| OPSWARE INC ITEM 1A RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K We have relatively limited experience operating as a software company, which makes it difficult to evaluate our future prospects |
| As a result of the sale of our Managed Services Business to EDS in fiscal 2003, our business model has shifted from providing managed Internet services to primarily licensing our software products |
| We have relatively limited experience operating as a software company |
| In addition, we have acquired existing businesses and a suite of software products from these businesses in order to address additional aspects of the IT automation market |
| We have limited experience operating these acquired businesses as well |
| Our potential for future profitability must be considered in light of the risks, uncertainties and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets |
| Some of these risks relate to our potential inability to: · sign contracts with a sufficient number of customers in the time frame we anticipate in order to meet our financial goals, including our bookings targets; · provide high levels of support for our products and support the deployment of a higher volume of our products; · develop new product offerings and extend the functionality of our existing technologies; · develop and extend our software products to effectively support a wide range of hardware, software and operating systems to meet the diverse needs of customers; · integrate acquired businesses and technologies; · develop effective direct sales and indirect channels to sell our suite of software products; · develop additional strategic partnerships to facilitate our ability to market and sell our software products; · develop the capability that permits our software products to be integrated with the variety of existing management systems that customers may already have deployed; and · establish awareness of our brand |
| If we do not successfully address these risks, we may not realize sufficient revenue to reach or sustain profitability |
| Our financial results may fluctuate significantly, which could cause our stock price to decline |
| Our revenue and operating results could vary significantly from period to period |
| These fluctuations could cause our stock price to fluctuate significantly or decline |
| Important factors that could cause our quarterly and annual financial results to fluctuate include: · our ability to obtain new customers and retain and generate expanded business from our existing customers; · the timing of signing contracts with customers; 9 ______________________________________________________________________ · that for the foreseeable future, whether we meet our sales targets will depend on closing a small number of relatively large deals each quarter; · the timing and magnitude of operating expenses and capital expenditures; · the effect of any non-cash compensation charges in connection with the issuance, cancellation or modification of stock option awards; · the timing of our satisfaction of revenue recognition criteria; · costs related to the various third-party technologies we may incorporate into our technology and services; · changes in our pricing policies or those of our competitors; · any downturn in our customers’ and potential customers’ businesses or in economic conditions generally; · the timing of product releases or upgrades by us or by our competitors; and · changes in the mix of higher-margin software products versus lower-margin integration and support services |
| We are planning to increase our operating expenses and capital expenditures in order to support our growth plans and based on estimates of future revenue |
| We believe that these expenditures are necessary in order to position our company for growth, but there is no assurance that these investments will result in sales and revenue substantial enough to compensate for these expenses |
| We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenue relative to planned expenditures could negatively impact our business and results of operations |
| Our quarterly sales have historically reflected a pattern in which a disproportionate percentage of a quarters’ total sales have occurred toward the end of that quarter |
| This makes predicting our revenue, earnings and cash flows for each financial period more difficult and increases the risk of unanticipated variations in our financial results |
| In addition, during our fiscal year 2006, the bulk of our license sales for the year occurred in the latter two fiscal quarters, and this pattern may continue in fiscal 2007 |
| This seasonality could make it more difficult to predict our financial results, which could have an adverse impact on the trading price of our common stock |
| Due to these and other factors, period-to-period comparisons of our operating results may not be meaningful |
| You should not rely on our results for any one period as an indication of our future performance |
| In future periods, our operating results may fall below the expectations of public market analysts or investors |
| If this occurs, the market price of our common stock would likely decline |
| Our operating results are and will continue to be highly dependent upon our relationship with EDS and any deterioration of our relationship with EDS could adversely affect the success of our business |
| Our operating results are largely dependent on our relationship with EDS and will continue to be so for the foreseeable future |
| In August 2002, we entered into a three-year, dlra52dtta0 million license and maintenance agreement with EDS In August 2004, we entered into an amendment of our license and maintenance agreement with EDS whereby EDS agreed to extend the term of the agreement through March 2008 and committed to pay minimum additional license and maintenance fees of approximately dlra50dtta0 million over the term of the extended license |
| If our relationship with EDS were to deteriorate, or if EDS’s own financial position were to deteriorate, our business and results of operations would be adversely affected |
