| JUNIPER NETWORKS INC ITEM 1A Risk Factors Factors That May Affect Future Results Investments in equity securities of publicly traded companies involve significant risks |
| The market price of our stock reflects a higher multiple of expected future earnings than many other companies |
| Accordingly, even small changes in investor expectations for our future growth and earnings, whether as a result of actual or rumored financial or operating results, changes in the mix of the products and services sold, acquisitions, industry changes or other factors, could trigger significant fluctuations in the market price of our common stock |
| Investors in our securities should carefully consider all of the relevant factors, including but not limited to the following factors, that could affect our stock price |
| Fluctuating economic conditions make it difficult to predict revenues for a particular period and a shortfall in revenues may harm our operating results |
| Economic weakness, customer financial difficulties and constrained spending on network expansion have previously resulted (for example, in 2001 and 2002), and may in the future result, in decreased revenues and earnings and could also negatively impact our ability to forecast and manage our contract manufacturer relationships |
| Economic downturns may also lead to restructuring initiatives and associated expenses and impairment of investments |
| In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are, and will continue to be, fixed in the short-term |
| Uncertainty about future economic conditions makes it difficult to forecast operating results and to make decisions about future investments |
| Future economic weakness, customer financial difficulties and reductions in spending on network expansion could have a material adverse effect on demand for our products and consequently on our results of operations and stock price |
| Our quarterly results are inherently unpredictable and subject to substantial fluctuations and, as a result, we may fail to meet the expectations of securities analysts and investors, which could adversely affect the trading price of our common stock |
| Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate |
| The factors that may affect the unpredictability of our quarterly results include, but are not limited to, limited visibility into customer spending plans, changes in the mix of products sold, changing market conditions, including current and potential customer consolidation, competition, customer concentration, long sales and implementation cycles, regional economic and political conditions and seasonality |
| For example, many companies in our industry experience adverse seasonal fluctuations in customer spending patterns, particularly in the first and third quarters |
| As a result, we believe that quarter-to-quarter comparisons of operating results are not necessarily a good indication of what our future performance will be |
| It is likely that in some future quarters, our operating results may be below one or more of the expectations of securities analysts and investors in which case the price of our common stock may decline |
| Such a decline could occur, and has occurred in the past, even when we have met our publicly stated revenue and/or earnings guidance |
| We sell our products to customers that use those products to build networks and IP infrastructure and, if the demand for network and IP systems does not continue to grow, then our business, operating results and financial condition will be adversely affected |
| A substantial portion of our business and revenue depends on the growth of IP infrastructure and on the deployment of our products by customers that depend on the continued growth of IP services |
| As a result of changes in the economy and capital spending or the building of network capacity in excess of demand, all of which have in the past particularly affected telecommunications service providers, spending on IP infrastructure can vary, which could have a material adverse effect on our business and financial results |
| A limited number of our customers comprise a significant portion of our revenues and any decrease in revenue from these customers could have an adverse effect on our net revenues and operating results |
| A substantial majority of our net revenues depend on sales to a limited number of customers and distribution partners |
| Siemens accounted for greater than 10prca of our net revenues during the years ended December 31, 2005, 2004 and 2003 and Ericsson accounted for greater than 10prca of our net revenues during the year ended December 31, 2003 |
| This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results |
| Any downturn in the business of our key customers or potential new customers could significantly decrease 11 _________________________________________________________________ [65]Table of Contents sales to such customers, which could adversely affect our net revenues and results of operations |
| In addition, there has been and continues to be consolidation in the telecommunications industry (for example, the acquisitions of AT&T and MCI) |
| This consolidation may cause our customers who are involved in these acquisitions to suspend or indefinitely reduce their purchases of our products or have other unforeseen consequences |
| We face intense competition that could reduce our revenues and adversely affect our financial results |
| Competition is intense in the markets that we address |
| The IP infrastructure market has historically been dominated by Cisco Systems, Inc, with other companies such as Alcatel SA, Nortel Networks Corporation, and Huawei Technologies providing products to a smaller segment of the market |
| In addition, a number of other small public or private companies have products or have announced plans for new products to address the same challenges that our products address |
| In the service layer technologies market, we face intense competition from a broader group of companies including appliance vendors such as Cisco Systems, Inc and software vendors such as CheckPoint Software Technologies |
| In addition, a number of other small public or private companies have products or have announced plans for new products to address the same challenges that our products address |
