decrease in cost of revenues as a percentage of revenues is due primarily to efficiencies resulting from the increase in transactions processed as well as the increase in revenues.
Product Development. Product development expenses consist primarily of compensation and related costs of employees engaged in the research, design and development of new services, and to a lesser extent, facility costs and related overhead. Product development expenses were $6.5 million for the three months ended March 31, 2009, as compared to $5.2 million for the three months ended March 31, 2008, an increase of approximately $1.2 million or 23.0%. The increase is primarily due to an increase in headcount and related compensation expense of approximately $0.9 million. As a percentage of revenues, product development expenses increased to 10.7% in the three months ended March 31, 2009, as compared to 9.8% for the three months ended March 31, 2008. The increase is primarily due to the increase in headcount to support existing and new development projects during the three months ended March 31, 2009, offset to a certain extent, by the increase in revenues. We expect product development expenses in the three months ended June 30, 2009 to moderately increase in absolute dollars as compared to the three months ended March 31, 2009 as we continue to increase headcount to support existing and additional development projects. As a percentage of revenues, we expect product development expenses in the three months ended June 30, 2009 to be relatively consistent with the three months ended March 31, 2009 due primarily to expected revenue growth.
Sales and Marketing. Sales and marketing expenses consist primarily of compensation of sales and marketing personnel, commissions paid to outside sales agents, market research and advertising costs, and, to a lesser extent, facility costs and related overhead. Sales and marketing expenses were $17.6 million for the three months ended March 31, 2009, as compared to $16.6 million for the three months ended March 31, 2008, an increase of approximately $0.9 million or 5.6%. The increase is primarily due to an increase in commissions paid to outside sales agents of approximately $0.8 million and an increase in compensation-related expense of approximately $0.5 million, offset by a decrease of approximately $0.4 million in intangible asset amortization expense related to the Authorize.Net trade name, partner contracts and related relationships as well as merchant contracts and related relationships. As a percentage of revenues, sales and marketing expenses decreased to 29.0% for the three months ended March 31, 2009, as compared to the 31.2% for the three months ended March 31, 2008. The decrease is primarily due to the increase in revenues for the three months ended March 31, 2009, offset to a certain extent, by the increase in sales and marketing expenses. We expect that sales and marketing expenses in the three months ended June 30, 2009 to moderately increase in absolute dollars as compared to the three months ended March 31, 2009 as we continue to develop sales and marketing infrastructure to support expected revenue growth. As a percentage of revenues, we expect sales and marketing expenses in the three months ended June 30, 2009 to be relatively consistent as a percentage of revenues as compared to the three months ended March 31, 2009 due primarily to expected revenue growth.
General and Administrative. General and administrative expenses consist primarily of compensation for executive and administrative personnel, fees for outside professional services and, to a lesser extent, facility costs and related overhead. General and administrative expenses were $7.0 million for the three months ended March 31, 2009, as compared to $5.5 million for the three months ended March 31, 2008, an increase of approximately $1.5 million or 26.9%. The increase is primarily due to a $0.9 million increase in legal fees and outside services. In addition, during the three months ended March 31, 2009, we recorded a restructuring accrual of approximately $0.9 million as a result of updating our assumptions associated with our excess office space in Burlington, Massachusetts and American Fork, Utah. As a percentage of revenues, general and administrative expenses were 11.5% for the three months ended March 31, 2009, as compared to the 10.3% for the three months ended March 31, 2008. The increase is primarily due to the increase in legal fees and outside services as well as restructuring charges in the three months ended March 31, 2009, offset to a certain extent, by the increase in revenues. We expect that general and administrative expenses in the three months ended June 30, 2009 will decrease in absolute dollars and as a percentage of revenues due primarily to a decrease in restructuring charges and expected revenue growth.
Other Income, net. Other income, net consists primarily of joint venture income from CyberSource K.K. and other miscellaneous gains and losses. Other loss, net was approximately $18,000 for the three months ended March 31, 2009, as compared to other income, net of $0.1 million for the three months ended March 31, 2008.
Interest Income. Interest income which consists of interest earnings on cash and cash equivalents was $0.1 million for the three months ended March 31, 2009 as compared to $0.4 million for the three months ended March 31, 2008. The decrease is primarily due to lower investment yields. We expect interest income in the three months ended June 30, 2009 to be relatively consistent with the three months ended March 31, 2009.