| 10 ______________________________________________________________________ Although we extended our license and maintenance agreement with EDS through March 2008, we cannot assure you that EDS will renew the license beyond the extended term or that if EDS does renew the license beyond the extended term, it will do so on the terms contemplated in the agreement |
| Whether or not EDS continues to license our software may depend, in large part, on its level of customer satisfaction and its own financial position |
| In addition, we cannot assure you that EDS will achieve the benefits they expect from our software products or that they will be able to continue to deploy our software successfully or in the time frames contemplated by the license agreement |
| Each of these factors may affect EDS’ willingness to renew the license |
| If EDS does not renew the license, our business and operating results may be adversely affected and this may negatively impact our reputation and our ability to license our software products to other customers |
| In addition to these risks, the occurrence of any of the adverse events discussed elsewhere in these Risk Factors could negatively impact our relationship with EDS and, consequently, our business |
| If we fail to maintain or achieve benefits from our existing distribution channels and develop additional channels in the future, our financial results may suffer |
| We generate a portion of our revenue from sales of our products and services through our network of indirect channel partners, such as distributors, value-added resellers, systems integrators and OEM partners |
| We may not experience increased revenue from new channels and may see a decrease in revenue from our existing channels, which could harm our business |
| The loss of one or more of our channel partners, or any reduction or delay in their sales of our products and services could result in reductions in our revenue in future periods |
| In addition, our ability to increase our revenue in the future depends on our ability to expand our indirect distribution channels |
| Our dependence on indirect distribution channels presents a number of risks, including: · our channel partners may cease marketing our products and services with limited or no notice and with little or no penalty; · our channel partners are generally not subject to minimum sales requirements or any obligation to market our products to their customers; · we may face conflicts between the activities of our indirect channels and our direct sales and marketing activities; and · our channel partners in some cases may not give priority to the marketing of our products and services as compared to our competitors’ products or their own products |
| In particular, we entered into a distribution agreement in February 2006 with Cisco to distribute our ONAS product under the Cisco Systems brand name |
| The initial term of this agreement is three years, although it may be terminated earlier in certain circumstances |
| We may not fully realize the benefits anticipated under this agreement, such as additional opportunities to cross-sell our OSAS product, and the amount and timing of revenue recognized as a result of sales under this arrangement are uncertain |
| In addition, this agreement may displace some sales that might otherwise occur through our direct sales force or other indirect sales channels |
| Accordingly, we would need to generate a higher volume of sales under this agreement since our margins on sales under this agreement may be lower than on sales under our existing distribution arrangements |
| In addition, we have formed in the past, and intend to continue to form in the future, strategic relationships with other technology companies in order to obtain a broader reach for our products and services |
| We cannot guarantee that any new customer relationships or revenue, or other anticipated benefits, will result from these strategic relationships |
| In addition, in the event that our strategic partners experience financial difficulties, we may not continue to realize existing benefits from these relationships |
| 11 ______________________________________________________________________ The IT automation software market is relatively new, and our business will suffer if the market, or the technology standards within that market, do not develop as we expect |
| The market for our products and services is relatively new and may not grow as we expect or be sustainable |
| Potential customers may choose not to purchase IT automation software from a third-party provider due to concerns about security, reliability, vendor stability and viability, cost or system compatibility |
| It is possible that our products may never achieve broad market acceptance |
| We will incur operating expenses based to an extent on anticipated revenue trends that are difficult to predict given the recent emergence of the IT automation software market |
| If this market does not develop, or develops more slowly than we expect, we may not achieve significant market acceptance for our software, our rate of revenue growth may be constrained and our operating results may suffer |
| We have also joined together with a number of other technology companies in connection with the establishment of the data center mark-up language (“DCML”) standard within the data center environment |
| We cannot assure you that the DCML standard will become widely accepted or result in any benefits to our business |
| If the DCML standard does not gain acceptance as we expect, we may not achieve significant market acceptance, our technology and products may need to be modified and our operating results may suffer |
| The market for our technology and services is competitive and we may not have the resources required to compete effectively |
| The market for our technology is relatively new and therefore subject to rapid and significant change and we cannot assure you of the success of our strategy going forward |
| Our competitors may succeed in developing technologies and products that are more effective than our software, which could render our products obsolete and noncompetitive |
