| SALESFORCE COM INC ITEM 1A RISK FACTORS RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS Risks Related to Our Business and Industry If our on-demand application service is not widely accepted, our operating results will be harmed |
| We derive substantially all of our revenue from subscriptions to our on-demand application service, and we expect this will continue for the foreseeable future |
| As a result, widespread acceptance of our service is critical to our future growth and success |
| Factors that may affect market acceptance of our service include: • reluctance by enterprises to migrate to an on-demand application service; • a limited number of service offerings and risks associated with developing new service offerings; • the price and performance of our service; • the level of customization we can offer; • the availability, performance and price of competing products and services; 14 ______________________________________________________________________ [44]Table of Contents • reluctance by enterprises to trust third parties to store and manage their internal data; and • adverse publicity about us, our service or the viability, reliability or security of on-demand application services generally from third party reviews, industry analyst reports and adverse statements made by competitors |
| The inability of our on-demand application service to achieve widespread market acceptance would harm our business |
| Defects or disruptions in our service could diminish demand for our service and subject us to substantial liability |
| Because our service is complex and we have incorporated a variety of new computer hardware and software, both developed in-house and acquired from third party vendors, our service may have errors or defects that users identify after they begin using it that could result in unanticipated downtime for our subscribers and harm our reputation and our business |
| Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released |
| We have from time to time found defects in our service and new errors in our existing service may be detected in the future |
| In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data |
| Since our customers use our service for important aspects of their business, any errors, defects, disruptions in service or other performance problems with our service could hurt our reputation and may damage our customers’ businesses |
| If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation |
| Interruptions or delays in service from our third-party Web hosting facilities could impair the delivery of our service and harm our business |
| As of January 31, 2006, we serve all of our customers from a single, third-party Web hosting facility located on the west coast of the United States, operated by Equinix, Inc |
| As part of our current disaster recovery arrangements, all of our customers’ data is currently replicated in near real-time in a separate standby Equinix facility located on the east coast |
| We do not control the operation of any of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events |
| They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct |
| Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at both facilities could result in lengthy interruptions in our service |
| In addition to the west coast and east coast facilities, we have an agreement with SunGard Data Systems, a provider of availability services, to provide access to a geographically remote disaster recovery facility that would provide us with access to hardware, software and Internet connectivity in the event the Web hosting facilities become unavailable |
| Even with the disaster recovery arrangements, our service could be interrupted |
| As we continue to add data center capacity, we may move or transfer data |
| Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service |
| Further, any damage to, or failure of, our systems generally could result in interruptions in our service |
| Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates |
| Our business will also be harmed if our customers and potential customers believe our service is unreliable |
| We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our service |
| We rely on computer hardware purchased or leased and software licensed from third parties in order to offer our service, including database software from Oracle Corporation |
| This hardware and software may not continue 15 ______________________________________________________________________ [45]Table of Contents to be available on commercially reasonable terms, or at all |
| Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business |
| Any errors or defects in third-party hardware or software could result in errors or a failure of our service which could harm our business |
| If our security measures are breached and unauthorized access is obtained to a customer’s data, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant liabilities |
| Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability |
| If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, during transfer of data to additional data centers or at any time, and, as a result, someone obtains unauthorized access to one of our customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability |
| Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures |
| If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers |
| The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed |
| The market for CRM applications is intensely competitive and rapidly changing, barriers to entry are relatively low, several of our competitors are larger and have more resources than we do, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future |
| If we fail to compete effectively, our operating results will be harmed |
| Some of our principal competitors offer their products at a lower price, which has resulted in pricing pressures |
| If we are unable to maintain our current pricing, our operating results could be negatively impacted |
| In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our service to achieve or maintain more widespread market acceptance, any of which could harm our business |
| Our current principal competitors include: • enterprise software application vendors including Amdocs Limited, SSA Global Technologies, Inc, which recently acquired Epiphany, Inc, Epicor, IBM Corporation, Microsoft Corporation, SAP AG, and Oracle Corporation, which recently acquired Siebel Systems, Inc |
| ; • packaged CRM software vendors, some of whom offer hosted services, such as FrontRange Solutions, Inc, Onyx Software Corp, Pivotal Corporation, which is owned by CDC Software Corporation, a subsidiary of chinadotcom corporation, Sage Group plc, and SugarCRM; • on-demand CRM application service providers such as Oracle, SAP, NetSuite, Inc, RightNow Technologies, Inc, and Salesnet, Inc |
