Fluctuations in Operating Results
Revenue in any quarter is substantially dependent on orders booked and
shipped in that quarter. Because staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the costs are fixed, small
variations in the timing of the recognition of specific revenues could cause
significant variations in operating results from quarter to quarter.
Historically, the Company has earned a substantial portion of its revenues in
the last weeks of the quarter. To the extent these trends continue, the
failure to achieve such revenues in the last weeks of any given quarter will
have a material adverse effect on the Company's financial results for that
quarter. The Company's revenue is difficult to forecast because Rational's
sales cycles, from initial evaluation to purchase, vary substantially from
customer to customer and from product to product and because the markets for
Rational's products are rapidly evolving. In addition, the Company's results
will be affected by the number, timing, and significance of new product
announcements by it and its competitors, its ability to develop, introduce,
and market new, enhanced, and integrated versions of its products on a timely
basis, the level of product and price competition, changes in operating
expenses, changes in average selling prices and product mix, any changes in
its sales incentive strategy, the experience level of and any changes in sales
personnel, any changes in sales cycles, the mix of direct and indirect sales,
product returns, and general economic factors, among others. The Company's
sales will also be sensitive to existing and prospective customers' budgeting
practices, global economic conditions, and potential cutbacks in U.S. defense
spending, which has historically been a significant factor for Rational.
Unanticipated expenses associated with the integration of Rational and Pure
Atria may arise, or the Company may incur additional material charges in
subsequent quarters to reflect additional costs associated with the
integration of the two companies. Total costs associated with such
transactions resulted in an operating loss and a net loss for the Company's
fiscal year ended March 31, 1998, and could negatively impact financial
results in future periods for the reasons discussed above.
Although Rational has experienced growth in revenues in recent years, there
can be no assurance that, in the future, Rational will sustain revenue growth
or be profitable on a quarterly or annual basis. Further, the revenues and
operating income (exclusive of nonrecurring operating, restructuring, and
merger-related expenses) experienced by Rational in recent quarters are not
necessarily indicative of future results, and period-to-period comparisons of
Rational's financial results should not be relied on as an indication of
future performance. Fluctuations in operating results have previously and may
continue to result in volatility in the price of Rational's common stock.
Due to all of the foregoing factors, it is possible that in some future
quarter, Rational's operating results will be below the expectations of public
market analysts and investors. In such event, the price of Rational's common
stock would likely be materially adversely affected, and significant declines
in stock prices frequently result in costly and lengthy securities litigation,
with its attendant costs, distraction, and liability exposure.
Volatility of Stock Price
The market price of the Company's common stock has been, and is likely to
continue to be, volatile. Factors such as new product announcements or changes
in product pricing policies by the Company or its competitors, quarterly
fluctuations in the Company's operating results, announcements of technical
innovations, announcements relating to strategic relationships or
acquisitions, changes in earnings estimates by analysts, and general
conditions in the software-development market, among other factors, may have a
significant impact on the market price of the Company's common stock. Should
the Company fail to introduce products on the schedule expected, the Company's
stock price could be adversely affected.
Any shortfall in anticipated operating results could have an immediate and
significant adverse effect on the market price of the Company's common stock.
Potential business synergies, if achieved, of Rational and Pure Atria may not
offset any such dilution. Further, the Company incurred substantial merger-
related charges in the quarter ended September 30, 1997. Although Rational
entered into the merger with the expectation that it would be accretive in the
long term, the merger has been dilutive in the initial periods following its
effective time, and there can be no assurance as to when the merger will
become accretive, if ever. Any failure of the Pure Atria merger to meet
expectations as to potential business synergies or any failure of the Pure
Atria merger to be accretive in any quarter could have an immediate and
significant adverse effect on the market price of the Company's common stock.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market for software and
high-technology company stocks or relating to Rational specifically have
resulted, and could in the future result, in an immediate and adverse effect
on the market price of Rational's common stock. Statements by financial or
industry analysts regarding the extent of the dilution in Rational's net
income per share resulting from operating results, the Pure Atria merger, or
other developments and the extent to which such analysts expect potential
business synergies to offset such dilution can be expected to contribute to
volatility in the market price of Rational's common stock. In addition, in
recent years the stock market in general, and the shares of technology
companies in particular, have experienced extreme price fluctuations. This
volatility has had a substantial effect on the market prices of securities
issued by many companies, including Rational, in certain cases for reasons
unrelated to the operating performance of the specific companies. These broad
market fluctuations may adversely affect the market price of Rational's common
stock. |