| Some of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater brand recognition, international presence and more established relationships in the industry than we have, each of which may allow them to gain greater market share |
| As a result, some of our competitors may be able to develop and expand their technology offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, devote greater resources to the marketing and sale of their technology and adopt more aggressive pricing policies than we can |
| Some of our competitors have lower priced offerings and offer solutions that may be easier to sell and demonstrate to prospective customers |
| In addition, certain large competitors, including hardware manufacturers, may be able to distribute their software products at minimal cost or free of charge to customers |
| Furthermore, the open source community may develop competing software products which could erode our market share and force us to lower our prices |
| Our competitors include large software and systems companies as well as small privately-held companies |
| Because some of our current competitors have pre-existing relationships with our current and potential customers, we might not be able to achieve sufficient market penetration to achieve or sustain profitability |
| These existing relationships can also make it difficult for us to obtain additional customers due to the substantial investment that these potential customers might have already made based on our competitors’ technology |
| Furthermore, our competitors may be able to devote substantial resources aimed at preventing us from establishing or enhancing our customer relationships |
| Our competitors and other companies may form strategic relationships with each other to compete with us |
| These relationships may take the form of strategic investments, joint-marketing agreements, licenses or other contractual arrangements, any of which may increase our competitors’ ability to address customer needs with their product offerings |
| Our competitors and other companies may consolidate with one another or acquire other technology providers, enabling them to offer a broader array of products and 12 ______________________________________________________________________ more effectively compete with us |
| This consolidation could affect prices and other competitive factors in ways that could impede our ability to compete successfully and harm our business |
| In addition, to the extent that we seek to expand our product lines, managerial and technical personnel skills and capacity through acquisitions, the trend in the software industry toward consolidation may result in our encountering competition, and paying higher prices, for acquired businesses |
| The rates we charge our customers for our software products may decline or the terms of our customer contracts upon renewal may be changed over time, either of which could reduce our revenue and affect our financial results |
| As our business model attracts the attention of competitors, we may experience pressure to decrease the fees we charge for our software products, which could adversely affect our revenue and our gross margins |
| If we are unable to sell our software at acceptable prices, or if we fail to offer additional products with sufficient profit margins, our revenue growth could slow, our margins may not improve and our business and financial results could suffer |
| In addition, we may choose to enter into new contracts with existing customers to better achieve our business objectives, and any new contracts could affect the manner in which we report our results of operations as well as the historical accounting treatment for any such contracts |
| We must satisfy the criteria for revenue recognition in order to recognize the fees generated under our license agreements as revenue |
| In order to recognize the fees generated under our license agreements as revenue, we must demonstrate that the license arrangement satisfies the criteria for revenue recognition including persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable |
| If we are unable to satisfy the criteria for revenue recognition, our operating results may suffer or may fluctuate significantly from period to period |
| In addition, the timing of our recognition of revenue will depend upon the mix of revenue that is recognized in connection with multi-year licenses under the residual method or ratably pursuant to the American Institute of Certified Public Accountants (AICPA) SOP 97-2 and SOP 98-9, under the percentage of completion or completed contract method of accounting, pursuant to SOP 81-1 |
| In addition, if we are not able to maintain VSOE of fair value for maintenance and services for all product lines in the future, we could be required, in certain circumstances, to recognize license, maintenance and professional services revenues ratably over the maintenance period or defer all revenue recognition until professional services are delivered |
| Our revenue recognition requirement, and accordingly the length of time between execution of a sales contract and recognition of revenue, varies among our three primary products |
| As a result, the mix of sales of particular products will impact our recognition of revenues from these sales in future quarters |
| Our sales in any quarter depend on a small number of relatively large transactions Our quarterly sales to customers other than EDS, and consequently the revenues that we recognize in subsequent quarters, are especially subject to fluctuation, because they normally depend on the completion of a small number of relatively large license transactions |
| This dependence on large orders makes our net revenue and operating results more likely to vary from quarter to quarter, and more difficult to predict, because the loss or delay of any particular large order is significant |
| As a result, our operating results could be adversely impacted if any large orders are delayed or canceled in any future period |
| Sales of our products generally involve lengthy sales cycles, which may cause our financial results to suffer |
| We focus our sales efforts on enterprises, government agencies and service providers |