Income Tax Provision. Income tax expense for the three months ended March 31, 2009 was approximately $0.6 million on pre-tax income of $1.6 million, as compared to $0.2 million on pre-tax income of $0.8 million for the three months ended March 31, 2008. The effective tax rate for the three months ended March 31, 2009 differs from the U.S. federal statutory rate of 35% primarily due to the unfavorable impact of stock-based compensation and state income taxes. The effective tax rate for the first quarter of 2008 differs from the U.S. federal statutory rate of 35% primarily due to foreign operation tax benefits.
Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $79.2 million as of March 31, 2009 compared to $73.3 million as of December 31, 2008, an increase of approximately $5.9 million. The increase is primarily due to cash provided by operating activities of approximately $7.7 million, which is net of bonuses paid under the company-wide bonus plan of approximately $4.5 million, and proceeds from the issuance of the Companys common stock resulting from stock option exercises of approximately $0.9 million, offset by capital expenditures of approximately $2.5 million.
We believe that our cash and cash equivalents, which consist of only money market funds, as of March 31, 2009 will be sufficient to meet our working capital and capital requirements for at least the next twelve months. Our future capital requirements will depend on many factors including the level of investment we make in new businesses, new products or new technologies. We currently have no agreements or understandings with respect to any future investments or acquisitions. To the extent that our existing cash resources and future earnings are insufficient to fund our future activities, we may need to obtain additional equity or debt financing. Additional funds may not be available or, if available, we may not be able to obtain them on favorable terms.
The following is a table summarizing our significant commitments as of March 31, 2009, consisting of future minimum lease payments under all non-cancelable operating leases (in thousands):
We have excluded tax contingencies totaling approximately $2.0 million from the table above as there is a high degree of uncertainty regarding the timing of future cash outflows and, as a result, we are not able to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.
Factors That May Affect Future Results
A description of the risk factors associated with our business is included under Risk Factors in Item 1A of Part II of this report.
We provide our services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, we are exposed to foreign currency risk. The majority of sales are currently made in U.S. dollars or pounds sterling. A strengthening of the dollar or the pound sterling could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates. We also have non-functional currency cash balances that are exposed to foreign currency risk. Currently, we do not have any arrangements to hedge against the effects of currency fluctuations.
All of our cash equivalents are presented at fair value on our consolidated balance sheets. We generally invest our excess cash in money market funds. Due to the nature of our cash equivalents, which are money market funds, we have concluded that there is no material market risk exposure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Our management, including the CEO and the CFO, does not expect that our disclosure controls or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We confirm that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and that our CEO and CFO have concluded that our disclosure controls and procedures are effective at that reasonable assurance level.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ending March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting
PART II. OTHER INFORMATION
For legal proceedings, see Note 7 Legal Matters in the Notes to the Condensed Consolidated Financial Statements appearing in Item 1, Part I to this Quarterly Report, which is incorporated by reference into this Item 1, Part II.
Set forth below are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. There have been no material changes to the Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. In addition, some risk factors below update the relevant date cited although the risk remains materially unchanged. As a matter of practice, however, we choose to fully restate the Risk Factors in our Quarterly Reports on Form 10-Q. The occurrence of any of the developments or risks identified below may make the occurrence of one or more of the other risk factors below more likely to occur.
Risks Related to Our Business
Potential system failures and lack of capacity issues could negatively affect demand for our services.
Our ability to deliver services to our merchants depends on the uninterrupted operation of our commerce transaction processing systems. Our systems and operations are vulnerable to damage or interruption from:
Despite the fact that we have implemented redundant servers in third-party hosting centers located in San Jose, California; Seattle, Washington; Denver, Colorado; Phoenix, Arizona; London, England; and Tokyo, Japan, we may still experience service interruptions for the reasons listed above and a variety of other reasons. If our redundant servers are not available, we may not have sufficient business interruption insurance to compensate us for resulting losses. We have experienced periodic interruptions and performance issues, affecting all or a portion of our systems, which we believe will continue to occur from time to time. Any interruption in our systems that impairs our ability to efficiently and timely provide services could damage our reputation and reduce demand for our services.