| ; and • enterprise application service providers including British Telecom and IBM In addition, we face competition from businesses that develop their own CRM applications internally, as well as from enterprise software vendors and online service providers who may develop and/or bundle CRM products with their products in the future |
| For small business customers, we also face competition from companies whose offering is based on Microsoft Outlook and Excel for limited contact management functionality |
| We also face competition from some of our larger and more established competitors who historically have been packaged CRM software vendors, but who also have directly competitive on-demand CRM application services offerings, such as Siebel Systems’ Siebel CRM OnDemand, which was acquired by Oracle |
| Our 16 ______________________________________________________________________ [46]Table of Contents professional services organization competes with a broad range of large systems integrators, including Accenture Ltd, BearingPoint, Inc |
| and IBM, as well as smaller independent consulting firms specializing in CRM implementations |
| We have relationships with many of these consulting companies and frequently work cooperatively on projects with them, even as we compete for business in other customer engagements |
| Many of our potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources |
| In addition, many of our potential competitors have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants, system integrators and resellers |
| As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements |
| Furthermore, because of these advantages, even if our service is more effective than the products that our competitors offer, potential customers might accept competitive products and services in lieu of purchasing our service |
| For all of these reasons, we may not be able to compete successfully against our current and future competitors |
| If we experience significant fluctuations in our operating results and rate of growth and fail to balance our expenses with our revenue and earnings expectations, our results would be harmed and our stock price may fall rapidly and without advance notice |
| Due to our limited operating history, our evolving business model and the unpredictability of our emerging industry, we may not be able to accurately forecast our rate of growth |
| We base our current and future expense levels and our investment plans on estimates of future revenue and future rate of growth |
| We may not be able to adjust our spending quickly enough if our revenue falls short of our expectations |
| As a result, we expect that our operating results may fluctuate significantly on a quarterly basis |
| Revenue growth may not be sustainable and may decrease in the future |
| We believe that period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance |
| Our quarterly results can fluctuate and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially |
| Our quarterly operating results are likely to fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline |
| Some of the important factors that could cause our revenues and operating results to fluctuate from quarter to quarter include: • the requirement to begin expensing stock options on February 1, 2006, which is the start of our fiscal 2007; • our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers’ requirements; • the renewal rates for our service; • changes in our pricing policies; • the introduction of new features to our service; • the rate of expansion and effectiveness of our sales force; • the length of the sales cycle for our service; • new product and service introductions by our competitors; • our success in selling our service to large enterprises; • variations in the revenue mix of editions of our service; 17 ______________________________________________________________________ [47]Table of Contents • technical difficulties or interruptions in our service; • expenses related to our new data centers; • changes in foreign currency exchange rates; • changes in tax rates and adjustments to the valuation allowance for our deferred tax assets; • general economic conditions in our geographic markets; • the timing of additional investments in our on-demand application service and in our consulting service; • regulatory compliance costs; • payment defaults by customers; • costs associated with future acquisitions of companies and technologies; and • extraordinary expenses such as litigation or other dispute-related settlement payments |
| Some of these factors are not within our control, and the occurrence of one or more of them might cause our operating results to vary widely |
| As such, we believe that quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and should not be relied upon as an indication of future performance |
| We have incurred significant operating losses in the past and may incur significant operating losses in the future |
| We incurred significant losses in each fiscal quarter from our inception in February 1999 through fiscal 2003 and we have begun generating profits only since fiscal 2003 |
| As we are a relatively young company in an emerging market and with the new requirement to begin expensing stock options in fiscal 2007, we may not be able to maintain profitability and we may again incur significant operating losses in the future |
| In addition, we expect our costs and operating expenses to increase in the future as we expand our operations |
| You should not consider recent quarterly revenue growth as indicative of our future performance |
| In fact, in future quarters we may not have any revenue growth and our revenue could decline |
| Furthermore, if our costs and operating expenses exceed our expectations, our financial performance will be adversely affected |
| Because we recognize revenue from subscriptions for our service over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our operating results |
| We generally recognize revenue from customers ratably over the terms of their subscription agreements, which are typically 12 to 24 months, although terms can range from one to 60 months |
| As a result, much of the revenue we report in each quarter is deferred revenue from subscription agreements entered into during previous quarters |
| Consequently, a decline in new or renewed subscriptions in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters |
| In addition, we may be unable to adjust our cost structure to reflect these reduced revenues |
| Accordingly, the effect of significant downturns in sales and market acceptance of our service may not be fully reflected in our results of operations until future periods |
| Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term |
| The market for our technology delivery model and on-demand application services is immature and volatile, and if it does not develop or develops more slowly than we expect, our business will be harmed |
| The market for on-demand application services is relatively new and unproven, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance |
| Our success will depend to a substantial extent on the willingness of enterprises, large and small, to increase their use of on-demand application services in general, and for CRM in particular |
| Many enterprises have invested substantial personnel 18 ______________________________________________________________________ [48]Table of Contents and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to an on-demand application service |
| Furthermore, some enterprises may be reluctant or unwilling to use on-demand application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services |
| If enterprises do not perceive the benefits of on-demand application services, then the market for these services may not develop at all, or it may develop more slowly than we expect, either of which would significantly adversely affect our operating results |
| In addition, as a new company in this unproven market, we have limited insight into trends that may develop and affect our business |
| We may make errors in predicting and reacting to relevant business trends, which could harm our business |
| Our success also depends on the willingness of third-party developers to build applications that are complementary to our service |
| Without the development of these applications, both current and potential customers may not find our service sufficiently attractive |
| In fiscal 2006, we introduced the AppExchange directory, a central online marketplace for on-demand applications that we host for our customers, developers and partners to exchange custom on-demand applications that are built on, or can integrate with, our service |
| These custom applications, some of which are not CRM-related, include applications ranging from expense management to purchasing to recruiting |
| Although we do not presently charge for use of the AppExchange directory, it is uncertain whether this service will be accepted and adopted by our customers, developers and partners or will increase the demand for subscriptions to our service |
| We do not have an adequate history with our subscription model to predict the rate of customer subscription renewals and the impact these renewal rates will have on our future revenue or operating results |
| Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period and in fact, some customers have elected not to do so |
| In addition, our customers may renew for a lower priced edition of our service or for fewer subscriptions |
| We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates |
| Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our service and their ability to continue their operations and spending levels |
| If our customers do not renew their subscriptions for our service, our revenue will decline and our business will suffer |
| Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our service to our current customers |
| This may require increasingly sophisticated and costly sales efforts that are targeted at senior management |
| Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan |
| We are currently experiencing a period of rapid growth in our headcount and operations, which has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management, administrative, operational and financial infrastructure |
| We anticipate that further growth will be required to address increases in our customer base, as well as our expansion into new geographic areas |
| Our success will depend in part upon the ability of our senior management to manage this growth effectively |
| To do so, we must continue to hire, train and manage new employees as needed |
| If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed |
| To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures |
| The additional headcount and capital investments we are adding will increase our cost base, which will make it more difficult for us to offset any 19 ______________________________________________________________________ [49]Table of Contents future revenue shortfalls by offsetting expense reductions in the short term |
| If we fail to successfully manage our growth, we will be unable to execute our business plan |
| We derive a significant portion of our revenue from small businesses, which have a greater rate of attrition and non-renewal than medium-sized and large enterprise customers |
| Our small business customers, which we consider to be companies with fewer than 200 employees, typically have shorter initial subscription periods and, based on our limited experience to date, have had a higher rate of attrition and non-renewal as compared to our medium-sized and large enterprise customers |
| If we cannot replace our small business customers that do not renew their subscriptions for our service with new customers quickly enough, our revenue could decline |
| Our limited operating history may impede acceptance of our service by medium-sized and large customers |
| Our ability to increase revenue and maintain profitability depends, in large part, on widespread acceptance of our service by medium-sized and large businesses |
| Our efforts to sell to these customers may not continue to be successful |
| In particular, because we are a relatively new company with a limited operating history, these target customers may have concerns regarding our viability and may prefer to purchase critical CRM applications from one of our larger, more established competitors |
| Even if we are able to sell our service to these types of customers, they may insist on additional assurances from us that we will be able to provide adequate levels of service, which could harm our business |
| As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, we may encounter pricing pressure and implementation challenges, and we may have to delay revenue recognition on these customers, all of which could harm our business |
| As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales |
| In this market segment, the customer’s decision to use our service may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education to prospective customers regarding the use and benefits of our service |
| In addition, larger customers may demand more customization, integration services and features |
| As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions, while at the same time requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met |
| In addition, larger enterprise customers may seek volume discounts and price concessions that could make these transactions less profitable |
| If we are not able to develop enhancements and new features to our existing service or acceptable new services that keep pace with technological developments, our business will be harmed |
| If we are unable to develop enhancements to and new features for our existing service or acceptable new services that keep pace with rapid technological developments, our business will be harmed |