| Sales of our products to these entities generally involve a long sales cycle |
| The length of the average sales cycle could 13 ______________________________________________________________________ make it more difficult for us to predict revenue and plan expenditures accordingly |
| The sales cycle associated with the purchase of our products is subject to a number of significant risks over which we have little or no control, such as: · customers’ budget cycles, budgetary constraints and internal acceptance procedures; · the limited experience and customer references we have from operating as a software company; · concerns about the introduction or announcement of new products or enhancements by our customers or us; and · potential downturns in the IT market and in economic conditions generally |
| In addition, the time it takes to demonstrate and deploy our software with these accounts may be longer than a non-enterprise customer given the complexity of their operations, which may delay our ability to recognize revenue from sales to these accounts and may affect customer satisfaction |
| We may continue to incur significant operating losses and negative cash flow in future periods |
| We may be required to spend significant funds to continue developing our software products, and to expand our research and development and sales and marketing organizations to fit the needs of our business |
| We have incurred significant operating and net losses and negative cash flow in the past and have not achieved operating profitability |
| If our revenue grows more slowly than we anticipate or if our operating expenses increase by more than we expect, our cash flow and operating results will suffer |
| Consequently, it is possible that we will never achieve operating profitability |
| Even if we do achieve positive cash flow or profitability in any one quarter, we may not sustain or increase positive cash flow or profitability on a quarterly or annual basis in the future |
| In addition, any decision to restructure our operations, to exit any activity or to eliminate any excess capacity could result in significant accounting charges |
| Future business combinations may also result in restructuring or other accounting charges |
| These charges could result in greater net losses, could transform an otherwise profitable quarter into a net loss in future periods, or could materially impair earnings should we achieve profitability in the future |
| Our revenue and operating results will be highly dependent upon our ability to provide high levels of customer satisfaction |
| Our products must integrate with many existing computer systems and software programs used by our customers |
| In addition, integration requires adaptation to each customer environment, both in terms of interoperability and to meet the particular goals and objectives of each customer for our products |
| This integration can be complex, costly and time consuming, and can cause delays in the deployment of our products for customers |
| Customers could become dissatisfied with our products if deployments within customer environments prove to be difficult, costly or time consuming, and this could negatively impact our ability to sell our products in the future |
| We provide technical support to our customers pursuant to contracts that are generally renewable annually |
| Our customers’ willingness to renew their maintenance and support agreements, enter into new contracts for additional products and act as a reference account will depend in large part on our ability to provide high levels of customer service |
| If we fail to provide the level of support demanded by our customers or if the capabilities of our products do not match our customers’ expectations, they may not renew their maintenance and support agreements or enter into new contracts for additional products and may not act as a reference account, each of which could have a material adverse impact on our revenue and operating results |
| 14 ______________________________________________________________________ We may engage in additional acquisitions or investments, which may place a strain on our resources, cause dilution to our stockholders and harm our operating results |
| From time to time we may make acquisitions of or investments in other companies in an effort to increase our customer base, broaden our product offerings or expand our technology platform |
| For example, in February 2005, we acquired Rendition Networks, a network device automation company located in Redmond, Washington |
| If we fail to evaluate and execute acquisitions or investments successfully, they may seriously harm our business |
| We may not realize anticipated benefits from acquisitions if we are unable to do the following: · effectively market and sell the newly acquired products, and capitalize on cross-selling opportunities; · effectively provide services to any newly acquired customers; · accurately forecast the financial impact of the transaction, including but not limited to, accounting charges related to the impairment of assets acquired and transaction expenses; · manage the expenses of the acquired business; · integrate and retain personnel; · manage geographically dispersed operations; and · address unforeseen liabilities or risks associated with the acquired company |
| Integrating acquired businesses has been and will continue to be a complex, time consuming and expensive process |
| To integrate acquired businesses, we must implement our technology systems in the acquired operations and integrate and manage the personnel of the acquired operations |
| Our success in completing the integration of acquired businesses may impact the market acceptance of such acquisitions, and our willingness to acquire additional businesses in the future |
| Other challenges of integration include our ability to incorporate acquired products and business technology into our existing product lines, including consolidating technology with duplicative functionality or designed on a different technological architecture, and our ability to sell the acquired products through our existing or acquired sales channels |
| Further, the difficulties of integrating acquired businesses could disrupt our ongoing business, distract our management focus from other opportunities and challenges, and increase our expenses and working capital requirements |
| Future acquisitions by us may result in entering into markets or acquiring technologies in areas in which we have little experience |
| Future acquisitions also may result in customer dissatisfaction, new competitors, performance problems with an acquired company and its technology, dilutive issuances of equity securities, the use of a substantial portion of our cash and investment balances, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in significant impairment charges or amortization expense |
| Any of the foregoing and other factors could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated benefits of acquisitions |
| Mergers and acquisitions of high technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition |
| Our business is subject to changing regulation that has increased both our costs and the risk of noncompliance |
| Our business, results of operations or financial condition could be adversely affected if laws, regulations or standards relating to us are implemented or changed |
| 15 ______________________________________________________________________ In particular, we are subject to rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded |
| These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have recently issued new requirements and regulations and continue to develop additional regulations and requirements in response to recent laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002 |
| Our efforts to comply with these new regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| Any failure to comply with the reforms required by these new laws and regulations could significantly harm our business, operating results and financial condition |
| In particular, if we do not adequately manage and evolve our financial reporting and managerial systems and processes as necessary, our ability to manage and grow our business may be harmed |
| Unfavorable economic conditions and reductions in information technology spending could limit our ability to grow our business |
| Our business and operating results are subject to the effects of changes in general economic conditions and changes in the information technology market |
| In addition, fears of global recession, war and acts of terrorism may impact global economies negatively |
| We believe that, during the past few years, poor US economic conditions, as well as a decline in worldwide economic conditions, led to reduced IT spending |
| If these conditions resurface, demand for our products may be reduced |
| Our management is required to make forecasts with respect to economic trends and general business conditions in order to develop budgets, plan research and development strategies and perform a wide variety of general management functions |
| To the extent that our forecasts are incorrect, our performance may suffer because of a failure to properly align our corporate strategy with economic conditions |
| If we do not develop our direct sales organization, we will have difficulty acquiring customers |
| Our products require a sophisticated sales effort targeted at a limited number of key people within our prospective customers’ organizations |
| Because the market for our technology and services is new, many prospective customers are unfamiliar with the products we offer |
| During our 2006 fiscal year, we substantially increased the size of our direct sales force in order to enhance our geographic and vertical market segment coverage, and we intend to continue to increase our sales force during fiscal 2007 |
| Our new sales personnel will require extensive training and time to become productive, and there is no guarantee that they will produce at the levels that we anticipate |
| In addition, competition for these individuals is intense, and we may not be able to hire and retain the type and number of sales personnel we need |
| Moreover, even after we hire these individuals, they require extensive training and time to become productive |
| If we decide, but are unable, to expand our direct sales force and train new sales personnel as rapidly as necessary, we may not be able to increase market awareness and sales of our products, which may prevent us from growing our revenue and achieving and maintaining profitability |
| Future changes in accounting standards or our interpretation of current standards, particularly changes affecting revenue recognition, could cause unexpected fluctuations in reported revenue |
| Future changes in accounting standards or our interpretation of current standards, particularly those affecting revenue recognition, could require us to change our accounting policies |
| These changes could cause deferral of revenue recognized in current periods to subsequent periods or accelerate recognition of deferred revenue to current periods, each of which could impair our ability to meet securities analysts’ and investors’ expectations, which could cause a decline in our stock price |
| 16 ______________________________________________________________________ Changes in the accounting treatment of stock options will significantly impact our results of operations and could negatively impact our ability to attract and retain employees |
| Changes in the accounting treatment for stock options will require us to account for employee stock options as compensation expense on our financial statements commencing February 1, 2006 |
| We are currently evaluating option valuation methodologies and assumptions permitted by the FASB for purposes of implementing the change in accounting treatment |
| This change will significantly impact our reported results of operations and our timing to achieve profitability |
| We have historically used stock options and other forms of equity compensation as key components 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 changing regulatory landscape could make it more difficult and expensive for us to grant stock options to employees in the future |
