Item 1. Business
The Merger
On September 7, 2016, we entered into a definitive agreement to be acquired by Google Inc. (“Google”) for $17.40 per share in cash for each share of our common stock (the “Merger”), for a total value of approximately $625 million. Completion of the Merger is subject to the satisfaction of customary closing conditions, including approval of the Merger by our stockholders, the absence of certain legal impediments, the absence of a material adverse effect on our business and the approval of applicable regulatory authorities. The companies expect the transaction to close by the end of calendar 2016. For more information about the Merger, please see the preliminary proxy statement on Schedule 14A we filed with the Securities Exchange Commission on September 28, 2016 and any subsequently filed definitive proxy statement.
Overview
Unprecedented growth in mobile technologies, big data, cloud services and the connected devices that comprise the Internet of Things (“IoT”) has changed consumer behavior, disrupted or transformed the dynamics of business, and eroded the divide between the physical and digital worlds. To fully embrace the digital world, businesses must provide customer experiences on a variety of devices and channels, respond quickly to fast-changing customer expectations and market conditions, drive revenue through new business models, and create or participate in digital ecosystems. A digital business creates value by unlocking its data and services to better serve customers in a real-time, anywhere-anytime fashion and uses data to continually improve the customer experience and drive additional revenue.
We believe that APIs are a critical enabling technology for the shifts in mobile, cloud computing, big data and the IoT and that APIs are a foundational technology on which digital business operates. APIs are programmed instructions that allow any app (for example, a customer-care app on a mobile phone) to easily consume data in various combinations from various corporate and partner systems. We believe that a new and expansive market opportunity exists to help enterprises adopt digital strategies and navigate the digitally driven economy. We believe that in order to optimize this process for speed and to also extract critical data insights from API-based interactions required for the digital economy, nearly all businesses will require a new layer within their core application software stack to achieve this.
We provide an innovative software platform that serves as a connection layer between our customers’ core IT systems and data, and the applications with which their customers, partners, and employees engage with their business. Our web scale and flexible platform processes billions of API calls per week and allows businesses to secure, manage, scale and analyze API traffic, and to design and deploy both APIs and a systematic API strategy. Our cloud service provides up to 99.99% availability and uptime, and a multi-region API delivery network enabling low latency worldwide. We have designed a comprehensive security solution to enable security at all points of engagement, from users, apps, developers, the API team, the APIs themselves to the back-end systems. We enable organizations to control access to APIs and services, and to protect customers and the business from threats, backend system overload, service issues and sensitive data exposure. Our platform provides end-to-end visibility across the digital value chain with unified operational and business metrics and application monitoring. Furthermore, our platform enables a business to provide a developer community experience that accelerates API adoption, simplifies learning, enables monetization and increases the business value of APIs.
Our customers include many leading businesses: over 30 percent of the Fortune 100, five of the top ten Global 2000 retail companies and five of the top 10 global telecommunications companies as of
July 31, 2016
. Our solution has been sold to customers in over 30 countries around the world. Our current focus is on acquiring new customers and increasing revenue from our existing customers as they realize the value of our platform and expand the use of our software through additional use cases and broader deployment within their organizations. We are also focused on increasing adoption of our platform through Apigee Edge Start.
We generate our revenue primarily from licenses of and subscriptions for our Apigee Edge products and from professional services. We also generate revenue from licenses of and subscriptions to our Apigee Insights product, although such revenue has been immaterial to date. We also offer free trial versions of Apigee Edge to the developer community. We provide our customers the flexibility to deploy our software as a cloud service or on-premises. For those customers that deploy our products as a cloud service, we license our software on a subscription basis. For those customers that deploy our products on premises, we offer two pricing options: a time-based subscription or a perpetual license. We recognize revenue from subscription fees ratably over the service period, and have been increasing the proportion of our revenue mix that we derive
from subscriptions. We therefore believe that gross billings, which is a key performance metric that takes into consideration deferred revenue resulting from subscriptions, provide valuable insight into the performance of our business. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Certain Key Non-GAAP Financial Metrics and Key Performance Metrics for information on the uses and limitations of gross billings, and a reconciliation of this key performance metric to the most directly comparable financial measures calculated and presented in accordance with GAAP. We expect professional services and other revenue to account for a decreasing percentage of our total revenue over the long term as we continue to increase our subscriptions and as our customers increase their use of professional services provided by our channel partners and other third parties. However, we expect to continue to provide professional services as an important part of our solution to our customers because digital infrastructure transformation frequently involves core business strategy.
From fiscal 2004 to fiscal 2007, our activities were focused on research and development that resulted in the first commercial release of our software in fiscal 2007 – our Apigee Edge on-premises platform. In fiscal 2009, we extended Apigee Edge solution to a cloud offering to enable deployment flexibility for our customers. In fiscal 2012, we further extended our platform with the release of our first predictive analytics solution, Apigee Insights. In December 2013, we acquired InsightsOne, to further advance predictive analytics as part of our platform strategy and to bolster our developer adoption strategy. In fiscal 2013, we expanded our network of channel partners by entering into a master alliance agreement with Accenture, under which either we co-sell or they resell our solutions as part of larger installations. In fiscal 2014, we announced an OEM and reseller partnership with SAP under which SAP will deliver a comprehensive API management application build on our Apigee Edge product on SAP’s Hana Cloud to SAP’s cloud customers, and sell our Apigee Edge product on a standalone basis to its on-premises customers. In fiscal 2016 and 2015, we continued to build out our global partner ecosystem and extend the capabilities in Apigee Edge. We also added a new product, Apigee Sense, which helps customers detect malicious “bots” at the API layer.
We sell our products through direct field sales, direct inside sales and indirect channel sales. We utilize a wide range of online and offline marketing activities to drive brand awareness, thought leadership, developer trials and lead volume. Our software sales pricing is based on the customer’s usage. Our on-premises term and perpetual license sales are based on the number of computer server cores, while our cloud-based services sales are based on API traffic. Many of our customers initially use our product as a free trial by visiting our website, creating an account and testing the free cloud version of our platform. In addition, we offer open source solutions that introduce developers to the key technical concepts and technologies of APIs and mobile app development, and that allow their APIs and applications to be migrated or deployed to our paid products. After signing up, developers are able to experience the power of our platform and learn how to interact with our solutions, enabling them to understand the benefits of our paid products. We use the trial program as a source of lead volume for our direct sales team.
We have experienced rapid growth in recent periods. Our total revenue was
$92.0 million
,
$68.6 million
, and
$52.7 million
in fiscal
2016
,
2015
, and
2014
, respectively, representing growth rates of
34%
from fiscal 2015 to fiscal 2016 and 30% from fiscal 2014 to fiscal 2015. Our gross billings were
$105.1 million
,
$81.2 million
, and $63.8 million
in fiscal
2016
,
2015
, and
2014
, respectively, representing growth rates of
29%
from fiscal 2015 to fiscal 2016 and 27% from fiscal 2014 to fiscal 2015. Please see our reconciliation between revenue and gross billings in
Certain Key Non-GAAP Financial Metrics and Key Performance Metrics
within
Management's Discussion and Analysis.
Our revenue derived from sales to customers located outside the United States was approximately
36%
,
38%
, and
33%
in fiscal
2016
, 2015, and 2014, respectively. We expect that sales to customers located outside the United States will continue to comprise a significant portion of our total revenue for the foreseeable future.
We have made substantial investments in developing and improving our platform and solutions, in expanding our sales and marketing capabilities and geographic coverage, and in providing general and administrative resources to support our growth. As a result, we have incurred net losses of
$41.5 million
,
$50.4 million
, and
$60.8 million
in fiscal
2016
,
2015
, and
2014
, respectively. We had an accumulated deficit of
$237.7 million
and
$196.2 million
as of
July 31, 2016
and
July 31, 2015
, respectively, and we expect to continue to incur net losses for the foreseeable future. We expect that continued investments will drive further growth in our total revenue and gross billings.
Our Solution
We have pioneered a software platform that enables API-based digital strategies and business insights for enterprises. Our solution is a secure run-time platform for optimized execution and management of APIs and predictive analytics that accelerates the pace at which businesses innovate, share their data and services for developers and partners, and continuously adapt to ever-changing customer and market needs. Our API platform is designed for the digital economy and the data-rich and mobile-driven APIs and applications that power it. It is designed to service the needs of the stakeholders across the new digital
value chain, from the backend systems of record through to the developers of apps to customers who have a digital experience delivered by a mobile app or a connected device.
Key elements of this solution include:
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Purpose-built for People and Technology Across the Digital Value Chain
. Our management tools, business and operational analytics, policy-based approach and advanced programmability provide a simple yet powerful platform that serves the entire digital value chain between the end user and the business’ backend systems. This digital value chain includes the applications, the developers who build them and the APIs that they use, all of which need to work together seamlessly and each of which has requirements that can only be addressed by an integrated platform. Pre-built and configurable policies provide a unified and intuitive platform approach to APIs, enabling organizations to control traffic on their APIs, enhance performance, enforce security, simplify customer self-service and reduce time-to-value—all without coding or changing the backend systems of record. Advanced programmability allows developers to handle advanced use cases, customize existing APIs for online and mobile platforms and add new API services—all using languages and tools, such as Java, JavaScript, Node.js and Python, which are familiar to developers.
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Enterprise-grade Software Enables Web Scale, Reliability and Security
. Our platform is web scale and flexible and is offered as a cloud service or as an on-premises deployment. Our cloud service provides up to 99.99% availability and uptime, and a multi-region API delivery network enabling low latency worldwide. We have designed a comprehensive security solution to enable security at all points of engagement. Our solutions provide mechanisms to secure users, apps, developers, the API team, the APIs themselves, as well as the back-end systems. We enable organizations to control access to APIs and services to protect customers and the business from threats, backend system overload, service issue and sensitive data exposure. Our platform supports billions of API calls per week for the world’s largest and mission-critical API programs, including more than 30% of the Fortune 100, five of the top ten Global 2000 retail companies and five of the top 10 global telecommunications companies as of
July 31, 2016
.
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Built-in Developer Services to Foster Adoption and Enhance the Business Value of APIs
. Our platform enables a business to provide a developer community experience that accelerates API adoption, simplifies learning, enables monetization and increases the business value of APIs. Using our platform, businesses can rapidly onboard developers and facilitate their secure interaction with their business data and systems. Our customizable developer portal helps businesses foster innovation among internal and external developers and partners by making it easy for developers to interact with the enterprise and with each other.
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Analytics for End-to-end Business Visibility
. Our platform provides end-to-end visibility across the digital value chain with unified operational and business metrics and application monitoring. Operational metrics enable monitoring of the health and performance of APIs and digital ecosystems. Business metrics enable businesses to track product, service, customer usage and trends, respond quickly to customer and market changes and make data-driven decisions. Application monitoring helps organizations discover application errors and performance glitches, optimize application performance, identify network bottlenecks and understand usage patterns.
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Predictive Analytics to Derive Actionable Insights at the Point of Engagement
. With APIs positioned at the center of the application data stream, our platform enables businesses to gain actionable insights from the flow of data. Every connected experience that a business delivers to customers, partners, or employees generates an interaction with that business, and interactions produce data. Our platform collects data in a Hadoop data store and mines API traffic for critical business events and adds contextual data from the customer journey, which is the sequence of digital interactions by customers with the business over time. Businesses can derive insights from these events, their context and their sequence, and use them to create models to predict likely customer behaviors, and generate actions that result in a change of behavior in a system or in delivering the right experience, at the right time, on the right device.
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Support for All New Forms of Interaction and Connectivity, such as the Internet of Things
. Our platform allows businesses to manage APIs and data at the scale needed to support new and emerging forms of interaction and connectivity. Our platform powers the APIs, and captures and derives insights from the data generated by the applications and experiences, through which customers, partners, and employees engage with a business. We believe that our platform is positioned to power complex, distributed systems such as the IoT, including wearable technology, intelligent cars, smart energy grids and other forms of emerging connected interaction.
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Our Platform
Architecture
Our guiding architectural principles are simplicity, scalability and data-centricity. These principles guide our product design and technology strategies.