| The success of enhancements, new features and services depends on several factors, including the timely completion, introduction and market acceptance of the feature or edition |
| Failure in this regard may significantly impair our revenue growth |
| In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies |
| We may not be successful in either developing these modifications and enhancements or in timely bringing them to market |
| Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and 20 ______________________________________________________________________ [50]Table of Contents development expenses |
| Any failure of our service to operate effectively with future network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction and harm our business |
| Any efforts we may make in the future to expand our service beyond the CRM market may not succeed |
| To date, we have focused our business on providing on-demand application services for the CRM market, but we may in the future seek to expand into other markets |
| In addition, we recently launched the AppExchange directory, an on-line marketplace for on-demand applications running on our on-demand application service platform |
| However, any efforts to expand beyond the CRM market may never result in significant revenue growth for us |
| In addition, efforts to expand our on-demand application service beyond the CRM market may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, which may harm our business |
| If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results and the value of our common stock |
| As part of our business strategy, we may acquire or make investments in complementary companies, services and technologies in the future |
| Through January 31, 2006, we have not made any acquisitions or investments to date, and therefore our ability as an organization to make acquisitions or investments is unproven |
| Acquisitions and investments involve numerous risks, including: • difficulties in integrating operations, technologies, services and personnel; • diversion of financial and managerial resources from existing operations; • risk of entering new markets in which we have little to no experience; • potential write-offs of acquired assets or investments; • potential loss of key employees; • inability to generate sufficient revenue to offset acquisition or investment costs; • negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue; • delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses; and • the need to implement controls, procedures and policies appropriate for a public company at companies that prior to the acquisition lacked such controls, procedures and policies |
| In addition, if we finance acquisitions by issuing debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock |
| Further, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed and the value of our common stock may decline |
| If we fail to develop our brand cost-effectively, our business may suffer |
| com brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers |
| Furthermore, we believe that the importance of brand recognition will increase as competition in our market develops |
| Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices |
| In the past, our efforts to build our brand have involved significant expense |
| Brand promotion activities 21 ______________________________________________________________________ [51]Table of Contents may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand |
| If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer |
| Failure to adequately expand our direct sales force and develop and expand our indirect sales channel will impede our growth |
| We continue to be substantially dependent on our direct sales force to obtain new customers, particularly large enterprise customers, and to manage our customer base |
| We believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need |
| Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel |
| New hires require significant training and may, in some cases, take more than a year before they achieve full productivity |
| Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business |
| If we are unable to hire and develop sufficient numbers of productive direct sales personnel, sales of our service will suffer and our growth will be impeded |
| In addition, we plan to develop and expand our indirect sales channel by engaging third-party resellers |
| Because of our on-demand service model, the structuring of such relationships is complex and requires the investment of significant business, financial and other resources |
| If we are unable to structure successful third-party channel relationships that enable us to enter markets we otherwise would have greater difficulty entering, our growth will be inhibited |
| Sales to customers outside the United States expose us to risks inherent in international sales |
| Because we sell our service throughout the world, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in the United States |
| For example, sales in Europe and Asia Pacific together represented approximately 20 percent of our total revenues during fiscal 2006, and we intend to continue to expand our international sales efforts |
| The risks and challenges associated with sales to customers outside the United States include: • localization of our service, including translation into foreign languages and associated expenses; • laws and business practices favoring local competitors; • compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations; • foreign currency fluctuations, whose effects we may not be able to mitigate through our hedging program; • different pricing environments; • difficulties in staffing and managing foreign operations; • different or lesser protection of our intellectual property; • longer accounts receivable payment cycles and other collection difficulties; and • regional economic and political conditions |
| Any of these factors could negatively impact our business and results of operations |
| Additionally, some of our international subscription fees are currently denominated in US dollars and paid in local currency |
| As a result, fluctuations in the value of the US dollar and foreign currencies may make the service more expensive for international customers, which could harm our business |
| 22 ______________________________________________________________________ [52]Table of Contents Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand |
| If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be harmed |
| In addition, defending our intellectual property rights might entail significant expense |
| Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation |
| While we have US and international patent applications pending, we currently have no issued patents and may be unable to obtain patent protection for our technology |
| In addition, if any patents are issued in the future, they may not provide us with any competitive advantages, or may be successfully challenged by third parties |
| Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain |
| Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our service is available |
| The laws of some foreign countries may not be as protective of intellectual property rights as those in the US, and mechanisms for enforcement of intellectual property rights may be inadequate |
| Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property |
| We might be required to spend significant resources to monitor and protect our intellectual property rights |
| We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights |
| Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel |
| We may be sued by third parties for alleged infringement of their proprietary rights |
| The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights |
| We have received in the past, and may receive in the future, communications from third parties claiming that we have infringed on the intellectual property rights of others |
| Our technologies may not be able to withstand any third-party claims or rights against their use |
| Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan and could require us to pay monetary damages or enter into royalty or licensing agreements |
| In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim |
| An adverse determination could also prevent us from offering our service to others |
| We may be required to purchase the interest in our Japanese joint venture held by our joint venture partner, under certain circumstances, on terms that may not be favorable to us |
| In some circumstances, we may be required to purchase the interest of our Japanese joint venture partner |
| If we default under the terms of our joint venture agreement with our joint venture partner, or if we and our partner disagree over a course of action proposed for the joint venture entity and the disagreement continues, then our partner may require that we purchase its interest in the joint venture |
| In the event we are required to purchase our partner’s interest in the joint venture, we could be forced to make an unanticipated outlay of a significant amount of capital, which could harm our financial condition |
| Although the timing and circumstances of any such purchase, were it to be required, are not predictable, if the joint venture were valued based on its most recent financing, which occurred in September 2003, the buyout price could be as much as approximately dlra13dtta0 million |
| Evolving regulation of the Internet may affect us adversely |
| As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely |
| For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for CRM solutions and 23 ______________________________________________________________________ [53]Table of Contents restricting our ability to store, process and share data with our customers |
| In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed |
| Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business |
| Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our solution and adversely affect our business |
| Our customers can use our service to store contact and other personal or identifying information regarding their customers and contacts |
| Federal, state and foreign government bodies and agencies, however, have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers and individuals |
| The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our service and reduce overall demand for it |
| Furthermore, privacy concerns may cause our customers’ customers to resist providing the personal data necessary to allow our customers to use our service effectively |
| Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our service in certain industries |
| For example, regulations such as the Gramm-Leach-Bliley Act, which protects and restricts the use of consumer credit and financial information, and the Health Insurance Portability and Accountability Act of 1996, which regulates the use and disclosure of personal health information, impose significant requirements and obligations on businesses that may affect the use and adoption of our service |
| The European Union has also adopted a data privacy directive that requires member states to impose restrictions on the collection and use of personal data that, in some respects, are far more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States |
| All of these domestic and international legislative and regulatory initiatives may adversely affect our customers’ ability to collect and/or use demographic and personal information from their customers, which could reduce demand for our service |
| In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us |
| If the gathering of personal information were to be curtailed in this manner, CRM solutions would be less effective, which may reduce demand for our service and harm our business |
| Our business is subject to changing regulations regarding corporate governance and public disclosure that have increased both our costs and the risk of noncompliance |
| We are subject to rules and regulations by various governing bodies, including the Securities and Exchange Commission, New York Stock Exchange and Public Company Accounting Oversight Board, that are charged with the protection of investors and the oversight of companies whose securities are publicly traded |
| Our efforts to comply with these new regulations, most notably the Sarbanes-Oxley Act, or SOX, 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 |
| We are required to comply on an on-going basis with the SOX requirements involving the assessment of our internal controls over financial reporting and our independent public accountants’ audit of that assessment |
| These requirements first became applicable to us on January 31, 2006 |
| Our efforts to comply with the SOX requirements has required, and will continue to require the commitment of significant financial and personnel resources |
| Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available |
| This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices |
| If we fail to address and comply with these regulations and any subsequent changes, our business may be harmed |
| 24 ______________________________________________________________________ [54]Table of Contents We are dependent on our management team and development and operations personnel, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner |
| Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Marc Benioff, our Chief Executive Officer and Chairman of the Board, Steve Cakebread, our Chief Financial Officer, Jim Steele, our President of Worldwide Sales and Distribution, Parker Harris, our Executive Vice President of Technology, Ken Juster, our Executive Vice President of Law, Policy and Corporate Strategy, and John Freeland, our President of Worldwide Operations |
| We are also substantially dependent on the continued service of our existing development and operations personnel because of the complexity of our service and technologies |
| We do not have employment agreements with any of our executive officers, key management, development or operations personnel and, therefore, they could terminate their employment with us at any time |
| We do not maintain key person life insurance policies on any of our employees |
| The loss of one or more of our key employees or groups could seriously harm our business |
| Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our planned growth |
| To continue to execute on our growth plan, we must attract and retain highly qualified personnel |
| Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and Internet-related services and senior sales executives |
| We may not be successful in attracting and retaining qualified personnel |
| We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications |
| Many of the companies with which we compete for experienced personnel have greater resources than we have |
| In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment |
| Volatility in the price of our stock may, therefore, adversely affect our ability to attract or retain key employees |
| Furthermore, the new requirement to expense stock options may discourage us from granting the size or type of stock options awards that job candidates require to join our company |
| If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed |
| We might require additional capital to support business growth, and this capital might not be available |
| We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new services or enhance our existing service, enhance our operating infrastructure or acquire complementary businesses and technologies |
| Accordingly, we may need to engage in equity or debt financings to secure additional funds |
| If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock |
| Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions |
| In addition, we may not be able to obtain additional financing on terms favorable to us, if at all |
| If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited |
| Changes in the accounting treatment of stock options will adversely affect our reported results of operations |
| In December 2004, the Financial Accounting Standards Board, or FASB, announced its decision to require companies to expense employee stock options |
| The pro forma disclosures that the FASB previously permitted 25 ______________________________________________________________________ [55]Table of Contents will no longer be an alternative to the financial statement recognition of the expense |
| We will adopt this new accounting pronouncement, Statement of Financial Accounting Standards Nodtta 123 (revised 2004), Share-Based Payment, on a prospective basis beginning on February 1, 2006, which is the start of our fiscal 2007 |
| We believe this change in accounting will materially reduce our fiscal 2007 reported results of operations |
| Unanticipated changes in our effective tax rate could adversely affect our future results |
| We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions |
| We expect our tax rate in fiscal 2007 to be significantly higher than in previous years |
| The tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, the tax accounting for option activities pursuant to the new requirement to expense stock options and the valuation of deferred tax assets and liabilities |
| Increases in our effective tax rate could materially affect our net results |
| Risks Related to Ownership of Our Common Stock The trading price of our common stock is likely to be volatile and could subject us to litigation |
| The trading prices of the securities of technology companies have been highly volatile |
| Accordingly, the trading price of our common stock has been and is likely to continue to be subject to wide fluctuations |
| Further, our common stock has a limited trading history |
| Factors affecting the trading price of our common stock include: • variations in our operating results and cash flows; • the quarterly net increases in the number of customers and paying subscriptions; • announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; • customer cancellations or delays in customer purchases; • recruitment or departure of key personnel; • changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock; • market conditions in our industry, the industries of our customers and the economy as a whole; and • disruptions in our service due to computer hardware, software or network problems or due to a natural disaster, act of terrorism or other catastrophic event |
| In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition |
| The trading price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us |
| Any volatility in our stock price may result in litigation, such as the lawsuits following the approximately 25prca decline in our stock price on July 21, 2004, which may harm our business and results of operations |
| If securities analysts stop publishing research or reports about us or our business or if they downgrade our stock, the price of our stock could decline |
| The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business |
| If one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly |
| Furthermore, if one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline |
| 26 ______________________________________________________________________ [56]Table of Contents The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters |
| Our executive officers, directors, current 5 percent or greater stockholders and affiliated entities together beneficially own a significant percentage of our outstanding common stock |
| As a result, these stockholders, acting together, will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions, even if other stockholders oppose them |
| This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial |
| Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock |
| Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous |
| These provisions among other things: • establish a classified board of directors so that not all members of our board are elected at one time; • permit the board of directors to establish the number of directors; • provide that directors may only be removed “for cause” and only with the approval of 66^ 2/3 percent of our stockholders; • require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws; • authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt; • eliminate the ability of our stockholders to call special meetings of stockholders; • prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; • provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and • establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings |
| In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company |
| Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15 percent or more of our common stock |