| In light of these changes, we may modify our equity compensation strategy to emphasize equity incentives other than stock options, including increased use of certain performance-related features |
| If employees believe that the incentives that they would receive under a modified strategy are less attractive, we may find it difficult to attract, retain and motivate employees |
| To the extent that new regulations make it more difficult or expensive to grant equity instruments to employees, we may incur increased compensation costs, further change our equity compensation strategy or find it increasingly difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business, financial condition or results of operations |
| If we are unable to manage rapid growth and change, our operating results could be adversely affected |
| We have, in the past, experienced significant growth and we believe this growth may continue |
| To successfully manage past growth and any future growth, we will need to continue to implement additional management information systems, continue the development of our operating, administrative, financial and accounting systems and controls and maintain close coordination among our executive, engineering, finance, legal, marketing, sales and operations organizations |
| Any failure by us to properly manage growth could impair our ability to attract and service customers and could cause us to incur higher operating costs and experience delays in the execution of our business plan |
| In particular, we plan to increase our international sales force and operations over the long term |
| Expanding internationally requires significant management attention and financial resources, and we may not generate sufficient revenues to cover these expenses |
| In addition, our international business activities are subject to a variety of risks, including the adoption of or changes in laws, currency fluctuations and political and economic conditions that could restrict or eliminate our ability to conduct business in foreign jurisdictions |
| If we do not develop and maintain productive relationships with systems integrators, our ability to deploy our software, generate sales leads and increase our revenue sources may be limited |
| We intend to develop additional relationships with a number of computing and systems integration firms to enhance our sales, support, service and marketing efforts, particularly with respect to the implementation and support of our products, as well as to help generate sales leads and assist in the sales process |
| Many such firms have similar, and often more established, relationships with our competitors |
| These systems integrators may not be able to provide the level and quality of service required to meet the needs of our customers |
| If we are unable to develop and maintain effective relationships with systems integrators, or if they fail to meet the needs of our customers, our business could be adversely affected |
| 17 ______________________________________________________________________ Because our success depends on our proprietary technology, if third parties infringe our intellectual property or if we are unable to rely upon the legal protections for our technology, we may be forced to expend significant resources enforcing our rights or suffer competitive injury |
| Our success depends in large part on our proprietary technology |
| We have a number of issued patents and pending patent applications, and we currently rely on a combination of copyright, trademark, trade secret and other laws and restrictions on disclosure to protect our intellectual property rights |
| These legal protections afford only limited protection, and our means of protecting our proprietary rights may not be adequate |
| Our intellectual property may be subject to even greater risk in foreign jurisdictions, as the laws of many countries do not protect proprietary rights to the same extent as the laws of the United States |
| If we cannot adequately protect our intellectual property, our competitive position may suffer |
| We may be required to spend significant resources to monitor and police our intellectual property rights |
| We may not be able to detect infringement and may lose our competitive position in the market before we are able to ascertain any such infringement |
| In addition, competitors may design around our proprietary technology or develop competing technologies |
| Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement |
| Any such litigation could result in significant costs and diversion of resources, including the attention of senior management |
| If our products infringe on the intellectual property rights of others, we could face costly litigation, which could cause us to pay substantial damages and ongoing royalties, and limit our ability to use our technology or sell some or all of our products |
| Other companies, including our competitors, may obtain patents or other proprietary rights that could prevent, limit or interfere with our ability to make, use or sell our products |
| As a result, we may be found to infringe on the proprietary rights of others |
| Intellectual property litigation or claims could force us to do one or more of the following: · engage in costly litigation and pay substantial damages to third parties, and indemnify customers or commercial partners; · stop licensing technologies that incorporate the challenged intellectual property; · terminate existing contracts with customers or with channel partners; · contribute portions of our proprietary technology to the open source community; · obtain a license from the holder of the infringed intellectual property right, which may not be available on reasonable terms or at all; or · redesign our technology and products, if feasible |
| If we are forced to take any of the foregoing actions, our business and financial condition may be seriously harmed |
| In addition, the occurrence of any of these conditions could have the effect of increasing our costs and reducing our revenue |