| If we are unable to compete successfully against existing and future competitors on the basis of product offerings or price, we could experience a loss in market share and revenues and/or be required to reduce prices, which could reduce our gross margins, and which could materially and adversely affect our business, operating results and financial condition |
| The long sales and implementation cycles for our products, as well as our expectation that some customers will sporadically place large orders with short lead times, may cause our revenues and operating results to vary significantly from quarter to quarter |
| A customer’s decision to purchase certain of our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process |
| In particular, customers making critical decisions regarding the design and implementation of large or next-generation networks may engage in very lengthy procurement processes that may delay or impact expected future orders |
| Throughout the sales cycle, we may spend considerable time educating and providing information to prospective customers regarding the use and benefits of our products |
| Even after making the decision to purchase, customers may deploy our products slowly and deliberately |
| Timing of deployment can vary widely and depends on the skill set of the customer, the size of the network deployment, the complexity of the customer’s network environment and the degree of hardware and operating system configuration necessary to deploy the products |
| Customers with large networks usually expand their networks in large increments on a periodic basis |
| Accordingly, we may receive purchase orders for significant dollar amounts on an irregular basis |
| These long cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, may cause revenues and operating results to vary significantly and unexpectedly from quarter to quarter |
| We are dependent on sole source and limited source suppliers for several key components, which makes us susceptible to shortages or price fluctuations in our supply chain and we may face increased challenges in supply chain management in the future |
| With the current demand for electronic products, component shortages are possible and the predictability of the availability of such components may be limited |
| Growth in our business and the economy is likely to create greater pressures on us and our suppliers to accurately project overall component demand and to establish optimal component levels |
| If shortages or delays persist, the price of these components may increase, or the components may not be available at all |
| We may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner and our revenues and gross margins could suffer until other sources can be developed |
| We currently purchase numerous key components, including application-specific integrated circuits (ASICs), from single or limited sources |
| The development of alternate sources for those components is time consuming, difficult and costly |
| In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules |
| In the event of a component shortage or supply interruption from these suppliers, we may not be able to develop alternate or second sources in a timely manner |
| If, as a result, we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver product to our customers, which would seriously impact present and future sales, which would, in turn, adversely affect our business |
| 12 _________________________________________________________________ [66]Table of Contents In addition, the development, licensing or acquisition of new products in the future may increase the complexity of supply chain management |
| Failure to effectively manage the supply of key components and products would adversely affect our business |
| If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience manufacturing delays which would harm our business |
| We provide demand forecasts to our contract manufacturers |
| If we overestimate our requirements, the contract manufacturers may assess charges or we may have liabilities for excess inventory, each of which could negatively affect our gross margins |
| Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements, the contract manufacturers may have inadequate time or materials and components required to produce our products, which could delay or interrupt manufacturing of our products and result in delays in shipments and deferral or loss of revenues |
| We are dependent on contract manufacturers with whom we do not have long-term supply contracts, and changes to those relationships, expected or unexpected, may result in delays or disruptions that could cause us to lose revenue and damage our customer relationships |
| We depend primarily on independent contract manufacturers (each of whom is a third party manufacturer for numerous companies) to manufacture our products |
| Although we have contracts with our contract manufacturers, those contracts do not require them to manufacture our products on a long-term basis in any specific quantity or at any specific price |
| In addition, it is time consuming and costly to qualify and implement additional contract manufacturer relationships |
| Therefore, if we should fail to effectively manage our contract manufacturer relationships or if one or more of them should experience delays, disruptions or quality control problems in our manufacturing operations, or we had to change or add additional contract manufacturers or contract manufacturing sites, our ability to ship products to our customers could be delayed |
| Also, the addition of manufacturing locations or contract manufacturers would increase the complexity of our supply chain management |
| Each of these factors could adversely affect our business and financial results |
| Integration of past acquisitions and future acquisitions could disrupt our business and harm our financial condition and stock price and may dilute the ownership of our stockholders |
| We have made, and may continue to make, acquisitions in order to enhance our business |
| In 2005 we completed the acquisitions of Funk, Acorn, Peribit, Redline, and Kagoor |