We define simplicity in two dimensions: first as the initial experience of a first time user of our platform, and second as the ability of our product to serve the entire life cycle of usage by both individuals and teams across multiple projects. We define scalability as the ability to handle the highest levels of traffic throughput with the lowest latencies, with a system that is reliable and available, in the cloud or in a private datacenter. We define data-centricity as the essential property that drives us to enable the customer to mine every transaction and interaction for data; to provide data management capabilities that efficiently store all of the data that we collect or generate; and to ensure that these data can be used throughout the system, whether to present meaningful dashboard reports or to automatically adapt the platform to optimize business outcomes.
Our architecture is designed as a platform technology—it is not just about managing APIs, but a technology stack that is itself built out of APIs. This makes it possible for us to build new solutions for new markets and it enables our customers and partners to leverage the full set of capabilities that we deliver for new purpose-built applications and systems.
Products
Our platform is designed to empower business leaders, IT technologists and developers to build and operate digital businesses. The platform is comprised of the following products:
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Apigee Edge
is a self-service API platform that enables businesses to manage the digital value chain from exposure of their services and data through APIs to the use of those APIs by developers who are building consumer-facing and enterprise applications, and to measure the success of the business’s digital initiatives with end-to-end analytics.
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Apigee Edge
PRO
is API management for small and medium-sized businesses and divisions in large enterprises. It is a cloud-delivered service that enables up to 25 million API calls/quarter for a monthly subscription fee. It is designed to enable businesses to deploy in days on the same technology as the Apigee Edge product and upgrade to the Apigee Edge product as the business grows. Apigee Edge Start is an entry level package targeting startups or single project teams in enterprise to get started with Apigee at a much lower price point. Once they start using Apigee Edge Start, they can upgrade to Apigee Edge Pro or Apigee Edge Enterprise as their needs grow over time.
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Apigee Link
is our IoT platform for connecting devices to the Internet, which is currently under development and in beta testing with certain customers. Apigee Link is designed to provide built-in REST APIs and end-to-end connectivity for devices to enable device makers to offer new digital experiences for their customers, create new revenue streams with their partners, and grow their business. Apigee Link is designed to take the IoT beyond connecting gadgets, and to enable any device maker to become a digital platform business that can operate at scale in the physical world of home automation, smart transportation, wearable computing, and in other ecosystems of devices.
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Apigee Sense
is a bot prevention product that was launched in late 2015. Apigee Sense leverages sophisticated machine learning algorithms to detect bad bots at the API layer. Apigee Sense processes the high volume of API traffic going through Apigee Edge in the Apigee Cloud, does pattern recognition using machine learning algorithms to identify bad bots, creates blacklists and either blocks or marks bad bots.
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Apigee Insights
is the self-service predictive analytics solution that enables the enterprise to find time-based patterns in big data—both structured and unstructured—and gain insights to help an enterprise provide personalized experiences, maximize customer satisfaction and retention and grow revenue and profits.
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Apigee Edge
Apigee Edge is the foundation of our platform strategy. It provides a solution that addresses the entire digital value chain and minimizes risk and time-to-value by eliminating the need to integrate disparate point solutions. Apigee Edge includes three components: API Services, Developer Services and Analytics Services.
API Services unites Internet and enterprise technologies with API management, BaaS, security and programming extensibility. API Services enable the transformation of services into APIs that extend an enterprise’s capabilities to the digital world of applications and devices, delivering new agility while maintaining the security and reliability that enterprises require. Key capabilities of API Services include:
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Self-service and extensibility
enables developers to directly manage API policy configuration and changes with pre-built policies for traffic management, security, mediation and extension.
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Protocol transformation
enables the transformation of enterprise data and services into easily usable, scalable and secure APIs.
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BaaS
provides developers with a cloud datastore and API-based capabilities for user management, push notifications, social networking and geolocation services.
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Policy-based security architecture
provides a configurable model that enables enterprise-grade security to protect the business from threats, backend overload and service issues.
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API programmability
enables the extension of API Services capabilities to increase flexibility and meet business requirements, with support for Java, JavaScript, Node.js and Python.
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Developer Services enables an enhanced developer and community experience that accelerates API adoption, simplifies learning and increases the business value of APIs. Key Developer Services capabilities include:
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Developer portal
is deployed by an enterprise to provide a community for developers with the resources necessary to learn about the enterprise’s APIs, become a registered developer and collaborate with peers and with the enterprise.
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Fast on-boarding for developers
with self-service registration and key generation to register their applications and engage with both the API provider and with a community of peer developers.
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Interactive API documentation and modeling
simplifies designing and documenting new APIs as well as learning, testing and evaluation of existing APIs.
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API monetization
enables API revenue models based on fees, freemium and revenue sharing and can be customized to meet complex requirements.
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Analytics Services enables end-to-end visibility across the digital value chain with the unified operational, developer, application performance and business metrics necessary to monitor, measure and manage success. Key Analytics Services capabilities include:
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Business metrics
provide a business context for monitoring and measuring API program goals and helping to make smart, informed business decisions.
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Operational analytics
monitors the health and performance of production APIs, enabling enterprises to plan for traffic spikes, identify slow and error-prone APIs, find root causes and understand traffic anomalies.
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Application performance monitoring
measures mobile app usage and performance of applications, on different platforms, carriers and devices.
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Developer program metrics
identifies the developer programs with the most popular applications, best developer engagement and highest API traffic.
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The API Health feature of the Apigee Edge product is designed to help organizations detect and prevent the potential consequences of bad API performance such as poor application experience, user frustration, and lost revenue.
Apigee Edge Microgateway adds a hybrid cloud deployment option to Apigee Edge that can reduce latency and improve performance of API programs by leveraging the availability of the Apigee public cloud together with the performance of local, on-premises API management.
Apigee Link
Apigee Link is our IoT platform for connecting devices to the Internet. We are developing Apigee Link to enable companies to reliably and securely connect devices to the Internet with minimal latency, enable developers, partners and customers to orchestrate digital experiences that involve multiple devices, and collects, analyzes, and act on data from sensors and actuators. Apigee Link is designed to enable a device maker to become a digital business by helping them create an ecosystem around their devices, all powered by APIs. Key capabilities that are planned for this solution include:
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The ability to access any device using the built-in REST APIs;
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The ability to stream near-real-time data among physical devices, the cloud and mobile apps using open standards;
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Two-way communication
to send data from the cloud to the device or from the device to the cloud, including requests through traditional home routers in either direction;
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Protocol mediation
to enable communication with any device by mediating between Web, wired, and wireless protocols, including, ZigBee, WiFi, BLE, MQTT;
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Sensor and actuator data
to monitor device behavior by streaming and ingesting data in the cloud for storage and analysis; and
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Identity and security
to enable secure device interactions by authenticating and authorizing users, apps and devices
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Apigee Sense
Apigee Sense, a bot prevention product was launched in late 2015. Apigee Sense leverages sophisticated machine learning algorithms to detect bad bots at the API layer. Apigee Sense processes the high volume of API traffic going through Apigee Edge in the Apigee Cloud, does pattern recognition using machine learning algorithms to identify bad bots, creates blacklists
and either blocks or marks bad bots. Customers can then use the marking of bots to do further actions like honeypotting or throttling to mitigate the impact of bad bots on their application systems.
Apigee Insights
Apigee Insights delivers predictive analytics enabling businesses to gain actionable insights. To address the need to perform sophisticated predictive analytics on business events, such as those captured by the data streams running through our APIs, we have built a unique time-sequenced graph database that stores and analyzes the events within graphs, which can be used to represent the relationships of events within complex sequences. This allows businesses to model customers’ journeys as they interact with various digital touch-points such as mobile apps. By modeling the propensity of a customer to step through these sequences, a company can make predictions that determine the next most likely or next best action, or to make recommendations and tailor the experience to drive the user to choose the next action that serves business objectives. Graph and Sequence Processing technology, or GRASP, is the core proprietary technology within Insights.
Our Technology
Our technology efforts are centered on five key areas of focus across our solutions: scalability, multi-tenancy, data-centricity, simplicity and reliability. Each of these areas represents a significant challenge to implement effectively, and we believe that the combination of the five differentiates our platform.
Scale Is Hard
Our API platform is positioned at the center of the enterprise architecture and enables all API traffic between applications and backend systems to pass through our systems. This means that our products must be among the most scalable, high performance and reliable systems in the enterprise. Enterprise architectures are by nature distributed geographically and often have elements that run in the cloud as well as in the customer’s data center. Therefore, our platform technology is built as a distributed architecture and can be deployed both in the cloud and on premises. Our cloud service is highly scalable and can process more than one billion API calls a day.
In order to build a system that can perform at scale, we use a variety of best practices and technologies. These include:
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High-performance pipelined proxy architectures that can effectively handle very high levels of API traffic, efficiently processing the traffic whether to analyze or transform it with minimal computational overhead;
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Automated elastic computing to devote additional computational resources on-demand, with our software automatically able to take advantage of new resources and allocate them to tasks efficiently;
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Micro-services architecture that allows us to develop constituent services powering specific features and then scale these features independently as necessary based on usage patterns; and
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Distributed database technologies and expertise that allows us to manage the storage requirements for our architecture as demand grows.
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Multi-tenancy Is Hard
Multi-tenancy is the technology that cloud-based services use to share IT resources cost-efficiently and securely across multiple users and projects. The multi-tenant design of a cloud service can have a dramatic impact on the application delivery and productivity of an IT organization. Multi-tenancy at scale is a core requirement and key technological advantage for us. Customers of our cloud service business must experience the fast and simple self-service process that they have come to expect from Software-as-a-Service products.
We have developed unique mechanisms for ensuring that each user of our cloud service is isolated from other users in ways designed to ensure that each user gets guaranteed service levels. At the same time, we are able to safely share certain pooled computation and data resources between users in order to create a high degree of operational efficiency. We provide the same multi-tenancy experience to our non-cloud customers who install our software as an on-premises solution.
Data Is Hard
All of our solutions rely on the ability to store, query and analyze data, often in real time, and at significant levels of scale, leveraging a unique combination of open source data storage technologies, including Cassandra, Hadoop and Postgres, and a proprietary set of data management and analytics capabilities. We have augmented these capabilities with predictive analytics based on complex graph-based analysis of these data streams. These technologies allow us to:
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Store large amounts of API data and API traffic metadata in real-time regardless of traffic levels;
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Construct queries that can execute in real time with traffic flows in order to retrieve information that supplements API data and to make real-time decisions about the handling of API traffic;
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Implement “counters,” which are the running tallies of traffic patterns and key metrics related to users, devices and business events;
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Generate alerts based on data conditions in order to notify IT personnel of critical events; and
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Serve pre-defined and customer reports to provide answers to questions such as how API traffic is trending over time, who are the top developers, when API response time varies, from which geography is API traffic coming, what APIs are failing, and what devices are making the most API requests.
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Apigee Insights leverages our proprietary GRASP to power big data predictive analytics that increases the ability to find time-based patterns in structured and unstructured data. Featuring a distributed processing foundation based on Hadoop and an in-memory real-time processor, Apigee Insights combines the power of big data and data science to deliver significantly greater precision than is possible with traditional technologies and statistical tools.
Simplicity Is Hard
We leverage APIs in our own platform architecture to deliver simplicity and adaptability. Using a modern “microservices architecture” approach, the capabilities of our solutions are exposed as APIs. This allows us to develop our solutions as a set of independent services, which are assembled to create a comprehensive user experience. This also allows developers or organizations to create and customize the manner in which they interact with our solutions, bringing simplicity and flexibility to enterprise infrastructure. We provide an intuitive graphical user interface, and easy to use “command line” options for developers. We make our APIs intuitive and easy to use and enable developers to build on our platform with technologies such as JavaScript and Node.js, simplifying the programmability of our platform. Our platform is designed to be operated in a “self-service” manner by our customers, and our configurable policies allow customers to transform services into highly consumable APIs, control API traffic, enhance performance and enforce security, all without coding or changing the backend systems of record.
Reliability Is Hard
The integrity and security of our cloud products is critical to our business, and as such we leverage industry-standard security and monitoring tools to ensure performance across our cloud service. Our technology enables enterprises to provide secure access to their data and services with a well-defined API that is consistent across all of their databases and services, regardless of implementation. Our cloud customers are highly dependent on our cloud service, and as such, it is designed to be available 24 hours a day, 365 days a year. We provide a service level commitment for our cloud service, which can be up to 99.99%, excluding designated periods of maintenance.
Our Customers
Our customers include leading enterprises across a broad range of industry segments, including telecommunications, media and entertainment, financial services, retail, travel and hospitality, and healthcare and insurance. Our paying customer base has grown 64% from July 31, 2015 to July 31, 2016. We define the number of paying customers at the end of any particular month as the number of customers for which we have recognized or deferred revenue during that month. As of July 31, 2015 and July 31, 2016, we had 205 and 337 paying customers, respectively. Our customers are comprised of organizations that have purchased our cloud or on-premises software solutions and professional services.
On an annual basis, our revenue per customer ranges from less than $50,000 to over $1.0 million. No customer accounted for more than 10% of our total revenue in fiscal 2016. One customer, AT&T, represented 15% of our total revenue in fiscal 2014. No other customer accounted for more than 10% of our total revenue in fiscal 2016, fiscal 2015 or fiscal 2014.
Below are some of our representative customers by revenue during the prior eight fiscal quarters ended July 31, 2016, organized by industry segment:
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Telecommunications
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Media & Entertainment
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Financial Services
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T-Mobile USA, Inc.
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BBC Worldwide Ltd.
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Thomson Reuters
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AT&T Inc.
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Gamesys, Ltd.
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First Data Corporation
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Vodafone
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Fox Broadcasting Company
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Vantiv, Inc.
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Telstra Corp.
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ITV Plc.
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Morningstar, Inc.
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Swisscom AG
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Live Nation
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Retail
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Healthcare/Insurance
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Target Corporation
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Humana Inc.
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Magazine Luiza
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McKesson
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Walgreens Company
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Health Care Service Corp.
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Staples, Inc.
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Kaiser Permanente
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Burberry Group Plc.
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We also offer a free, limited trial version of our software to developers with much of the functionality in the enterprise edition of Apigee Edge. This enables us to build awareness of our platform and our technologies within the developer community and we believe that it results in our products being used in projects at early stages of development, giving us an advantage as projects grow and require commercial support and services.
Sales and Marketing
Our sales and marketing organizations optimize our customer acquisition process by generating brand and product awareness, cultivating customer relationships, lead generation, building pipeline, onboarding new channel partners and implementing customer expansion programs.
Sales
We sell our software through direct field sales, direct inside sales and indirect channel sales. We have local sales teams in North America, Europe and Asia Pacific. Our software sales pricing is based on the customer’s usage. Our on-premises license sales are based on the number of computer server cores, while our cloud-service sales are based on API traffic. We generate prospects and leads through a wide range of marketing programs and events and also run a robust outbound teleprospecting program. Leads are qualified by inside account development representatives based on a set of criteria agreed upon by sales and marketing leadership. Our direct sales team seeks to build relationships high up in the enterprise where business strategy decisions are being made. In addition to acquiring new customers, our sales teams are responsible for increased adoption of our software by existing customers.
We have formed strategic partnerships with Accenture and SAP and work closely with them globally to acquire new customers. We also have established relationships with other channel partners to provide us with additional sales leverage worldwide by sourcing new prospects, providing professional services and technical support to existing customers and upselling for additional use cases. Our channel partners include system integrators that combine our products with their own technology expertise and solutions and digital agencies that help customers implement digital initiatives. Technology partners and OEMs integrate our products to extend functionality and use our products in their own solutions.
Backlog
As is typical in the software industry, we expect a significant portion of our product orders to be received in the last month of each fiscal quarter. We typically provision our product orders shortly after the receipt of an order. While we may have a backlog consisting of product orders that have not shipped and maintenance, professional and training services that have not been billed and for which the services have not yet been performed at the end of a given fiscal year, historically, we have not had material backlog, and we do not anticipate having material backlog in the future.
Marketing
Our marketing and demand generation efforts consist of a mix of metrics-driven programs to educate the market and generate leads for our field sales team. Through our marketing programs and events, and through our strategic relationships, we generate customer leads, accelerate sales opportunities and increase brand awareness.
Our thought leadership content and online education and certification programs reach business leaders, IT technologists and developers, helping define the language and the requirements of the market. Equipping all of these important constituents with the know-how and tools to be effective in digital business facilitates our potential future sales. We offer a free trial cloud service as well as free developer tools, and open source solutions to help drive adoption of our solutions. Our marketing programs include free online and local training to engage both existing and prospective customers. We participate in conferences, trade shows and industry events and also annually host a series of API industry user conferences held in large cities across the U.S. and other countries, called Adapt or Die, to build and support the API community to enable companies to become digital businesses.
Customer Success
We have built a company culture centered around our customers’ success and satisfaction. We have developed several programs designed to provide customers with service options to enhance their experience with, and expand their use of, our products.
Professional Services
We provide consulting, training, configuration and implementation services to customers through our professional services organization. These services are typically utilized by large enterprises looking to deploy our solutions across their large, disparate and complex IT infrastructure. We believe that these professional services are an important part of our solution to our customers because digital infrastructure transformation frequently involves core business strategy and impacts the entire organization. Personnel within our professional services organization are trained on our products and are encouraged to follow our methodologies. We generally provide these services at the time of initial installation to help the customer with configuration and implementation. Given our software’s ease-of-use, our professional services engagements are typically short in duration.
Maintenance and Customer Support
Our customers typically purchase annual subscriptions to our platform that include software maintenance and support as part of their initial purchase of our software platform. Software maintenance and support is not included as part of a perpetual license and may be purchased separately. The maintenance agreements provide customers the right to receive unspecified software updates, maintenance releases and patches and access to our technical support services during the term of the agreement.
Customers receiving maintenance and support receive guaranteed response times, direct telephonic support and access to online support portals. All support is provided 24x7x365 for critical issues. Our customer support organization has global capabilities, delivering support with deep expertise in both its software as well as complex IT environments. Our support team also works closely with our updates team to create the best possible experience for customers as they move from one version of our products to the next version.
Training
We provide several options for customers to increase their level of knowledge about our products through our training organization, which offers classroom training, virtual classroom training and on-demand training. Paid classroom training offers customers the opportunity to visit one of our training facilities for one or more days of hands-on, instructor-led courses. Paid virtual classroom training is also delivered by an instructor, but students attend the training on-line rather than being present at
a training facility. We also continue to develop our free and on-demand online education and enablement courses through the Apigee Academy.
Research and Development
We invest substantial resources in research and development to enhance our platform, develop new solutions, conduct software and quality assurance testing and improve our core technology. Our technical staff monitors and tests our software on a regular basis, and we maintain a regular release process to refine, update, and enhance our existing products. We typically provide our customers with updates to our solutions at least monthly in the cloud and quarterly on premises. Research and development expense totaled
$37.8 million
,
$30.4 million
and
$22.3 million
for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
Competition
The market for enterprise API-based platforms is fragmented, rapidly evolving and highly competitive. We compete against in-house or custom development efforts, a variety of large software vendors and smaller specialized companies and open source initiatives, all of which vary in the breadth and scope of the products and services offered. Beyond in-house or custom development efforts, our competitors include International Business Machines Corporation and Oracle Corporation, both of which can bundle competing products and services with other software offerings, or offer them at a low price as part of a larger sale. In addition, Amazon Web Services offers gateway functionality in a product called AWS Gateway, which functionality is a subset of that offered by the API Services component of Apigee Edge. Our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on API management and API-based platforms and could directly compete with us. Smaller companies could also launch competing or new products and services.
We believe that the principal competitive factors in our market include the following:
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domain expertise in API business practices and technologies;
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size of customer base and level of user adoption;
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established status as a strategic IT platform;
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brand awareness and reputation;
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total cost of ownership;
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ease of deployment and use of API-based platforms by paying customers and developers;
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level of paying customer and developer following;
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breadth and depth of offering;
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performance, availability and support for API-based platforms;
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capability for customization, configurability, integration, security, scalability and reliability of applications; and
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the ability to innovate and respond to customer needs rapidly.
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We believe that we compete favorably on the basis of the above factors. However, some of our actual and potential competitors have certain additional advantages over us, such as significantly greater financial, technical, marketing, research and development or other resources, stronger brand and business user recognition, larger installed customer bases, larger intellectual property portfolios and broader global distribution and presence.
Intellectual Property
Our success depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.
We had nine issued patents and fifteen patent applications pending in the United States as of
July 31, 2016
. Our issued patents expire between 2028 and 2029. We cannot assure you whether any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. Furthermore, even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. We also license software from third parties for integration into our solutions, including open source software and other software available on commercially reasonable terms.
We control access to and use of our proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright laws. Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise
obtain and use our software and other technology. In addition, we intend to expand our international operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in our markets have extensive patent portfolios and are regularly involved in litigation. From time to time, third parties, including certain of these leading companies, may assert patent, copyright, trade secret and other intellectual property rights against us, our channel partners or our customers. Our standard license and other agreements may obligate us to indemnify our channel partners and customers against such claims. Successful claims of infringement by a third party could prevent us from continuing to offer our solution or performing certain services, require us to expend time and money to develop non-infringing solutions, or force us to pay substantial damages, including treble damages if we are found to have willfully infringed patents or copyrights, royalties or other fees. Competitors may also be more likely to claim that our solutions infringe their proprietary rights and seek an injunction against us from continuing to offer our platform. We cannot assure you that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights.
Employees
As of
July 31, 2016
, we had 374 full-time employees. None of our employees are either represented by a labor union or subject to a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Segment and Geographic Information
Segment and geographic information is set forth in Note 10 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Government Regulation
We are subject to a number of U.S. federal and state and foreign laws and regulations that involve matters central to our business. These laws and regulations may involve privacy, data protection, intellectual property, competition, consumer protection, taxation or other subjects. Many of the laws and regulations to which we are subject are still evolving and being tested in courts and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and rapidly evolving industry in which we operate. Because global laws and regulations have continued to develop and evolve rapidly, it is possible that we may not be, or may not have been, compliant with each such applicable law or regulation.
Corporate Information
We were incorporated in the State of Delaware as Nexgen Machines, Inc. on June 3, 2004, changed our name to Sonoa Systems, Inc. on November 15, 2004 and changed our name to Apigee Corporation on September 21, 2010. Our principal executive offices are located at 10 South Almaden Blvd., 16th Floor, San Jose, California 95113. Our telephone number at that location is (408) 343-7300.
Our website is located at www.apigee.com and our investor relations website is located at www.investors.apigee.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge on the Investors portion of our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Webcasts of our earnings calls and certain events we participate in or host with members of the investment community are on our investor relations website. Additionally, we announce investor information, including news and commentary about our business and financial performance, SEC filings, notices of investor events, and our press and earnings releases, on our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our corporate governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not incorporated by reference into this
Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto, before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Ownership of Our Common Stock
Our stock price has been and may continue to be volatile or may decline, regardless of our operating performance, resulting in substantial losses for investors.
The trading prices of the securities of technology companies have been and may continue to be highly volatile. Since shares of our common stock were sold in our initial public offering in April 2015 at a price of $17.00 per share, the reported high and low sales prices of our common stock have ranged from $5.14 to $13.15 in the most recent fiscal year ended
July 31, 2016
. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our operating results;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
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ratings changes by any securities analysts who follow our company;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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the addition or loss of large customers;
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network outages or performance issues of our cloud service;
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information security breaches of our internal systems, our cloud service or customer on-premises deployments of our platform;
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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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any major change in our board of directors or management;
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lawsuits threatened or filed against us; and
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
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In addition, the stock markets, and in particular the market on which our common stock is listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.
Our directors, executive officers and significant stockholders continue to have substantial control over us and could delay or prevent a change in corporate control.
As of
July 31, 2016
, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, currently beneficially own, in the aggregate 48% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In
addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might adversely affect the market price of our common stock by:
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delaying, deferring or preventing a change in control of the company;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company.
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If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share 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, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. As of
July 31, 2016
, we had
30,440,809
shares of our common stock outstanding.
We rely on judgments, assumptions and estimates, as well as data collected from our data management system, to calculate certain of our metrics, and real or perceived inaccuracies in such metrics may harm our reputation and cause our stock price to decline.
Certain of our metrics are calculated and estimated using data from data systems other than our financial accounting system. While these numbers are based on what we believe to be reasonable calculations and estimates for the applicable period of measurement, there are inherent challenges in measuring these metrics because of the judgments and assumptions such measurements require our management team to make. If these judgments or assumptions are made incorrectly, the resulting calculation or estimation of the applicable metric will likely be inaccurate. Further, the judgments and assumptions made by our management team to calculate or estimate a metric may change from time to time, as additional information is taken into account subsequent to the initial calculation or estimate, and such changes by themselves may significantly impact such metric in future periods and may cause us to revise the calculations or estimations of such metric for historical periods.
If we discover material inaccuracies in our metrics, our reputation may be harmed. Such inaccuracies could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
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authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors;
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require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
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specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;
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establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
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establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;
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prohibit cumulative voting in the election of directors;
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provide that our directors may be removed only for cause;
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provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
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require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the accounting provisions of the FCPA, the listing requirements of the NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time, we would cease to be an “emerging growth company” as of the following January 31.
We also expect that these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
As a public company, our business and financial condition has become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.
As a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. These internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes–Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.
If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.
We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS Act if we take advantage of the exemptions contained in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future
To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, our loan and security agreement with SVB restricts, and any future indebtedness may restrict, our ability to pay dividends. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Risks Related to Our Business and Industry
The Merger, the pendency of the Merger or our failure to complete the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.
Completion of the Merger is subject to the satisfaction of various conditions, including approval of the Merger by our shareholders, the absence of certain legal impediments, the absence of a material adverse effect on our business, and the approval of antitrust authorities in the United States and foreign jurisdictions. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. Furthermore, there are additional inherent risks in the Merger, including the risks detailed below.
Risks related to the pendency of the Merger
During the period prior to the closing of the Merger, our business is exposed to certain inherent risks due to the effect of the announcement or pendency of the Merger on our business relationships, operations, results and business generally, including:
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potential uncertainty in the marketplace, which could lead current and prospective customers to purchase from other vendors or delay purchasing from us;
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the possibility of disruption to our business and operations, including diversion of management and employee time and resources, increased transaction costs, and the potentially negative impact on our relationships with our commercial partners;
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the inability to attract and retain key personnel, and the possibility that our current employees could be distracted, and their productivity decline as a result, due to uncertainty regarding the Merger;
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the inability to pursue alternative business opportunities or make changes to our business pending the completion of the Merger, and other restrictions on our ability to conduct our business;
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the fact that under the terms of the Merger Agreement, we are unable to solicit other acquisitions proposals during the pendency of the Merger;
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the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger; and
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other developments beyond our control, including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger.
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Risks that the Merger may be delayed or may not be completed
The Merger may be delayed, and may ultimately not be completed, due to a number of factors, including:
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the failure to obtain the approval of the Merger Agreement by our shareholders;
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the failure to obtain regulatory approvals from various foreign governmental entities (or the imposition of any conditions, limitations or restrictions on such approvals);
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potential future shareholder litigation and other legal and regulatory proceedings, which could delay, disrupt or prevent the Merger; and
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the failure to satisfy the other conditions to the completion of the Merger, including the possibility that a material adverse effect on our business would permit Google not to close the Merger.
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Risks to our business if the Merger does not close
If the Merger does not close, our business and shareholders would be exposed to additional risks, including:
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to the extent that the current market price of our stock reflects an assumption that the Merger will be completed, the price of our common stock could decrease if the Merger is not completed;
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investor confidence could decline, shareholder litigation could be brought against us, relationships with existing and prospective customers, suppliers and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the pending Merger; and
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the requirement that we pay a termination fee of $21.75 million to Google if the agreement governing the Merger is terminated under certain circumstances; and;
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Risks related to the successful completion of the Merger
Even if successfully completed, there are certain risks to our shareholders from the Merger, including:
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the amount of cash to be paid under the agreement governing the Merger is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;
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the fact that receipt of the all-cash Merger Consideration will be taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes;
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the possibility that Google could, at a later date, engage in unspecified transactions, including restructuring efforts, special dividends or the sale of some or all of Apigee’s assets to one or more as yet unknown purchasers, that could conceivably produce a higher aggregate value than that available to stockholders in the Merger; and
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the fact that, if the Merger is completed, shareholders will forego the opportunity to realize the potential long-term value of the successful execution of Apigee’s current strategy as an independent company.
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We have a history of losses, and we expect to incur losses for the foreseeable future.
We have incurred significant net losses in each year since our inception, including net losses of
$41.5 million
,
$50.4 million
, and
$60.8 million
for the years ended
July 31, 2016
,
2015
, and
2014
, respectively. As a result, we had an accumulated deficit of
$237.7 million
and
$196.2 million
at
July 31, 2016
and
2015
, respectively, and we expect to continue to incur net losses for the foreseeable future. Because the market for our software is rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future operating results. We expect our operating expenses to significantly increase over the next several years as we hire additional personnel, particularly in sales and marketing, expand and improve the effectiveness of our distribution channels, expand our operations and infrastructure, both domestically and internationally, and continue to develop our platform. In addition, as we grow and because we are a newly public company, we will incur additional significant legal, accounting and other expenses that we did not incur as a private company. If our revenue does not increase to offset these increases in our operating expenses, we will not be profitable in future periods. While historically our total revenue has grown, not all components of our total revenue have grown consistently. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing demand for our software, increasing competition, any failure to gain or retain channel partners, a decrease in the growth of our overall market, or our failure, for any reason, to continue to capitalize on growth opportunities. As a result, our past financial performance should not be considered indicative of our future performance. Any failure by us to achieve or sustain profitability on a consistent basis could cause the value of our common stock to materially decline.
The market for our platform is new and unproven and may not grow or may decrease.
Since we were founded in 2004, we have been creating products for the developing and rapidly evolving market for API-based software platforms, a market that is largely unproven and is subject to a number of inherent risks and uncertainties. We believe that our future success will depend in large part on the growth, if any, in the market for API-based software platforms. The utilization of API software is still relatively new, and enterprises may not recognize the need for APIs or, if they do, they may decide that they do not need a solution that offers the range of functionalities that we offer, or they may decide to build such capabilities in-house. In order to grow our business and extend our market position, we intend to expand the functionality of our product and bring new technologies to market to increase market acceptance and use of our platform. It is difficult to predict customer adoption and renewal rates, customer demand for our solutions, the size and growth rate of the overall market that our platform addresses, the entry of competitive products and the success of existing competitive products. Any expansion of the market our platform addresses depends upon a number of factors, including the cost, performance and perceived value associated with such solutions. If the market our platform addresses does not achieve significant additional growth or there is a reduction in demand for our platform solutions caused by a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic conditions, or otherwise, it could result in reduced revenue and customer orders, early terminations, and reduced renewal rates, any of which would adversely affect our business, results of operations, financial condition and growth prospects.
We have a short operating history for our recently released solutions, including the current version of our cloud-based solution and the current version of our predictive analytics solution, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
We have a short operating history of selling our recently released solutions, including the current version of our cloud-based solution that we began offering at the end of 2012 and other solutions such as Apigee Insights and Apigee Sense, both of which we introduced more recently.This short selling history limits our ability to forecast our future operating results and plan for and model future growth. We also have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in developing industries. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or if we do not address these risks successfully, our business, results of operations, financial condition and growth prospects could differ materially from our expectations and our business could suffer.
Additionally, we have limited experience with respect to determining the optimal prices for our solutions. If the market for our solutions begins to mature or as new competitors introduce new products or services that compete with our solutions, we may be unable to attract new customers based on the pricing model we have used historically. Moreover, large customers, which are the focus of our sales efforts, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could adversely affect our revenue, gross margin, and other results of operations, financial condition and cash flows. Furthermore, our software sales pricing is based on the customer’s usage. Our on-premises license sales are based on the number of computer server cores, while our cloud-based services sales are based on API traffic. This usage-based
aspect to our pricing model may make it difficult to accurately forecast revenue because the customer controls when and to what extent it uses our platform, and our customers’ activities on our platform may vary from period to period based on a variety of factors. As a result, revenue may fluctuate period to period. Therefore, historical revenue from a customer may not be indicative of our future revenue, and this usage-based aspect of our pricing model may limit our ability to forecast revenue. If we fail to address these risks and challenges and those described elsewhere in this “Risk Factors” section, our business will be adversely affected and our operating results will suffer.
Moreover, although we have experienced strong growth historically, we may not continue to grow in the future. Any success that we may experience in the future will depend in large part on our ability to, among other things:
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maintain and expand our customer base and the ways in which our customers use our platform;
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increase revenue from existing customers through increased or broader use of our platform within their organizations;
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improve the performance and capabilities of our software through research and development;
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successfully expand our business domestically and internationally;
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successfully compete with other companies, open source initiatives and custom development efforts that are currently in, or may in the future enter, the markets for our software;
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continue to invest in our platform to foster an ecosystem of developers and users to expand the use cases of our software;
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continue to develop Apigee Edge and other solutions on our platform such as Apigee Link and Apigee Sense;
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generate leads and convert users of the trial version of our software to paying customers;
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prevent users from circumventing the terms of their software licenses;
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continue to enhance our website infrastructure to minimize interruptions or slower than expected download times when accessing our software from our website;
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process, store and use our customers’ data in compliance with applicable governmental regulations and other legal obligations related to data privacy and security; and
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hire, integrate and retain qualified talent.
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Because we currently derive substantially all of our revenue and cash flows from our Apigee Edge solution, failure of this solution to satisfy customer demands or to achieve increased market acceptance would materially and adversely affect our business, results of operations, financial condition and growth prospects.
We derive substantially all of our revenue and cash flows from our Apigee Edge solution. As such, the market acceptance of Apigee Edge is critical to our continued success. Demand for Apigee Edge is affected by a number of factors beyond our control, including continued market acceptance of our solutions by referenceable accounts for existing and new use cases, the timing of development and release of new products by our competitors and additional capabilities and functionality by us, technological change, and growth or contraction of the market in which we compete. In addition, similar to the situation encountered by traditional APIs, we cannot assure you that our Apigee Edge solution and future enhancements to our platform and solutions will be able to address future advances in technology or requirements of digital businesses. Moreover, our platform may not be able to scale and perform to meet increased requirements, including any associated with the proliferation of mobile apps and devices. We also lacked a clear migration path to transition existing customers under prior versions of our Apigee Edge solution (versions prior to August 2012), which has limited our ability to sell add-on purchases to these existing customers. We have experienced, and may continue to experience, decline in add-on purchases from customers using prior versions of our Apigee Edge solution. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our software, our business, results of operations, financial condition and growth prospects will be materially and adversely affected.
If we are not able to introduce new products successfully and to make enhancements to existing products, our growth rates would likely decline and our business, results of operations and competitive position could suffer.
We invest substantial resources in researching and developing new products and enhancing existing products by incorporating additional features, improving functionality and adding other improvements to meet our customers’ evolving demands in our highly competitive industry. In order to be competitive, our platform must address an ever-increasing array of mobile apps, networked devices and back end databases, applications and systems, as well as keep pace with technological innovations in our industry and with our customers’ business requirements. For example, we are focused on enhancing the features and functionality of our platform to enhance its adaptability for the Internet of Things (“IoT”), and have developed Apigee Link, our IoT product for connecting devices to the Internet. We are also focused on enhancing the features and functionality of our platform for the healthcare industry segment, and have developed Apigee Health APIx to enable healthcare payors and providers to securely share patient data with mobile health apps and with each other. In addition, we recently introduced Apigee Sense for enhanced, data driven API security. We have derived very little revenue from Apigee Link and no
revenue from our new healthcare solution or Apigee Sense to date, and we cannot assure you when new products or solutions under development will be commercially released or that they will generate material revenue. Since developing our platform is complex, the timetable for the release of new products and enhancements to existing products is difficult to predict, and we may not offer new products and updates as rapidly as our customers require or expect. The success of new products and enhancements to our platform and their market acceptance may depend upon the timing of introduction of these new products and enhancements, and any failure in this regard may significantly impair our revenue growth.
We also have invested, and may in the future continue to invest, in the acquisition of complementary products or services that expand the solutions that we can offer our customers and help us enter into new markets. We often make these investments without being certain that they will result in products or enhancements that our target markets will accept or that they will expand our share of those markets. The sizes of the markets currently addressed by our products are not certain, and our ability to grow our business in the future may depend upon our ability to introduce new solutions or enhance and improve our existing products for those markets or entry into new markets. Our growth would likely be adversely affected and we would not be able to extend our leadership position if we fail to introduce these new solutions or enhancements, fail to manage successfully the transition to new solutions from the products they are replacing or do not invest our development efforts in appropriate products or enhancements for significant new markets, or if these new products or enhancements do not attain market acceptance.
In addition, our introduction of new products that are developed or acquired by us may reduce sales of existing products or cause us to lower the sales price of existing products, which may impact our results of operations. For example, we recently began offering a lower-priced version of our Apigee Edge product, which includes a limit on call volume, fewer features and less functionality than our current version of Apigee Edge. Customers may choose to purchase this new version of Apigee Edge instead of our existing version, or we may determine to lower the price of our existing version of Apigee Edge in order to make this version more attractive to our customers.
Our new solutions or enhancements, such as Apigee Link, Apigee Sense and Apigee Insights, could fail to attain market acceptance for many reasons, including:
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downtime or other lack of availability or performance of our cloud–based solution;
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defects, errors or failures in our platform;
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the inability of our platform to interoperate effectively with products from other vendors or to operate successfully when deployed within the networks of our customers;
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negative publicity about the performance or effectiveness of our new solutions or enhancements to our existing solutions;
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the timeliness of the introduction and delivery of our solutions or enhancements;
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our failure or inability to predict changes in our industry or customers’ requirements;
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reluctance of customers to purchase products that include cloud-based solutions or incorporate elements of open source software;
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failure of our channel partners to market, support or distribute our solutions; and
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changes in government or industry standards and criteria.
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If we do not respond to the rapidly changing needs of our customers by timely developing and introducing new and effective solution features, upgrades and services that can respond adequately to their needs, our competitive position, business and growth prospects will be harmed.
We may not be able to compete successfully against current and future competitors.
We compete against in-house or custom IT development efforts, a variety of large software vendors and smaller specialized companies and open source initiatives, all of which vary in the breadth and scope of the products and services offered. The principal competitive factors in our markets include domain expertise in API business practices and technologies, size of customer base and level of user and developer adoption, established status as a strategic IT platform, brand awareness and reputation, total cost of ownership, ease of deployment and use of our solution by paying customers and developers, breadth and depth of offering, performance, availability and support for our solution, capability for configurability, integration, security, scalability and reliability of applications, and the ability to innovate and respond to customer needs rapidly. Beyond in-house or custom IT development efforts, our competitors include, among others, International Business Machines Corporation and Oracle Corporation, both of which can bundle competing products and services with other software offerings, or offer them at a low price as part of a larger sale. In addition, in July 2015 Amazon Web Services (“AWS”) introduced a gateway functionality in a product called AWS Gateway, which product’s functionality is a subset of that offered by the API
Services component of our Apigee Edge solution. Some of our actual and potential competitors have additional advantages over us, such as:
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significantly greater financial, technical, marketing, research and development or other resources;
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stronger brand and business user recognition;
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larger installed customer bases;
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larger intellectual property portfolios;
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more basic, lower priced solutions; and
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broader global distribution and presence.
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Our industry is evolving rapidly and is becoming increasingly competitive, and we expect further increased competition if our market continues to expand. Larger and more established companies may focus on API management and API-based software platforms and could directly compete with us. Smaller companies are also launching new products and services that could gain market acceptance quickly. Conditions in our market could change rapidly and significantly as a result of technological advancements, open source initiatives or other factors.
In recent years, there have been significant acquisitions and consolidation by and among our competitors. Consolidation in our industry may allow our competitors to take advantage of the greater resources of the larger organization or may increase the likelihood of our competitors offering bundled or integrated products with which we cannot effectively compete. As a result of these acquisitions, competitors might take advantage of the greater resources of the larger organization to compete more vigorously or broadly with us. If we are unable to differentiate our products from the integrated or bundled products of our competitors, such as by offering enhanced functionality or performance, we may see increased pricing pressure, decreased demand or increased sales and marketing expenses, which would adversely affect our business, operations, financial results and growth prospects. Further, it is possible that continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently their willingness to use software solutions from such firms. Similarly, if customers seek to concentrate their software license purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage regardless of the performance and features of our software. We believe that to remain competitive at the large enterprise level, we may need to develop and expand relationships with resellers, large system integrators and providers of complementary technologies to provide a broad range of products and services. If we are unable to compete effectively, our business, results of operations, financial condition and growth prospects could be materially and adversely affected.
Our future quarterly results may fluctuate significantly, which could adversely affect our share price.
Our results of operations, including the levels of our revenue, cost of revenue, gross margin, operating expenses, cash flow and deferred revenue, have fluctuated from quarter to quarter in the past and may continue to vary significantly in the future so that period-to-period comparisons of our operating results may not be meaningful. Accordingly, our financial results in any one quarter should not be relied upon as indicative of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult to predict, and may or may not fully reflect the underlying performance of our business. Because the timing and amount of our revenue is difficult to forecast and because our operating costs and expenses are relatively fixed in the short term, if our revenue does not meet our expectations, we are unlikely to be able to adjust our spending to levels commensurate with our revenue. As a result, the effect of revenue shortfalls on our results of operations may be more accentuated, and these and other fluctuations in quarterly results may negatively affect the market price of our common stock. Among the factors that may cause fluctuations in our quarterly financial results are those listed below:
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our ability to attract and retain new customers;
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the addition or loss of large customers;
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our ability to successfully expand our business domestically and internationally;
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our ability to gain new channel partners and retain existing channel partners;
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fluctuations in the growth rate of the overall market that our solutions address;
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fluctuations in the mix of our revenue;
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the unpredictability of the timing of our receipt of orders for perpetual licenses, the revenue for which we typically recognize upfront;
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the amount and timing of operating expenses related to the maintenance and expansion of our business and operations, including continued investments in sales and marketing, research and development and general and administrative resources;
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network outages or performance degradation of our cloud service;
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information security breaches;
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general economic, industry and market conditions;
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customer renewal rates;
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increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;
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changes in our pricing policies or those of our competitors;
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the budgeting cycles and purchasing practices of customers;
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decisions by potential customers to purchase alternative solutions from larger, more established vendors, including from their primary software vendors;
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decisions by potential customers to develop in-house solutions as alternatives to our platform;
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insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our software and services;
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delays in our ability to fulfill our customers’ orders;
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seasonal variations in sales of our solutions;
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the cost and potential outcomes of future litigation or other disputes;
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future accounting pronouncements or changes in our accounting policies;
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our overall effective tax rate, including impacts caused by any reorganization in our corporate tax structure and any new legislation or regulatory developments;
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fluctuations in stock-based compensation expense;
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fluctuations in foreign currency exchange rates;
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the timing and success of new products and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners;
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the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and
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other risk factors described in this Annual Report on Form 10-K.
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We expect our revenue mix to vary over time, which can affect our gross margin and operating results.
We expect our revenue mix to vary over time due to a number of factors, including the mix of perpetual licenses, time-based licenses, subscriptions and professional services. In addition, third-party hosting infrastructure costs associated with customer adoption of our cloud-based solution can vary over time. Our gross margins and operating results can be affected by such changes in revenue mix and costs, together with numerous other factors including:
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entry into new markets or growth in lower margin markets;
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entry into markets with different pricing and cost structures;
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increased price competition;
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changes in distribution channels; and
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how well we execute our strategy and operating plans.
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Reliance on orders, especially for perpetual licenses, at the end of a fiscal quarter could cause our revenue to vary from period to period or to fall below expected levels for a given period.
As a result of customer buying behavior and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically received and generated a substantial portion of bookings and generated a significant portion of our quarterly revenue related to perpetual licenses during the last month of each quarter. The unpredictability of the timing of customer licenses—particularly for perpetual licenses, the revenue for which we typically recognize upfront—and subscriptions could cause our revenue to vary from period to period or to fall below expected levels for a given period, which would adversely affect our business, financial condition, and results of operations, and result in a decline in the market price of our common stock.
Our business and growth depend on our ability to obtain subscription and maintenance renewals from existing customers. Nonrenewals and subscription downgrades could adversely affect our future operating results.
We primarily sell our platform on a yearly subscription basis, either deployed in the cloud or on premises. At the end of the term of these subscriptions, customers can renew their existing subscriptions, upgrade their subscriptions, downgrade their subscriptions or not renew. In recent periods, a lesser portion of our total revenue has been derived from annual maintenance and support associated with perpetual licenses. During the year ended July 31, 2016, our subscription, support and time-based licenses that were eligible for renewal were renewed at a dollar-based simple renewal rate of approximately 90%. We calculate dollar-based simple renewal rate based on the dollar value of renewed contracts divided by the dollar value of expiring
contracts at any given period. However, due to limited historical data with respect to rates of subscription renewals by our customers, particularly for our cloud-based solution, we cannot accurately predict customer dollar-based simple renewal rates. The dollar-based simple renewal rate for the year ended July 31, 2016, is not necessarily indicative of our dollar-based simple renewal rate for any future period. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our pricing or our products’ functionality, features or performance, competitors’ product offerings or in-house developed solutions, customers’ ability to continue their operations and spending levels, migration path issues for new versions of products (which we have experienced before) and other factors, a number of which are beyond our control. Our customers have no obligation to renew their subscriptions after the expiration of the initial term, and they may elect not to renew their subscriptions or to reduce the product quantity under their subscriptions or maintenance and support contracts, thereby reducing our future revenue. If our customers do not renew their subscriptions for our products on similar pricing terms, our revenue may decline and our business, results of operations and growth prospects could suffer. In addition, if the average term of our contracts were to decrease, this may afford us less visibility into our future financial performance.
We recognize our subscription and time-based revenue over the term of our customer contracts. Consequently, downturns or upturns in new sales may not be immediately reflected in our operating results and may be difficult to discern.
We recognize our revenue ratably over the term, typically one year, of customer subscriptions for our cloud-based solution and on-premises time-based licenses. As a result, a portion of our total revenue in each quarter is derived from the recognition of deferred revenue relating to subscriptions and time-based licenses and maintenance and support contracts entered into during prior periods. Consequently, a decline in new or renewed subscriptions or time-based licenses in any single quarter may have a small impact on our revenue for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our platform and potential changes in our rate of customer expansion or retention or in our pricing policies will not be fully reflected in our results of operations in a single quarter but only over several quarters. In addition, a significant majority of our operating costs are expensed as incurred, while a majority of our revenue is recognized over the term of our agreements with our customers. As a result, continued growth in the number of our customers may not result in increases in our revenue that offset increases in our operating costs and expenses. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers is generally recognized ratably over the applicable term of our agreements.
We may require additional capital to support our business, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business and may require additional funds, in particular as we seek to grow our business, including the need to develop new features or enhance our software, improve our operating infrastructure 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 funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve 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 not be able to obtain additional financing on terms favorable to us, if at all. 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, scale our infrastructure, develop product enhancements and to respond to business challenges could be significantly impaired, and our business may be adversely affected.
To the extent that we are unable to timely recognize revenue from the provision of professional services to our customers or to rely on our partners and others to deliver professional services for our solutions, our total revenue, gross profit and gross margins may be lower.
We generally offer professional services associated with implementing our solutions, and we recognize revenue from professional services primarily on a time and materials basis as services are delivered. Costs associated with maintaining a professional services department is fixed while professional services revenue is dependent on the amount of work actually billed to customers in a period, the combination of which may result in variability in our gross profit. In addition, the timing of the recognition of professional services revenue is dependent on several factors outside our control. If a customer deploys our solutions and utilizes our services more slowly than we expect, we may not be able to recognize the related revenue as quickly as we anticipated, and we may experience an adverse impact on our gross profit and other results of operations. We increasingly rely on our channel partners for professional services associated with implementing our solutions and we plan to continue to expand our channel relationships that provide these professional services to supplement our own resources and, to
the extent that we are unable to adequately grow these channel partner relationships, or otherwise have others perform professional services associated with our solutions, we may have a significant portion of our revenue mix derived from our provision of such services which carry lower gross margins than our other revenue sources and may reduce our gross profit.
The seasonality of our business can create significant variance in our quarterly bookings, license revenue and cash flows from operations.
We operate on a July 31 fiscal year end and believe that there are significant seasonal factors which may cause us to experience lower levels of revenue in our first fiscal quarter ending October 31 and higher levels of revenue in our second fiscal quarter ending January 31 as compared with other quarters. We believe that this seasonality results from a number of factors, including:
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slower enterprise buying patterns during the late summer months, both domestically and overseas, including from our telecommunications customers, as well as government customer procurement, budget and deployment cycles, and the timing of our training for our entire sales force, each of which impacts our revenue in our first fiscal quarter; and
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larger customers with a December 31 fiscal year end choosing to spend remaining budgets shortly before their year end, which impacts our revenue in our second fiscal quarter.
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If we are unable to attract and retain key personnel, our business and financial results could be adversely affected.
We depend on the continued contributions of our senior management and other key personnel, the loss of whom could adversely affect our business. All of our executive officers and key employees are at-will employees, which means they may terminate their employment relationship with us at any time. We do not maintain a key-person life insurance policy on any of our officers or other employees.
Our future success also depends in large part on our ability to identify, attract and retain highly skilled technical, managerial, finance and other personnel, particularly in our sales and marketing, research and development, general and administrative, and professional service departments. We face intense competition for qualified individuals from numerous software and other technology companies. In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may incur significant costs to attract and retain them, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those areas. Certain members of our senior management team have only recently joined us, and other members of our senior management team have separated from us in recent quarters. Our productivity and business may be harmed if we do not integrate and train our employees and managers quickly and effectively or if we do not retain them. If we are unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.
Volatility or lack of appreciation in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our employees, our business, results of operations, financial condition and cash flows would be adversely affected.
If we do not effectively train and expand our sales force, we may be unable to add new customers or increase sales to our existing customers and our business will be adversely affected.
Currently, we sell our solutions primarily through our direct sales force. Our ability to increase our sales to both new and existing customers is in part dependent on our ability to continue to train and expand our sales force, which from July 31, 2012 to July 31, 2016 grew over 250%. There is significant competition for sales personnel with the skills and technical knowledge that we require. Moreover, newly hired sales personnel require substantial training and typically take a significant amount of time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow, a large percentage of our sales force can be expected to be new to the company and our platform. Identifying, recruiting and effectively training sufficient sales personnel to support our growth requires significant time, expenses and management and other resources. If we are unable to hire, develop and retain sales personnel or if our new direct sales personnel are unable to achieve expected sales productivity levels in a reasonable period of
time or at all, we may not be able to increase our revenue and grow our business, which would adversely affect our results of operations.
If we fail to manage our growth effectively, our business, operating results and financial condition would be adversely affected.
In recent periods, we have been adding personnel and other resources as we focus on growing our business, entering new geographic markets and increasing our market share, and we expect to incur significant additional expenses in further expanding our personnel, particularly in sales and marketing and our international operations in order to grow our business, operations and customer base, and we intend to continue to make significant additional investments in these areas. The number of our full-time employees was 374 as of July 31, 2016. The return on these investments in terms of increases in revenue, operating margin and number of customers may be lower, or may be realized more slowly, than we expect. If we do not achieve the benefits anticipated from our investments, or if the achievement of these benefits is delayed, our business, results of operations and financial condition would be adversely affected.
In addition, our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. To effectively manage growth, we must continue to improve our operational, financial and management controls, and our reporting systems and procedures.
If we are not able to maintain and enhance our brand and increase market awareness of our company and solutions, our business and operating results may be adversely affected.
We believe that maintaining and enhancing the “Apigee” brand identity and increasing market awareness of our company and solutions is critical to achieving widespread acceptance of our platform, to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. The successful promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality software, our ability to be thought leaders in API-based software platforms and our ability to successfully differentiate our platform from those of our competitors. Our thought leadership and brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our products, as well as those of our competitors, and perception of our product in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected.
In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we may lose customers and channel partners, all of which would adversely affect our business, results of operations, and financial condition.
Our growth depends in part on the success of our strategic relationships with third parties, which relationships are at an early stage of development.
In order to grow our business, we anticipate that we will continue to depend on relationships with third parties, such as Accenture LLP and SAP AG, to resell and co-sell and provide services related to our platform. Our relationships with these partners are at an early stage of development, we have generated very limited revenue through these relationships to date, and we cannot assure you that we will be able to maintain successful relationships with our channel partners or that these partners will be successful in marketing and selling our platform or solutions based upon our platform. Identifying partners such as these, negotiating and supporting relationships with them and maintaining relationships requires a significant commitment of time and resources that may not yield a significant return on our investment in these relationships. Our channel partners are not required to exclusively market or sell our solutions in our target markets and have only limited commitments to dedicate resources to marketing and promoting our solutions. In addition, our competitors may be more effective in providing incentives to our strategic partners or prospective partners to favor their products or services over our solutions. If we are unsuccessful in establishing or maintaining our relationships with strategic partners, or if these partners are unsuccessful in marketing or selling our solutions, or are unable or unwilling to devote sufficient resources to these activities, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may suffer.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period.
The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our platform. We are often required to spend time and resources to better familiarize potential customers with the value proposition of API management and API-based software platforms generally. Customers often view the purchase of our products as a significant and strategic decision and, as a result, frequently require considerable time to evaluate, test and qualify our products prior to making a purchase decision and placing an order. A number of factors influence the length and variability of our sales cycles, including, for example:
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the need to educate potential customers about the uses and benefits of our platform;
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the discretionary nature of potential customers’ purchasing and budget cycles and decisions;
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the competitive nature of potential customers’ evaluation and purchasing approval processes; and
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the availability of in-house solutions, either currently or through addition internal development, to our potential and current customers.
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The amount of time that customers devote to their evaluation, contract negotiation and budgeting processes vary significantly. The length of the sales cycle for our platform averages approximately seven months, but specific transactions can be significantly longer. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. For all of these reasons, it is difficult to predict whether and when a sale will be completed, and when revenue from a sale will be recognized or begin to be recognized. If our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, results of operations and financial condition.
We rely upon Amazon Web Services to operate certain aspects of our service and any disruption of or interference with our use of Amazon Web Services would impact our operations and our business would be adversely impacted.
AWS, provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have designed our software and computer systems so as to utilize data processing, storage capabilities and other services provided by AWS. Currently, the vast majority of our cloud service infrastructure is run on AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted.
If we fail to adequately maintain cloud-based infrastructure capacity through third parties, our existing customers may experience service outages, and our new customers may experience delays in the deployment of our platform.
Customers of our cloud-based solution need to be able to access our platform 24 hours a day, seven days a week, without interruption or degradation of performance. We outsource all of our data centers to third parties, including AWS. The number of API calls trafficked through our platform is increasing substantially. An API call is a request for data or services from within an application, made through an API, to another application or system. Although we expend considerable effort to ensure that our platform performance is able to handle existing and anticipated traffic levels, we are dependent upon third parties in order to meet these performance requirements of our customers and we may not be able to maintain the level of performance required by our customers, especially to cover peak levels or spikes in the number of API calls trafficked through our platform. The provisioning of new cloud hosting capacity and data center infrastructure requires lead-time. If we do not accurately predict our infrastructure capacity requirements with sufficient lead-time, our customers could experience service shortfalls.
We do not control the operation of the third-party infrastructure on which our cloud service is deployed and we are therefore vulnerable to any information security breaches, power outages or other issues the data center may experience. We have in the past experienced, and expect that we will in the future experience, interruptions, delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions or capacity constraints due to a number of potential causes including technical failures, natural disasters or fraud or security attacks. For example, in the fall of 2014, we were unable to process all of the API calls for one of our customers due to initial capacity constraints in connection with a spike in the number of API calls for this customer. As a result, this customer experienced a momentary outage in service and availability, and during a period of less than two hours the performance of our platform was degraded for this customer while we provisioned additional capacity for this customer. We assessed the impact of the outage and determined that it did not have a material impact on our business or operating results. If our security, or that of our third-party infrastructure providers, is compromised, our platform is unavailable or our users are unable to deploy our solutions within a reasonable amount of time or at all, our business could be negatively affected. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times and as our software becomes more complex and the number of API calls trafficked through our platform increases. To the extent that we do not effectively address capacity constraints, upgrade third-party infrastructure as needed and continually
develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be adversely affected. In addition, any changes in service levels from our cloud infrastructure provider may adversely affect our ability to meet our customers’ requirements.
Any of the above circumstances or events may harm our reputation, cause customers to terminate their agreements with us, impair our ability to obtain subscription and maintenance renewals from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements, and otherwise harm our business, results of operations and financial condition.
Breaches of our networks or systems, or those of our third-party cloud infrastructure providers, could degrade our ability to conduct our business operations, delay our ability to recognize revenue, compromise the integrity of our solutions and products, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.
We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners. Computer programmers or other individuals or entities may attempt to penetrate our network security, or that of our platform, including both customer deployments and our third-party cloud infrastructure, and to cause adverse effects on our business operations, including by misappropriating our proprietary information or that of our customers, employees and business partners or to cause interruptions of our service. Because the techniques used by such individuals or entities to access, disrupt or sabotage computing devices, systems and networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques, and we may not become timely aware of such a security breach which could exacerbate any damage we experience. Any data security incidents, unauthorized access, unauthorized usage, virus or similar breach or disruption of us or of a third-party infrastructure provider could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, fines, penalties and other liabilities. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data and to deploy our IT resources in safe and secure fashion that does not expose our network systems to security breaches or the loss of data. Accordingly, if our cybersecurity protocols and defenses and those of our contractors, including our third-party infrastructure providers, fail to protect against unauthorized access, attacks (which may include sophisticated cyberattacks) or the mishandling of data by our employees and contractors, our ability to conduct our business effectively could be damaged in a number of ways, including:
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sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen or compromised;
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sensitive customer data running through our cloud-based solution or through on-premises customer deployments could be stolen or compromised;
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our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations could be seriously impeded until such systems can be restored;
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our ability to process customer orders, electronically deliver solutions and services and perform our contractual obligations could be degraded, and our distribution channels could be disrupted, resulting in delays in revenue recognition;
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defects and security vulnerabilities could be introduced into our software, thereby damaging the reputation and perceived reliability and security of our solutions and potentially making the data systems of our customers vulnerable to further data loss and cyberincidents; and
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personally identifiable data of our customers, employees and business partners could be stolen or compromised.
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If our security measures or those of our third-party infrastructure providers are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to or engages in unauthorized use of customer data, our reputation may be damaged, our business may suffer and we could incur significant liability. Also, the regulatory and contractual actions, litigation, investigations, fines, penalties and liabilities relating to any such incidents can be significant in terms of the dedication of management and financial resources, reputational impact and may necessitate changes to our business operations that may be disruptive to us. Additionally, we could incur significant costs, both in terms of monetary expense and in management and technical attention, in order to upgrade our information security systems and methods and remediate damages. Consequently, our financial performance and results of operations could be adversely affected.
Our ability to sell our products is highly dependent on the quality of our software, support and services offerings, and our failure to offer high-quality software, support and services could have a material and adverse effect on our business and results of operations.
Once our platform is deployed for our customers, those customers depend on our support organization and those of our channel partners to resolve any issues relating to our platform. Customers using our cloud-based solution are similarly dependent upon our ability to resolve these platform issues. Because our software is complex, undetected errors, failures or bugs may occur. Our platform may be installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into which it is deployed. Despite testing by us, errors, failures or bugs may not be found in enhancements to our platform until they are used by our customers. In the past, we have discovered software errors, failures and bugs in our platform. Real or perceived errors, failures or bugs in our software could result in negative publicity, loss of or delay in market acceptance of our software, loss of competitive position, claims by customers for losses sustained by them or, in the case of our cloud-based solution, failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem.
High-quality software, support and services are critical for the successful marketing and sale of our products. If we or our channel partners do not devote sufficient resources or are otherwise unsuccessful in assisting our customers in deploying our products effectively, succeed in helping our customers resolve post-deployment issues quickly, or provide ongoing support, it could adversely affect our ability to sell our products to existing end customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality software, support and services could have an adverse effect on our business, results of operations and financial condition.
Incorrect implementation or use of our software could result in customer or developer dissatisfaction and negatively affect our business, operations, financial results and growth prospects.
Our platform is designed to be operated in a “self-service” manner by developers and by customers who subscribe to our cloud-based solution. In addition, our platform may be deployed in large scale, complex technology environments of our customers. Our customers, developers and channel partners require training and experience in the proper use of and the variety of benefits that can be derived from our platform to maximize its potential. If our customers do not have sufficient or adequate resources to timely launch projects using our software, or they are unable to operate our software properly, customer perceptions of our platform may be impaired, our reputation and brand may suffer, and customers may choose not to expand their use of our software or to discontinue its use. If our software is not implemented or used correctly or as intended, inadequate performance or security vulnerabilities may result. Because our customers rely on our software to manage a wide range of operations, the incorrect implementation or use of our software, our failure to train customers on how to productively use our software may result in customer dissatisfaction, negative publicity and adversely affect our reputation and brand. Failure by us to provide these training and implementation services to our customers would result in lost opportunities for follow-on sales to these customers and adoption of our platform by new customers, and adversely affect our business and growth prospects.
In cases where our platform has been deployed on premises within a customer’s environment, if we or our customers or their developers are unable to configure or implement our software properly, or unable to do so in a timely manner, or poor advice or information is spread through our customer or developer communities, customer perceptions of our platform may be impaired, our reputation and brand may suffer, and customers may choose not to increase their use of our software or to discontinue its use. In addition, our on-premises solution imposes server load and data storage requirements for implementation. If our customers do not have the server load capacity or the storage capacity required, they may not be able to effectively implement and use our software and, therefore, may not choose to expand their use of our software or to discontinue its use.
We typically provide service level commitments of up to 99.99% under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our business, results of operations and financial condition.
Subscriptions for our cloud-based solution typically provide our customers with service level commitments on a monthly basis. If we are unable to meet the stated service level commitments to our customers, as has happened from time to time, or
suffer extended periods of unavailability of our cloud-based solution, we may be contractually obligated to provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, and could face contract terminations. As a result, our revenue, other operating results and financial condition could be adversely affected if we suffer unscheduled downtime that exceeds the service level commitments under our agreements with our customers, and any extended service outages could adversely affect our business and reputation.
Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition.
In fiscal
2016
, 2015, and 2014, respectively, we derived approximately
36%
,
38%
, and
33%
, respectively, of our total revenue from customers located outside the United States. We are continuing to expand our international operations as part of our growth strategy. Sales to our customers in foreign countries have typically been denominated in U.S. dollars. Fluctuations in currency exchange rates could cause our products to become relatively more expensive to end customers in a particular country, leading to a reduction in sales in that country. We are also exposed to movements in foreign currency exchange rates since the operating expenses we incur for our operations and personnel outside the United States are denominated in local currencies. We have research and development personnel in India and the United Kingdom, engage contractors in various international locations, and have testing and support personnel in the United States, India and the United Kingdom, and we may expand our offshore development efforts. In addition, we have sales and support personnel in numerous countries worldwide and expect to continue to substantially expand our overseas headcount. Our international operations subject us to a variety of additional risks, including:
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the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with numerous international locations;
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reduced demand for technology products outside the United States;
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difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
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demanding data protection standards in certain jurisdictions that can interrupt or delay the transfer and processing of personal data;
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tariffs and trade barriers, import requirements, export control and trade sanctions regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
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heightened exposure to political instability, war and terrorism;
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added legal compliance obligations and complexity;
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reduced protection for intellectual property rights in some countries;
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multiple conflicting tax laws and regulations;
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lack of familiarity and burdens of complying with foreign laws, accounting and legal standards, regulatory requirements, tariffs, and other barriers;
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compliance with laws and regulations applicable to domestic and international operations, including the United States Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), the United Kingdom Bribery Act of 2010 (“Bribery Act”), privacy and data protection laws and regulations, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance;
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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements;
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difficulties in adapting to differing technology standards;
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the need to localize our products for international end customers and our lack of experience in connection with the localization of our solutions, including translation into foreign languages and adaptation for local practices and regulatory requirements;
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increased financial accounting and reporting burdens and complexities; and
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complexities and increased costs in retaining and terminating employees in some countries.
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As noted above, we are subject to the FCPA and the Bribery Act in certain cases. We are also subject to the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other anti-bribery and anti-money laundering laws and regulations in countries in which we conduct activities. Failure to comply with these laws and regulations could cause delays in revenue recognition and financial reporting misstatements, and subject us to other serious adverse consequences discussed below. Anti-corruption and anti-bribery laws such as the FCPA and Bribery Act generally prohibit companies and their employees and third-party intermediaries from making corrupt payments to government officials or private parties for the purpose of obtaining or keeping business, permits or other regulatory approvals, securing an advantage, or directing business to another. These laws also require companies to maintain accurate books and records and a
system of internal accounting controls. We plan to increase our international sales and business and engage with an increasing number of business partners and other third-party intermediaries to conduct our business and sell our products and services abroad. We, our business partners, or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. Under the FCPA, the company may be held liable for the corrupt actions taken by directors, officers, employees, agents, or other strategic or local partners or representatives. Similarly, under the Bribery Act, we may be held strictly liable for the corrupt acts of any person associated with us. As such, if we or our intermediaries fail to comply with the requirements of the FCPA, the Bribery Act or similar legislation, we could be subject to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, significant criminal fines, civil penalties, tax penalties, disgorgement, and other remedial measures, suspension or debarment from contracting with certain governments or other persons, the loss of export privileges, reputational harm, adverse media coverage, civil litigation, and other collateral consequences. In addition, responding to any allegation or action will likely result in a materially significant diversion of management’s attention and resources and investigation, compliance, and defense costs and other professional fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We also face the risk of multijurisdictional liability for the same act. This is due to the fact that many countries have broad laws and regulations in place which overlap with the laws and regulations of other countries.
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and manage effectively these and other risks associated with our international operations. In addition, compliance with laws and regulations applicable to our international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, we cannot assure you that all of our employees, contractors, channel partners and agents will comply with the FCPA and Bribery Act.
Our reliance on Software-as-a-Service technologies from third parties may adversely affect our business and operating results.
We rely heavily on hosted Software-as-a-Service technologies from third parties in order to operate critical functions of our business, including enterprise resource planning services from NetSuite and customer relationship management services from salesforce.com. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our software and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.
We could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual property could impair our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States and foreign jurisdictions so that we can prevent others from using our inventions and proprietary information. As of
July 31, 2016
, we have only been issued nine U.S. patents and have filed fifteen nonprovisional U.S. patent applications. We have no foreign patents. Our issued patents expire between 2028 and 2029. There can be no assurance that additional patents will be issued or that any patents that have been issued or that may be issued in the future will provide significant protection for our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business might be harmed. There is no assurance that the particular forms of intellectual property protection that we seek, including business decisions about when to file patents and when to maintain trade secrets, will be adequate to protect our business. We could be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of us or others or defend against claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management, result in a diversion of significant resources, the narrowing or invalidation of portions of our intellectual property and have an adverse effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant’s own intellectual property. These steps may be inadequate to protect our intellectual property. Any of our patents, copyrights, trademarks or other intellectual property rights could be challenged by others or invalidated through administrative process or litigation.
We also rely, in part, on confidentiality agreements with our technology partners, employees, consultants, advisors, customers and others in our efforts to protect our proprietary technology, processes and methods,. These agreements may not effectively prevent disclosure of our confidential information, and it may be possible for unauthorized parties to copy our
software or other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our confidential information. In addition, others may independently discover our trade secrets and proprietary information, and in these cases we would not be able to assert any trade secret rights against those parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying, transfer and use of our solutions and proprietary technology or information may increase.
There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. If we fail to meaningfully protect our intellectual property, our business, brand, operating results and financial condition could be materially harmed.
We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.
In recent years, there has been significant litigation involving patents and other intellectual property rights in the software industry. Companies providing software are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims, and our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. The risk of patent litigation has been amplified by the increase in the number of a type of patent holder, which we refer to as a non-practicing entity, whose sole business is to assert such claims and against whom our own intellectual property portfolio may provide little deterrent value. We could incur substantial costs in prosecuting or defending any intellectual property litigation. If we sue to enforce our rights or are sued by a third party that claims that our solutions infringe its rights, the litigation could be expensive and could divert our management and resources.
Any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:
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cease selling or using solutions that incorporate the intellectual property that we allegedly infringe;
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terminate customer agreements and issue refunds to customers;
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make substantial payments for legal fees, settlement payments or other costs or damages;
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obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or
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redesign the allegedly infringing solutions to avoid infringement, which could be costly, time-consuming or impossible.
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If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or actions could harm our business.
Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.
A portion of our technologies incorporate open source software, and we expect to continue to incorporate open source software in our solutions in the future. Few of the licenses applicable to open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure you that we have not incorporated additional open source software in our software in a manner that is inconsistent with the terms of the license or our current policies and procedures. If we fail to comply with these licenses, we may be subject to certain requirements, including requirements that we offer our solutions that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such 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 the sale of our solutions that contained the open source software and required to comply with onerous conditions or restrictions on these solutions, which could disrupt the distribution and sale of these solutions. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. In any of these events, we and our customers could be required to seek licenses from third
parties in order to continue offering our products, and to re-engineer our products or discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis. We and our customers may also be subject to suits by parties claiming infringement due to the reliance by our solutions on certain open source software, and such litigation could be costly for us to defend or subject us to an injunction. Any of the foregoing could require us to devote additional research and development resources to re-engineer our solutions, could result in customer dissatisfaction, and may adversely affect our business, results of operations and financial condition.
We may have additional tax liabilities, which could harm our business, operating results, financial condition and prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax liabilities. Our tax expense may be impacted if our intercompany transactions, which are required to be computed on an arm’s-length basis, are challenged and successfully disputed by the tax authorities. Also, our tax expense could be impacted depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. In determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service, or IRS, and other tax authorities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. The ultimate outcome of these audits cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of audits, we may be required to record charges to operations that could have a material impact on the results of operations, financial position or cash flows.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our results of operations.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with clients and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our products, services, or other contractual obligations. Some of these indemnity agreements provide for uncapped liability for which we would be responsible. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business, operating results and financial condition. From time to time, we are requested by clients to indemnify them for breach of confidentiality with respect to personal data or other security breaches. Although we typically do not agree to, or contractually limit our liability with respect to, such requests, the existence of such a dispute with a client may have adverse effects on our client relationships and reputation.
We may become involved in litigation that may materially adversely affect us.
From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, financial condition, results of operations and prospects.
We employ third-party licensed software for use in or with our products, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.
Our products incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools from third parties in the future. Such third-party
companies may discontinue their products, go out of business, or otherwise cease to make support available for such third-party software. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our products with new third-party software may require significant work and require substantial investment of our time and resources. Also, to the extent that our products depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our products, delay new product introductions, result in a failure of our products and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties.
Future acquisitions could disrupt our business and adversely affect our results of operations, financial condition and cash flows.
We may choose to expand by making acquisitions that could be material to our business, results of operations, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:
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an acquisition may negatively affect our results of operations, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;
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we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
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an acquisition may disrupt our ongoing business, divert resources, increase our working capital requirements and expenses, and distract our management;
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the need to implement or improve internal controls, procedures and policies appropriate for a public company at businesses that, prior to our acquisition of them, may have lacked effective controls, procedures or policies, including but not limited to, processes required for the effective and timely reporting of the financial condition and results of operations of the acquired business, both for historical periods prior to the acquisition and on a forward basis following the acquisition;
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an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;
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we may encounter difficulties in, or may be unable to, successfully sell any acquired products;
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an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;
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our use of cash to pay for acquisition would limit other potential uses for our cash;
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if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants; and
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to the extent that we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.
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The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of
July 31, 2016
and
July 31, 2015
, we had goodwill and intangible assets with a net book value of
$16.9 million
and
$17.9 million
, respectively, related to our acquisition of InsightsOne Systems, Inc. (“InsightsOne”). An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may have a material negative impact on our operating results.
If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely affected.
As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Our sales contracts are denominated in U.S. dollars, and therefore substantially all of our revenues are not
subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our software to our customers located outside of the United States, which could adversely affect our business, results of operations, financial condition and cash flows. In addition, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported operating results. To date, we have not engaged in any hedging strategies, and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate this risk, may not eliminate our exposure to foreign exchange fluctuations.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”), to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.
Our international operations may give rise to potentially adverse tax consequences.
We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. In addition, a taxing authority in a jurisdiction in which we have substantial business operations could assert that withholding or other taxes in such jurisdiction could apply, including in connection with a future disposition of our shares. If such a disagreement were to occur or such assertion by a taxing authority made, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard. If our reserves are not sufficient to cover such contingency, our financial results could be harmed.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.
Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions or terrorism.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. We also have significant facilities in India, a region known for typhoons, floods and other natural disasters. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, at one of our other facilities or where a channel partner or supplier is located could have a material adverse effect on our business, operating results and financial condition. In addition, natural disasters and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. We also rely on IT systems to communicate among our workforce located worldwide and, in particular, our research and development activities that are coordinated between our corporate headquarters in the San Francisco Bay Area and our operations in other states and countries. Any disruption to our internal communications, whether caused by a natural disaster or by man-made problems, such as power disruptions or terrorism, could delay our research and development efforts. To the extent that these disruptions result in delays or cancellations of customer orders or delays in our research and development efforts or the deployment of our solutions, our business and operating results would be materially and adversely affected.
Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our operating results.
Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for business software applications and services generally and for API-based software platforms in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political deadlock, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including corporate spending on API-based software platforms in general and negatively affect the rate of growth of our business. Historically, during economic downturns there have been reductions in spending on information technology as well as pressure for extended billing terms and other financial concessions. If economic conditions deteriorate, our customers and prospective customers may elect to decrease their information technology, which would limit our ability to grow our business and negatively affect our operating results.
To the extent purchases of our platform perceived by customers and potential customers to be discretionary, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software as an alternative to using our products. Moreover, competitors may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our software.
We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or industries in which we operate do not improve, or worsen from present levels, our business, results of operations, financial condition and cash flows could be adversely affected.
We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Our solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our solutions must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including: the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our solutions or changes in applicable export or import regulations may create delays in the introduction and sale of our solutions in international markets, prevent our customers with international operations from deploying our solutions or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our solutions, or in our decreased ability to export or sell our solutions to existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business.
Furthermore, we incorporate encryption technology into certain of our solutions. Various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our customers’ ability to implement our solutions in those countries. Encrypted solutions and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our solutions, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our solutions, including with respect to new releases of our solutions, may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions throughout their globally-distributed systems or, in some cases, prevent the export of our solutions to some countries altogether.
Moreover, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Any violations
of such economic embargoes and trade sanction regulations could have negative consequences, including government investigations, penalties and reputational harm.
Our platform and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data protection and information security, and our customers may be subject to regulations related to the handling and transfer of certain types of sensitive and confidential information. Any failure of our products or solutions to comply with or enable our customers and channel partners to comply with applicable laws and regulations would harm our business, financial condition and operating results.
We and our customers that use our solutions may be subject to privacy- and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of personal data, financial data, health data or other similar data. Existing U.S. federal and various state and foreign privacy- and data protection-related laws and regulations are evolving and subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current or enact new laws and regulations regarding privacy- and data protection-related matters. For example, the European Union recently adopted a general data protection regulation, to be effective in May 2018, which will supersede current EU data protection legislation and impose more stringent EU data protection requirements. Such regulation provides for penalties for noncompliance of up to four percent of annual global revenues. More generally, we believe additional regulation is likely in the area of data privacy, and changing laws, regulations and standards applying to the collection, processing or use of personal or consumer information could affect our customers’ obligations and our facilitation of those obligations. New laws, amendments to or re-interpretations of existing laws and regulations, rules of self-regulatory bodies, industry standards and contractual obligations may impact our business and practices, and we may be required to expend significant resources to adapt to these changes. These developments could harm our business, financial condition and results of operations.
The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information of individuals. The U.S. Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. Similarly, many foreign countries and governmental bodies, including the member states of the European Union, or EU, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personally identifiable information that identifies or may be used to identify an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol, or IP, addresses. Further, as we undertake efforts to have our platform comply with applicable laws and regulations, these and other obligations may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements or our internal practices. We also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data.
Following a European court decision in October 2015 that invalidated the U.S.-EU Safe Harbor Framework, which framework was adopted to provide assurance that U.S. based companies were adhering to certain standards for data protection, we have in certain cases been willing to enter into standard EU model contractual clauses in an effort to help our customers comply with, relevant laws and regulations of the EU and its member states applicable to our handling of personal data. The invalidation of the U.S.-EU Safe Harbor Framework may serve as a basis for our personal data handling practices, or those of our customers, to be challenged and may otherwise adversely impact our business. U.S. and EU authorities reached a political agreement in February 2016 regarding a new means for legitimizing personal data transfers from the European Economic Area, or EEA to the United States, the EU-U.S. Privacy Shield. It is unclear whether the EU-U.S. Privacy Shield will function as an appropriate means for us to legitimize any of our personal data transfers from the EEA to the U.S. Responding to an investigation or enforcement action by relevant authorities of the EU and its member states could divert management’s attention and resources, cause us to incur investigation, compliance and defense costs and other professional fees, result in fines and other penalties, and adversely affect our business, results of operations, financial condition and cash flows.
We facilitate our customers’ compliance with a number of diverse data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. For example, with respect to portions of our platform we maintain compliance with the requirements set forth in the U.S. Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), and their respective implementing regulations, including the final omnibus rule published on January 25, 2013. Among other things, HITECH, through its implementing regulations, makes certain of HIPAA’s privacy and security standards directly applicable to business associates, defined as persons or organizations that create, receive, maintain or transmit protected health information
(“PHI”), for or on behalf of a HIPAA-covered entity for a function or activity regulated by HIPAA. Because certain customers that are HIPAA-covered entities receive and transmit PHI through our platform, we may be considered a business associate with respect to these customers and therefore subject to the HIPAA requirements applicable to business associates. In addition, state laws govern the privacy and security of personal information and health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Noncompliance with applicable HIPAA and related state law requirements could result in significant civil and criminal penalties, which could adversely impact our business, financial condition and cash flows as well as our reputation.
Similarly, because a number of our clients interface with payment card systems through our platform, including those for the processing of debit or credit cards, we maintain Payment Card Industry Data Security Standard (“PCI DSS”) compliance with respect to portions of our platform as part of our information security program. If we are unable to comply with PCI DSS, whether due to changes in the PCI DSS standard or for another reason, we might incur significant liability and may suffer an adverse effect to our reputation.
With respect to all of the above, any failure or perceived failure by us or our platform to comply with U.S., EU or other foreign privacy or security laws, policies, industry standards or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in governmental investigations, inquiries, enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity. Such actions and penalties could divert management’s attention and resources, adversely affect our business, results of operations, financial condition and cash flows, and cause our customers and channel partners to lose trust in our solutions, which could have an adverse effect on our reputation and business.
We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Because global laws, regulations and industry standards concerning privacy, data protection and information security have continued to develop and evolve rapidly, it is possible that we or our platform and solutions may not be, or may not have been, compliant with each such applicable law, regulation, and industry standard.
Any such new laws, regulations, other legal obligations or industry standards, or any changed interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations. If our privacy or data security measures fail to comply with current or future laws, regulations, policies, legal obligations or industry standards, we may be subject to litigation, regulatory investigations, fines or other liabilities, as well as negative publicity and a potential loss of business. Moreover, if future laws, regulations, other legal obligations or industry standards, or any changed interpretations of the foregoing limit our customers’ or partners’ ability to use and share personally identifiable information or our ability to store, process and share personally identifiable information or other data, demand for our solutions could decrease, our costs could increase and our business, financial condition and operating results could be harmed.
The outcome of the United Kingdom’s (U.K.) referendum on membership in the European Union may have a negative effect on global economic conditions, financial markets, and on the U.K. and European economies, any or all of which could have a material adverse effect on our U.K. and international businesses.
On June 23, 2016, a referendum was held on the U.K.’s membership in the European Union, the outcome of which was a vote in favor of leaving the European Union. The U.K.’s vote to leave the European Union creates an uncertain political and economic environment in the U.K. and potentially across other European Union member states, which may last for a number of months or years. The resulting political and economic instability has caused and may continue to cause significant volatility in global financial markets and the relative value of global currencies, particularly the Pound Sterling and the Euro, which may adversely affect our revenue, expenses as well as the value of our assets and liabilities. This period of uncertainty may continue for the foreseeable future and the extent of its effects or the time period for which it extends cannot be predicted with any certainty. Further, it is possible there will be greater restrictions on imports and exports between the U.K. and European Union countries along with increased regulatory complexities.
Apigee has significant operations based in the U.K., including its Apigee Europe head office. Subject to the terms negotiated for the U.K.’s exit from the European Union, it is possible that there may be other adverse practical and/or operational implications and costs on our business, and for our customers doing business in Europe, as a result of which our U.K. and European operations may be significantly affected and even impaired. Costs may rise for our U.K. operations while revenues may fall. Consequently, no assurance can be given as to the impact of the referendum outcome and, in particular, no assurances can be given that our operating results, financial condition and prospects would not be adversely impacted by the referendum result and such an exit from the European Union by the U.K.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our platform, and could have a negative impact on our business.
The future success of our business depends in part upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based platforms and services such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms,” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our platform could decline.
The terms of our existing loan and security agreement with Silicon Valley Bank and future indebtedness could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.
The terms of our existing loan and security agreement with Silicon Valley Bank, or SVB, contains, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability, and the ability of our subsidiaries, to take actions that may be in our best interests, including, among others, disposing of assets, entering into change of control transactions, mergers or acquisitions, incurring additional indebtedness, granting liens on our assets and paying dividends. Our loan and security agreement requires us to satisfy specified financial covenants, including a minimum revenue covenant and a minimum adjusted quick ratio. Our ability to meet those financial covenants can be affected by events beyond our control, and we may not be able to continue to meet those covenants. A breach of any of these covenants or the occurrence of other events specified in the loan and security agreement could result in an event of default under the loan and security agreement. Upon the occurrence of an event of default, SVB could elect to declare all amounts outstanding under the loan and security agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, SVB could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the loan and security agreement. If SVB accelerates the repayment of borrowings, if any, we may not have sufficient funds to repay our existing debt.
The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory environment affecting GAAP is uncertain. Significant changes in current principles could affect our financial statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from FASB and the SEC have focused on the integrity of financial reporting. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our financial statements.
For example, in May 2014, FASB issued a new accounting guidance on revenue recognition, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which becomes effective for us beginning August 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method and continue to evaluate the impact that this guidance will have on our financial condition and results of operations. Depending on the transition method selected, the application of this new guidance may result in exclusion of certain future licensing revenues in the statement of comprehensive loss after the adoption date, which, despite no change in associated cash flows, could have a material adverse effect on our net income or loss. We cannot predict the impact of future changes to accounting principles or our accounting policies on our financial statements going forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, were we to change our critical accounting estimates, including the timing of recognition of license revenue and other revenue sources, our results of operations could be significantly impacted.