| Our insurance for potential claims of this type may not be adequate or available to indemnify us for all liability that may be imposed |
| We use a limited amount of what we believe to be open source software in our products and may use more of this software in the future |
| As a result, we could be subject to suits by third parties claiming ownership of what we believe to be open source software or we could be found to be non-compliant with the terms and conditions of the open source licenses that we use |
| Any non-compliance could result in litigation or loss of the right to use this software |
| In addition, potential customers may delay or decline a 18 ______________________________________________________________________ purchase of technology involving open source software, and open source license terms may result in unanticipated obligations for us or our customers |
| Our business will suffer if we do not enhance our products or introduce new products and upgrades to meet changing customer requirements |
| The market for our products and services is characterized by rapid technological change, uncertain product life cycles, changes in customer demands, evolving industry standards and increased complexity and interdependence of our applications |
| Any delays in responding to these changes and developing and releasing enhanced or new products and upgrades could hinder our ability to retain existing and obtain new customers |
| In particular, our technology is designed to support a variety of hardware and software products that we believe to be proven and among the most widely used |
| We cannot be certain, however, that present and future customers will continue to use these products |
| Even if they do, new versions of these products are likely to be released and we will need to adapt our technology to these new versions |
| We must, therefore, constantly modify and enhance our technology to keep pace with changes made to our customers’ hardware and software configurations |
| If we fail to promptly modify or enhance our technology in response to evolving customer needs and demands, fail to introduce new products and upgrades or fail to fully develop our new product offerings, our technology may not achieve widespread acceptance and could become obsolete, which would significantly harm our business |
| As we introduce new products or technologies into existing customer environments, we may experience performance and functionality problems associated with incompatibility among different versions of hardware, software and networking products |
| To the extent that such problems occur, we may face adverse publicity, loss of sales, loss of customer satisfaction and delay in market acceptance of our products or customer claims against us, any of which could harm our business |
| We rely on third-party software to develop and deliver our products to our customers, and the loss of access to this software could harm our business |
| As part of our normal operations in connection with the development and delivery of our software, we license software from third-party commercial vendors |
| These products may not continue to be available on commercially reasonable terms, or at all |
| The loss of these products could result in delays in the sale of our software until equivalent technology, if available, is identified, procured and integrated, and these delays could result in lost revenue |
| Further, to the extent that we incorporate these products into our software and the vendors from whom we purchase these products increase their prices, our gross margins could be negatively impacted |
| Defects or security flaws in our products or claims asserted against us could result in the loss of customers, a decrease in revenue, unexpected expenses, loss of competitive market share and liability claims |
| Our products depend on complex software, both internally developed and licensed from third parties |
| Also, our customers may use our products with other companies’ products that also contain complex software |
| If our software does not meet performance requirements, our customer relationships will suffer |
| Complex software often contains errors and is susceptible to computer viruses and may contain security vulnerabilities |
| Any failure or poor performance of our software or the third party software with which it is integrated could result in: · delayed or diminished market acceptance of our software products; · delays in product shipments; · unexpected expenses and diversion of resources to identify the source of errors or to correct errors; 19 ______________________________________________________________________ · damage to our reputation; or · liability claims and loss of future revenue |
| Although our agreements with customers generally contain provisions designed to limit our exposure to potential liability claims, these provisions may not be effective to the extent warranty exclusions or similar limitations of liability are unenforceable |
| In addition, the extent of these limitations may require negotiation |
| If any claim is made against us, we may be required to expend significant cash resources in defense and settlement of the claim |
| If we are unable to retain our executive officers or key technical personnel, we may not be able to successfully manage our business or achieve our objectives |
| Our business and operations are substantially dependent on the performance of our key employees, all of whom are employed on an at-will basis |
| If we lose the services of one or more of our executive officers or key technical employees, in particular, Marc L Andreessen, our Chairman, Benjamin A Horowitz, our President and Chief Executive Officer, or Timothy A Howes, our Chief Technical Officer, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives |
| Our business will suffer if we are unable to hire and retain highly qualified employees |
| Our future success depends on our ability to hire and retain highly qualified technical, sales and managerial personnel |
| Our failure to hire and retain qualified personnel could seriously disrupt our operations and increase our costs by forcing us to use more expensive outside consultants and by reducing the rate at which we can increase revenue |