| Acquisitions involve numerous risks, including problems combining the purchased operations, technologies or products, unanticipated costs, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees |
| There can be no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire |
| The integration of businesses that we have acquired has been, and will continue to be, a complex, time consuming and expensive process |
| For example, although we completed the acquisition of NetScreen in April 2004, integration of the products, operations, and personnel is a continuing activity and will be for the foreseeable future |
| Acquisitions may also require us to issue common stock that dilutes the ownership of our current stockholders, assume liabilities, record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition |
| In addition, if we fail in our integration efforts and are unable to efficiently operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices, our business and financial condition may be adversely affected |
| We rely on value-added resellers and distribution partners to sell our products, and disruptions to, or our failure to effectively develop and manage our distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenues from the sale of our products |
| Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of value-added reseller and distribution partners |
| The majority of our revenues are derived through value-added resellers and distributors, most of which also sell competitors’ products |
| Our revenues depend in part on the performance of 13 _________________________________________________________________ [67]Table of Contents these partners |
| The loss of or reduction in sales to our value-added resellers or distributors could materially reduce our revenues |
| Our competitors may in some cases be effective in incentivizing current or potential resellers and distributors to favor their products or to prevent or reduce sales of our products |
| If we fail to maintain relationships with our partners, fail to develop new relationships with value-added resellers and distributors in new markets or expand the number of distributors and resellers in existing markets, fail to manage, train or motivate existing value-added resellers and distributors effectively or if these partners are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer |
| In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our distributors |
| If those distributors provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted |
| Further, in order to develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support it, and those processes and procedures may become increasingly complex and inherently difficult to manage |
| Our failure to successfully manage and develop our distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenues from the sale of our products |
| We expect gross margin to vary over time and our recent level of product gross margin may not be sustainable |
| Our product gross margins will vary from quarter to quarter and the recent level of gross margins may not be sustainable and may be adversely affected in the future by numerous factors, including product mix shifts, increased price competition in one or more of the markets in which we compete, increases in material or labor costs, excess product component or obsolescence charges from our contract manufacturers, increased costs due to changes in component pricing or charges incurred due to component holding periods if our forecasts do not accurately anticipate product demand, warranty related issues, or our introduction of new products or entry into new markets with different pricing and cost structures |
| Recent rulemaking by the Financial Accounting Standards Board will require us to expense equity compensation given to our employees and will significantly harm our operating results and may reduce our ability to effectively utilize equity compensation to attract and retain employees |
| We historically have used stock options as a significant component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages |
| The Financial Accounting Standards Board has adopted changes that will require companies to record a charge to earnings for employee stock option grants and other equity incentives |
| We adopted this standard effective January 1, 2006 |
| By causing us to record significantly increased compensation costs, such accounting changes will reduce our reported earnings and will require us to reduce the availability and amount of equity incentives provided to employees, which may make it more difficult for us to attract, retain and motivate key personnel |
| Each of these results could materially and adversely affect our business |
| Our reported financial results could suffer if there is an impairment of goodwill or other intangible assets with indefinite lives |
| We are required to annually test, and review on an interim basis, our goodwill and intangible assets with indefinite lives, including the goodwill associated with past acquisitions and any future acquisitions, to determine if impairment has occurred |
| If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized |
| This would result in incremental expenses for that quarter which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred |
| For example, such impairment could occur if the market value of our common stock falls below certain levels or if the portions of our business related to companies we have acquired fail to grow at expected rates or decline |
| We cannot accurately predict the amount and timing of any impairment of assets |
| 14 _________________________________________________________________ [68]Table of Contents Our ability to process orders and ship product is dependent in part on our business systems and upon interfaces with the systems of third parties such as our suppliers or other partners |
| If our systems, the systems of those third parties or the interfaces between them fail, our business processes could be impacted and our financial results could be harmed |
| Some of our business processes depend upon our information technology systems and on interfaces with the systems of third parties |
| For example, our order entry system feeds information into the systems of our contract manufacturers, which enables them to build and ship our products |