In addition, our success also depends on our ability to grow, or scale, our commerce transaction systems to accommodate increases in the volume of traffic on our systems, especially during peak periods of demand. We may not be able to anticipate increases in the use of our systems or successfully expand the capacity of our network infrastructure. Our inability to expand our systems to handle increased traffic could result in system disruptions, slower response times and other difficulties in providing services to our merchant customers, which could materially harm our business.
A breach of our eCommerce security measures could reduce demand for our services.
A requirement of the continued growth of eCommerce is the secure transmission of confidential information over public networks. We rely on public key cryptography, an encryption method that utilizes two keys, a public and a private key, for encoding and decoding data, and digital certificate technology, or identity verification, to provide the security and authentication necessary for secure transmission of confidential information. A party who is able to circumvent security measures could misappropriate proprietary information or interrupt our operations. Any compromise or elimination of security could reduce demand for our services.
We may be required to expend significant capital and other resources to protect against security breaches and to address any problems they may cause. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the Internet and other online services generally, and the Web in particular, especially as a means of conducting commercial transactions. Because our activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage our reputation and expose us to a risk of loss, fines, or litigation and other liabilities. Our security measures may not prevent security breaches, and failure to prevent security breaches may disrupt our operations.
We could incur chargeback or merchant fraud losses that would adversely affect our earnings.
We have potential liability for certain transactions processed through our global acquiring services if the payments associated with such transactions are rejected, refused, or returned for reasons such as consumer fraud or billing disputes. For instance, if a billing dispute between a merchant and payer is not ultimately resolved in favor of the merchant, the disputed transaction may be charged back to the merchants bank and credited to the payers account. If the charged back amount cannot be recovered from the merchants account, or if the merchant refuses or is financially unable to reimburse its bank for the charged back amount, we may bear the loss for the amount of the refund paid to the payers bank. We could also incur fraud losses as a result of merchant fraud. Merchant fraud occurs when a merchant, rather than a customer, intentionally uses a stolen or counterfeit card, card number, or other bank account number to process a false sales transaction, or knowingly fails to deliver merchandise or services in an otherwise valid transaction. We may be responsible for any losses for certain transactions if we are unable to collect from the merchant.
We have established systems and procedures designed to detect and reduce the impact of consumer fraud and merchant fraud, but we cannot assure you that these measures are or will be effective. To date, we have not incurred any significant losses relating to chargebacks resulting from consumer fraud or merchant fraud. During the three months ended March 31, 2009, our global acquiring revenue represented approximately 31.4% of our total revenue. Our global acquiring revenue may also include fees generated for gateway services as it is becoming more common to charge the customer a bundled price for transaction services provided. To the extent our global acquiring revenue grows, our potential liability for such chargebacks or merchant fraud increases.
Our revenue and customer relationships could be impacted if we were to lose bank sponsorship.
The credit card associations require a bank sponsor that ultimately assumes chargeback or merchant fraud losses if we were financially unable to assume such losses. Harris Bank, N.A. is our bank sponsor. Our current agreement with Harris Bank renews automatically in March of each year and requires at least 180 days written notice prior to the expiration of any annual term if either party wishes to exercise its right not to renew the agreement. Accordingly, this agreement was renewed automatically in March 2009 and will remain in effect through March 2010, unless the parties mutually agree to terminate the agreement prior to any such expiration or either party exercises its right to terminate the agreement prior to any such expiration based on a material breach by the other party as set forth in the agreement. If our current bank sponsor were to terminate our agreement, and we are not able to obtain another bank sponsor in a timely manner, we would be unable to provide global acquiring services, either whole or in part, which could impact our future revenue and customer relationships.
We may not be able to adequately protect our proprietary technology and may be infringing upon third-party intellectual property rights.
Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights.
As part of our confidentiality procedures, we enter into non-disclosure agreements with our employees, contractors, vendors and potential customers and alliances. Despite these precautions, third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently. Effective protection of intellectual property rights may be unavailable or limited in foreign countries. We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products and services or design around any patents or other intellectual property rights we hold.
We also cannot assure you that third parties will not claim that the technology employed in providing our current or future products and services infringe upon their rights. We have not conducted any search to determine whether any of our products and services or technologies may be infringing upon patent rights of third parties. As the number of products and services in our market increases and functionalities increasingly overlap, companies such as ours may become increasingly subject to infringement claims. In addition, these claims also might require us to enter into royalty or license agreements. Any infringement claims, with or without merit, could absorb significant management time and lead to costly litigation. If required to do so, we may not be able to obtain royalty or license agreements, or obtain them on terms acceptable to us.
If we are not able to fully utilize relationships with our sales alliances, we may experience lower revenue growth and higher operating costs.
Our future growth will depend in part on the success of our relationships with existing and future sales alliances that market our products and services to their merchant accounts. If these relationships are not successful or do not develop as quickly as we anticipate, our revenue growth may be adversely affected. For example, most of the new customer signups for our Authorize.Net platform come from resellers. To some degree, we compete with these resellers and conflicts may arise between the reseller and our direct sales force. While we believe we have been able to minimize any such conflict, we cannot assure you that conflicts will not increase. Accordingly, we may have to increase our sales and marketing expenses in an attempt to secure additional merchant accounts.
Our fraud detection services and marketing agreement with Visa U.S.A. can be terminated.
In July 2001, we entered into an agreement with Visa U.S.A. to jointly develop and promote the CyberSource Advanced Fraud Screen Service Enhanced by Visa (CAFSSEV) for use in the United States. Under the terms of the agreement, Visa agreed to promote and market the product to its member financial institutions and Internet merchants. The agreement expires in July 2009, but can be terminated by either party with ninety days prior written notice. Thereafter, the agreement renews automatically for additional periods of one year, unless terminated by either party. In September 2005, we entered into an agreement with Visa Canada for Visa Canada to promote CAFSSEV in Canada . The agreement with Visa Canada expires in September 2009, but can be terminated by either party with ninety days prior written notice. Thereafter, the agreement renews automatically for additional periods of one year, unless terminated by either party. As of the date of this filing, we have not received any notices of non-renewal from either Visa, U.S.A. or Visa Canada. Termination of either agreement will not impact our ability to sell our fraud screening services to our customers. Furthermore, based on the amount of royalties we pay to Visa, U.S.A., we do not believe that termination of the agreement will have a material, adverse impact on our financial condition, results of operations, or cash flows. However, we cannot quantify the marketing value of the relationships with Visa, U.S.A. and Visa Canada, and therefore termination of either agreement or both agreements may adversely impact the marketability of our fraud screening technology.
If we lose key management personnel, we may not be able to successfully manage our business and achieve our objectives.
Our success will depend in part upon our ability to retain key management personnel, including William S. McKiernan, our Chief Executive Officer, and other key members of management because of their experience and knowledge regarding the development, opportunities, and challenges of our business. We do not maintain any key-man insurance covering the death or disability of any of our executive officers. While we have an employment contract with Scott Cruickshank, our President and Chief Operating Officer, none of our current key employees are subject to legal obligations that enable us to retain them for a specific period of time. Competition for qualified personnel can be intense. We may not be successful in attracting and retaining key employees in the future. Loss of key personnel could have a material adverse effect on our business and results of operations.
Failure to manage future growth effectively may have a material adverse effect on our financial condition and results of operations.
In the event that we experience rapid growth in our operations, a significant strain may be placed upon management, administrative, operational and financial infrastructure. Our success will depend in part upon the ability of our executive officers to manage growth effectively. Our ability to grow also depends upon our ability to successfully hire, train, supervise, and manage new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our transactional and management functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations, and we may not be able to manage growth effectively or to achieve growth at all. Any failure to manage future growth effectively could have a material adverse effect on our business, financial condition and results of operations.
Charges to earnings resulting from the application of the purchase method of accounting might adversely affect the market value of our common stock.
In accordance with United States generally accepted accounting principles (GAAP), the Authorize.Net merger which closed on November 1, 2007 was accounted for using the purchase method of accounting, which will result in charges to earnings that could have an adverse impact on the market value of our common stock. Under the purchase method of accounting, the total estimated purchase price was allocated to Authorize.Nets net tangible assets, identifiable intangible assets or expense for research and development based on their fair values as of November 1, 2007. The excess of the purchase price over those fair values was recorded as goodwill. We will incur additional amortization expense based on the identifiable amortizable intangible assets acquired and their relative useful lives. Additionally, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets may become impaired, we will be required to incur material charges relating to the impairment. These amortization and potential impairment charges could have a material impact on our results of operations. We currently estimate that we will incur approximately $26.2 million of annual amortization expense relating to the Authorize.Net merger during the year ending December 31, 2009. Changes in earnings per share, including as a result of this incremental expense, could adversely affect the trading price of our common stock.
We may pursue strategic acquisitions and our business could be materially and adversely affected if we fail to adequately integrate acquired businesses.
As part of our future business strategy, we may pursue strategic acquisitions of complementary businesses or technologies that would provide additional product or service offerings, additional industry expertise, a broader client base or an expanded geographic presence. For example, on November 1, 2007, we completed the acquisition of Authorize.Net. If we do not successfully integrate a strategic acquisition, or if the benefits of the transaction do not meet the expectations of financial or industry analysts, the market price of our common stock may decline. Any future acquisition could result in the use of significant amounts of cash, dilutive issuances of equity securities, or the incurrence of debt or amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect our business, operating results and financial condition. In addition, acquisitions involve numerous risks, including:
Our international business is subject to additional foreign risks that could harm our business, results, and financial condition.
Products and services provided to merchants outside the United States accounted for 6.3% and 6.5% of our revenues in the three months ended March 31, 2009 and 2008, respectively. In March 2000, we entered into a joint venture agreement with Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. and established CyberSource K.K. to provide commerce transaction services to the Japanese market. Conducting business outside of the United States is subject to additional risks that may affect our ability to sell our products and services and result in reduced revenues, including:
In addition, some software contains encryption technology that renders it subject to export restrictions and we may become liable to the extent we violate these restrictions. We might not successfully market, sell or distribute our products and services in local markets and we cannot be certain that one or more of these factors will not materially adversely affect our future international operations, and consequently, our business, financial condition and operating results.
Also, sales of our products and services conducted through our subsidiary in the United Kingdom are primarily denominated in Pounds Sterling. We may experience fluctuations in revenues or operating expenses due to fluctuations in the value of the Pounds Sterling relative to the U.S. Dollar. We do not currently enter into transactions with the specific purpose to hedge against currency exchange fluctuations.
Risks Related To Our Industry
The intense competition in our industry could reduce or eliminate the demand for our products and services.
The market for our products and services is intensely competitive and subject to rapid technological change. We expect competition to intensify in the future. We face competition from merchant acquirers, independent sales organizations, and payment processors such as Chase Paymentech Solutions, First Data Corporation, and Royal Bank of Scotland. We also face competition from transaction service providers such as PayPal and Retail Decisions as well as eCommerce providers such as Bertelsmann Financial Services, Digital River, and GSI Commerce Inc. Further, other companies, including financial services and credit companies may enter the market and provide competing services.
Many of our competitors have longer operating histories, substantially greater financial, technical, marketing or other resources, or greater name recognition than we do. Our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Competition could seriously impede our ability to sell additional products and services on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future products and services obsolete, unmarketable or less competitive. Our current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with other solution providers, thereby increasing their ability to address the needs of our existing or prospective customers. Our current and potential competitors may establish or strengthen cooperative relationships with our current or future channel partners, thereby limiting our ability to sell products and services through these channels. We expect that competitive pressures may result in the reduction of our prices or our market share or both, which could materially and adversely affect our business, results of operations or financial condition.
Our market is subject to rapid technological change and to compete we must continually enhance our systems to comply with evolving standards.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our products and services and the underlying network infrastructure. The Internet and the eCommerce industries are characterized by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies, and the emergence of new industry standards and practices that could render our technology and systems obsolete. Our success will depend, in part, on our ability to both internally develop and license leading technologies to enhance our existing products and services and develop new products and services. We must continue to address the increasingly sophisticated and varied needs of our merchants, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of proprietary technology involves significant technical and business risks. We may fail to develop new technologies effectively or to adapt our proprietary technology and systems to merchant requirements or emerging industry standards. If we are unable to adapt to changing market conditions, merchant requirements or emerging industry standards, we may be forced to compete in different ways or expend significant resources in order to remain competitive.
The demand for our products and services could be negatively affected by a reduced growth of eCommerce or delays in the development of the internet infrastructure.
We depend on the growing use and acceptance of the Internet as an effective medium of commerce by merchants and customers in the United States and internationally. The sale of goods and services over the Internet has gained acceptance more slowly outside of the United States. We cannot be certain that acceptance and use of the Internet will continue to develop or that a sufficiently broad base of merchants and consumers will adopt, and continue to use, the Internet as a medium of commerce.
The increase in the significance of the Internet as a commercial marketplace may occur more slowly than anticipated for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development
of enabling technologies and performance improvements. If the number of Internet users, or the use of Internet resources by existing users, continues to grow, it may overwhelm the existing Internet infrastructure. Delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity could also have a detrimental effect. These factors could result in slower response times or adversely affect usage of the Internet, resulting in lower numbers of commerce transactions and lower demand for our products and services.
Global economics, political and other conditions may adversely affect trends in consumer spending, which may adversely impact our revenue and profitability
The global electronic payments industry depends heavily upon the overall level of consumer, business and government spending. The industry also relies in part on the number and size of consumer transactions. A sustained deterioration in the general economic conditions in the United States or globally may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards. A reduction in the amount of consumer spending could result in a decrease of our revenue and profits.
We may become subject to government regulation and legal uncertainties that would adversely affect our operations and financial results.
We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, export control laws and laws or regulations directly applicable to eCommerce. However, due to the increasing usage of the Internet, it is possible that a number of laws and regulations may be applicable or may be adopted in the future with respect to conducting business over the Internet covering issues such as:
For example, we believe that our fraud screen service may require us to comply with the Fair Credit Reporting Act (the Act). As a precaution, we have implemented processes that we believe will enable us to comply with the Act if we were deemed a consumer reporting agency. Complying with the Act requires us to provide information about personal data stored by us. Failure to comply with the Act could result in claims being made against us by individual consumers and the Federal Trade Commission.
Furthermore, the growth and development of the market for eCommerce may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business.
The applicability of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, export or import matters and personal privacy to the Internet is uncertain. The vast majority of laws were adopted prior to the broad commercial use of the Internet and related technologies. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes in the United States regarding taxation and encryption and in the European Union regarding contract formation and privacy, could create uncertainty in the Internet marketplace and impose additional costs and other burdens. These uncertainties, costs and burdens could reduce demand for our products and services or increase the cost of doing business due to increased litigation costs or increased service delivery costs.
Risks Related to Ownership of Our Common Stock
Potential fluctuations of our quarterly results could cause our stock price to fluctuate or decline.
We expect that our quarterly operating results will fluctuate significantly in the future based upon a number of factors, many of which are not within our control. We base our operating expenses on anticipated market growth and our operating expenses are relatively fixed in the short term. As a result, if our revenues are lower than we expect, our quarterly operating results may not meet the expectations of public market analysts or investors, which could cause the market price of our common stock to decline. Our quarterly results may fluctuate in the future as a result of many factors, including the following:
Other factors that may affect our quarterly results are set forth elsewhere in this section. As a result of these factors, our revenues are not predictable with any significant degree of certainty. Due to the uncertainty surrounding our revenues and expenses, we believe that quarter-to-quarter comparisons of our historical operating results may not be indicative of our future performance.
The trading price of our common stock has fluctuated and may continue to fluctuate due to factors outside our control.
The market price for our common stock has been volatile and likely will continue to be volatile in response to various factors, some of which are outside our control, including the following:
In addition, the stock market in general, and market for technology companies in particular, have experienced substantial price and volume fluctuations potentially unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors, as well as general economic, political and financial market conditions may materially and adversely affect the market price of our common stock.
The anti-takeover provisions in our certificate of incorporation, including the issuance of authorized preferred stock, could adversely affect the rights of the holders of our common stock.
Anti-takeover provisions of Delaware law and our Certificate of Incorporation may make a change in control more difficult to finalize, even if a change in control would be beneficial to the stockholders. These provisions may allow our Board of Directors to prevent changes in our management and controlling interests. Under Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future. One anti-takeover provision that we have is the ability of our Board of Directors to determine the terms of preferred stock and issue preferred stock without the approval of the holders of the common stock. Our Certificate of Incorporation allows the issuance of up to 5,610,969 shares of preferred stock. As of March 31, 2009, there are no shares of preferred stock outstanding. However, because the rights and preferences of any series of preferred stock may be set by our Board of Directors in its sole discretion without approval of the holders of the common stock, the rights and preferences of this preferred stock may be superior to those of the common stock. Accordingly, the rights of the holders of common stock may be adversely affected.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.