| As our customer base and revenue grow, we may need to hire additional qualified personnel |
| Competition for qualified personnel can be intense, and we may not be able to attract, train, integrate or retain a sufficient number of qualified personnel if we need to do so in the future |
| Important components of the compensation of our personnel are stock options and restricted stock, which typically vest over a four-year period |
| We may face significant challenges in retaining our employees if the value of our stock declines |
| To retain our employees, we expect to continue to grant new options subject to vesting schedules, which will be dilutive to the investments of our existing stockholders |
| If our stock price does not increase in the future, we may need to exchange options for new options or restricted stock, issue new options or grant additional shares of stock to motivate and retain our employees |
| To the extent we issue additional options or shares of restricted stock, existing stockholders will experience dilution |
| Our stock price has been volatile and could decline |
| The market price of our common stock has fluctuated significantly in the past, will likely continue to fluctuate in the future and may decline |
| The market for technology stocks has been extremely volatile, and has from time to time experienced significant price and volume fluctuations that bear little relationship to the past or present operating performance of those companies |
| Furthermore, our common stock is relatively thinly traded, which contributes significantly to the volatility of our stock price |
| Due to the low trading volume of our stock, stockholders may not be able to purchase or sell shares, particularly large blocks of shares, as quickly and as inexpensively as if the trading volume were higher |
| This could result in greater volatility in our stock price |
| Among the factors that could affect our stock price are: · actual or anticipated variations in our quarter-to-quarter operating results; 20 ______________________________________________________________________ · the loss of any of our significant customers or our failure to obtain new customers or renew existing contracts; · announcements by us or our competitors of significant contracts, new or enhanced products or services, acquisitions, distribution partnerships, joint ventures or capital commitments; · changes in our financial estimates or investment recommendations by securities analysts following our business; · our sale of common stock or other securities in the future; · changes in economic and capital market conditions for companies in our sector; · changes in the enterprise software markets; · changes in market valuations or earnings of our competitors; · changes in business or regulatory conditions; · interest rates and other factors affecting the capital markets; · fluctuations in the trading volume of our common stock; and · the occurrence of any of the adverse events discussed elsewhere in these Risk Factors |
| In addition, if our stockholders sell substantial amounts of our common stock in the public market, or if any of our officers or directors were to sell shares of our commons stock held by them, the market price of our common stock could fall |
| We may require additional capital to fund our operations or may elect to raise additional capital if the market permits |
| We believe that our current cash balances, including cash and cash equivalents, and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months |
| However, if our licensing revenue does not meet our expectations, if we encounter unforeseen expenses or if our business plan changes, we may require additional equity or debt financing |
| In addition, we may elect to raise additional capital if market conditions permit in order to increase our cash balance and expand our business |
| If we elect to raise additional capital in the future, we cannot be sure that we will be able to secure additional financing on acceptable terms, or at all |
| If we elect to raise additional capital through means of an equity financing, existing holders of our common stock will suffer dilution |
| Additionally, holders of any future debt instruments or preferred stock may have rights senior to those of the holders of our common stock |
| Any debt financing we raise could involve substantial restrictions on our ability to conduct our business and to take advantage of new opportunities |
| Insiders have substantial control over us and this could delay or prevent a change in control and could negatively affect your investment |
| As of April 1, 2006, our officers and directors and their affiliates beneficially own, in the aggregate, approximately 25prca of our outstanding common stock |
| These stockholders are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could have the effect of delaying or preventing a third party from acquiring control over us and could affect the market price of our common stock |
| In addition, the interests of certain large stockholders may not always coincide with our interests or the interests of other stockholders, and, accordingly, these stockholders could approve transactions or agreements that would not otherwise be approved by other stockholders generally |
| 21 ______________________________________________________________________ We have implemented anti-takeover provisions that could make it more difficult to acquire us |
| Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors, even if doing so would be beneficial to our stockholders |
| These provisions include: · classifying our board of directors into three groups so that the directors in each group will serve staggered three-year terms, which would make it difficult for a potential acquirer to gain immediate control of our board of directors; · authorizing the issuance of shares of undesignated preferred stock without a vote of stockholders; · prohibiting stockholder action by written consent; and · limitations on stockholders’ ability to call special stockholder meetings |