| If those systems fail, our processes may function at a diminished level or not at all |
| This could negatively impact our ability to ship products or otherwise operate our business, and our financial results could be harmed |
| Our products are highly technical and if they contain undetected errors, our business could be adversely affected and we might have to defend lawsuits or pay damages in connection with any alleged or actual failure of our products and services |
| Our products are highly technical and complex, are critical to the operation of many networks and, in the case of our security products, provide and monitor network security and may protect valuable information |
| Our products have contained and may contain one or more undetected errors, defects or security vulnerabilities |
| Some errors in our products may only be discovered after a product has been installed and used by end customers |
| Any errors or security vulnerabilities discovered in our products after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations |
| In addition, we could face claims for product liability, tort or breach of warranty |
| Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention |
| In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed |
| A breach of network security could harm public perception of our security products, which could cause us to lose revenues |
| If an actual or perceived breach of network security occurs in the network of a customer of our security products, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed |
| This could cause us to lose current and potential end customers or cause us to lose current and potential value-added resellers and distributors |
| Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques |
| If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenues will suffer |
| We cannot guarantee that we will be able to anticipate future market needs or be able to develop new products or product enhancements to meet such needs or to meet them in a timely manner |
| If we fail to anticipate the market requirements or to develop new products or product enhancements to meet those needs, such failure could substantially decrease market acceptance and sales of our present and future products, which would significantly harm our business and financial results |
| Even if we are able to anticipate, develop and commercially introduce new products and enhancements, there can be no assurance that new products or enhancements will achieve widespread market acceptance |
| Any failure of our products to achieve market acceptance could adversely affect our business and financial results |
| If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business |
| Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors |
| Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved |
| Our products will be required to interoperate with many or all of the products within these networks as well as future products in order to meet our customers’ requirements |
| If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware, which could be costly and negatively impact our operating results |
| In addition, if our products do not interoperate with those of our customers’ networks, demand for our products could be adversely affected, orders for our products could be cancelled or our products could be returned |
| This could hurt our operating results, damage our reputation and seriously harm our business and prospects |
| 15 _________________________________________________________________ [69]Table of Contents Litigation or claims regarding intellectual property rights may be time consuming, expensive and require a significant amount of resources to prosecute, defend or make our products non-infringing |
| Third parties have asserted and may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are relevant to our products |
| For example, in 2003, Toshiba Corporation filed a lawsuit against us, alleging that our products infringe certain Toshiba patents |
| The asserted claims and/or initiated litigation may include claims against us or our manufacturers, suppliers or customers, alleging infringement of their proprietary rights with respect to our products |
| Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and may require us to develop non-infringing technologies or enter into license agreements |
| Furthermore, because of the potential for high awards of damages or injunctive relief that are not necessarily predictable, even arguably unmeritorious claims may be settled for significant amounts of money |
| If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to settle litigation for significant amounts of money, or if we fail to develop non-infringing technology or license required proprietary rights on commercially reasonable terms and conditions, our business, operating results and financial condition could be materially and adversely affected |
| We are a party to lawsuits, which, if determined adversely to us, could require us to pay damages which could harm our business and financial condition |
| We and certain of our current and former officers and current and former members of our board of directors are subject to various lawsuits |
| There can be no assurance that actions that have been brought against us or may be brought against us will be resolved in our favor |
| Regardless of whether they are in our favor, these lawsuits are, and any future lawsuits to which we may become a party will likely be, expensive and time consuming to defend or resolve |
| Such costs of defense and any losses resulting from these claims could adversely affect our profitability and cash flow |
| Due to the global nature of our operations, economic or social conditions or changes in a particular country or region could adversely affect our sales or increase our costs and expenses, which could have a material adverse impact on our financial condition |
| We conduct significant sales and customer support operations directly and indirectly through our distributors and value-added resellers in countries throughout the world and also depend on the operations of our contract manufacturers and suppliers that are located inside and outside of the United States |
| Accordingly, our future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, political or social unrest, natural disasters, epidemic disease, war, or economic instability in a specific country or region, trade protection measures and other regulatory requirements which may affect our ability to import or export our products from various countries, service provider and government spending patterns affected by political considerations and difficulties in staffing and managing international operations |
| Any or all of these factors could have a material adverse impact on our revenue, costs, expenses, results of operations and financial condition |
| We are exposed to fluctuations in currency exchange rates which could negatively affect our financial results and cash flows |
| Because a majority of our business is conducted outside the United States, we face exposure to adverse movements in non-US currency exchange rates |
| These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows |
| We also have some transactions that are denominated in foreign currencies, primarily the Japanese Yen, Hong Kong Dollar, British Pound and the Euro, related to our sales and service operations outside of the United States |
| An increase in the value of the US Dollar could increase the real cost to our customers of our products in those markets outside the United States where we sell in US Dollars, and a weakened dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we must purchase components in foreign currencies |
| Currently, we hedge only those currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and periodically will hedge anticipated foreign currency cash flows |
| The hedging activities undertaken by us are intended to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities |
| If our attempts to hedge against these risks are not successful, our net income could be adversely impacted |
| 16 _________________________________________________________________ [70]Table of Contents Traditional telecommunications companies and other large companies generally require more onerous terms and conditions of their vendors |
| As we seek to sell more products to such customers, we may be required to agree to terms and conditions that may have an adverse effect on our business |
| Traditional telecommunications companies and other large companies, because of their size, generally have had greater purchasing power and, accordingly, have requested and received more favorable terms, which often translate into more onerous terms and conditions for their vendors |
| As we seek to sell more products to this class of customer, we may be required to agree to such terms and conditions, which may include terms that affect the timing of our ability to recognize revenue and have an adverse effect on our business and financial condition |
| For example, many customers in this class have purchased products from other vendors who promised certain functionality and failed to deliver such functionality and/or had products that caused problems and outages in the networks of these customers |
| As a result, this class of customers may request additional features from us and require substantial penalties for failure to deliver such features or may require substantial penalties for any network outages that may be caused by our products |
| These additional requests and penalties, if we are required to agree to them, would affect our ability to recognize the revenues from such sales, which may negatively affect our business and our financial condition |
| Our products incorporate and rely upon licensed third-party technology and if licenses of third-party technology do not continue to be available to us or become very expensive, our revenues and ability to develop and introduce new products could be adversely affected |
| From time to time, we may be required to license additional technology from third parties to develop new products or product enhancements |
| Third-party licenses may not be available or continue to be available to us on commercially reasonable terms |
| Our inability to maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products and product enhancements, could require us to obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could harm our business, financial condition and results of operations |
| Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel |
| Our future success depends upon our ability to recruit and retain the services of key executive, engineering, sales, marketing and support personnel |
| The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the service provider and enterprise markets, is limited and competition for such individuals is intense |
| None of our officers or key employees is bound by an employment agreement for any specific term |
| The loss of the services of any of our key employees, the inability to attract or retain key personnel in the future or delays in hiring required personnel, particularly engineers and sales people, and the complexity and time involved in replacing or training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell or support our products |
| Our success depends upon our ability to effectively plan and manage our resources and restructure our business through rapidly fluctuating economic and market conditions |
| Past restructuring efforts may prove to be inadequate or may impair our ability to realize our current or future business objectives |
| Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting, and management process to enable us to effectively scale our business and adjust our business in response to fluctuating market opportunities and conditions |
| In periods of market expansion, we have increased investment in our business by, for example increasing headcount and increasing our investment in research and development and other parts of our business |
| Conversely, during 2001 and 2002, in response to downward trending industry and market conditions, we restructured our business and reduced our workforce |
| In addition, we expect that we will have to change our facilities in certain locations and we may face difficulties and significant expenses identifying and moving into suitable office space and subleasing or assigning any surplus space |
| These changes and other similar actions taken to respond to fluctuating market and economic conditions have placed, and our anticipated future operations will continue to place, significant demands on our management resources |
| This may increase the potential likelihood of other risks, and our business may suffer if we fail to effectively manage changes in the size and scope of our operations |
| 17 _________________________________________________________________ [71]Table of Contents We may not be able to successfully implement the initiatives we have undertaken in restructuring our business in the past and, even if successfully implemented, these initiatives may not be sufficient to meet the changes in industry and market conditions |
| Furthermore, our past workforce reductions may impair our ability to realize our current or future business objectives |
| Lastly, costs actually incurred in connection with restructuring actions may be higher than the estimated costs of such actions and/or may not lead to the anticipated cost savings, all of which could harm our results of operations and financial condition |
| If we fail to adequately evolve our financial and managerial control and reporting systems and processes, our ability to manage and grow our business will be negatively affected |
| Our ability to successfully offer our products and implement our business plan in a rapidly evolving market depends upon an effective planning and management process |
| We will need to continue to improve our financial and managerial control and our reporting systems and procedures in order to manage our business effectively in the future |
| If we fail to continue to implement improved systems and processes, our ability to manage our business and results of operations may be negatively affected |
| We are subject to risks arising from our international operations |
| We derive a majority of our revenues from our international operations, and we plan to continue expanding our business in international markets in the future |
| As a result of our international operations, we are affected by economic, regulatory and political conditions in foreign countries, including changes in IT spending generally, the imposition of government controls, changes or limitations in trade protection laws, unfavorable changes in tax treaties or laws, natural disasters, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, acts of terrorism and continued unrest in many regions and other factors, which could have a material impact on our international revenues and operations |
| In particular, in some countries we may experience reduced intellectual property protection |
| Moreover, local laws and customs in many countries differ significantly from those in the United States |
| In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us |
| Although we implement policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors and agents will not take actions in violations of them |
| Violations of laws or key control policies by our employees, contractors or agents could result in financial reporting problems, fines, penalties, prohibition on the importation or exportation of our products and could have a material adverse effect on our business |
| While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from recent legislation requiring companies to evaluate those internal controls |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent auditors to attest to, the effectiveness of our internal control over financial reporting |
| We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements |
| We have and will continue to incur significant expenses and devote management resources to Section 404 compliance on an ongoing basis |
| In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determine in the future that our internal controls over financial reporting are not effective as defined under Section 404, investor perceptions may be adversely affected and could cause a decline in the market price of our stock |
| Governmental regulations affecting the import or export of products could negatively affect our revenues |
| The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies, especially encryption technology |
| In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys |
| Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products could harm our international and domestic sales and adversely affect our revenues |
| Regulation of the telecommunications industry could harm our operating results and future prospects |
| The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations relating to the telecommunications industry |
| Currently, there are few laws or 18 _________________________________________________________________ [72]Table of Contents regulations that apply directly to access to or commerce on IP networks |
| We could be adversely affected by regulation of IP networks and commerce in any country where we operate |
| Such regulations could address matters such as voice over the Internet or using Internet Protocol, encryption technology, and access charges for service providers |
| In addition, regulations have been adopted with respect to environmental matters, such as the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) regulations adopted by the European Union, as well as regulations prohibiting government entities from purchasing security products that do not meet specified local certification criteria |
| Compliance with such regulations may be costly and time-consuming for us and our suppliers and partners |
| The adoption and implementation of such regulations could decrease demand for our products, and at the same time could increase the cost of building and selling our products as well as impact our ability to ship products into affected areas and recognize revenue in a timely manner, which could have a material adverse effect on our business, operating results and financial condition |
| Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results |
| Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations thereof |
| In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities |
| We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes |
| There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition |