| VALUECLICK INC/CA ITEM 1A RISK FACTORS You should carefully consider the following risks before you decide to buy shares of our common stock |
| The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, may also adversely impact and impair our business |
| If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer |
| In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our stock |
| This annual report on Form 10-K contains forward-looking statements based on the current expectations, assumptions, estimates, and projections about us and our industry |
| These forward-looking statements involve risks and uncertainties |
| Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this annual report on Form 10-K We do not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future |
| INTEGRATING OUR ACQUIRED OPERATIONS MAY DIVERT MANAGEMENT’S ATTENTION AWAY FROM OUR DAY-TO-DAY OPERATIONS We have grown in part because of business combinations with other companies, and we expect to continue to evaluate and consider future acquisitions |
| Acquisitions generally involve significant risks, including difficulties in the assimilation of operations, services, technologies, and corporate culture of the acquired companies, diversion of management’s attention from other business concerns, overvaluation of the acquired companies, and the acceptance of the acquired companies’ products and services by our customers |
| The integration of our acquired operations, products and personnel may place a significant burden on management and our internal resources |
| The diversion of management attention and any difficulties encountered in the integration process could harm our business |
| We consummated the acquisitions of Search123, Commission Junction, Hi-Speed Media, Pricerunner, E-Babylon, Webclients, and Fastclick on May 30, 2003, December 7, 2003, December 17, 2003, August 6, 2004, June 13, 2005, June 24, 2005, and September 29, 2005, respectively |
| Because of the number of acquisitions we completed in the past several years, the differences in the customer base and functionality of Search123, Commission Junction, Hi-Speed Media, Pricerunner, E-Babylon, Webclients, and Fastclick and our products, these acquisitions may present materially higher product, sales and marketing, customer support, research and development, facilities, information systems, accounting, personnel, and other integration challenges than those we have faced in connection with our prior acquisitions and may delay or jeopardize the complete integration of certain businesses we had acquired previously |
| If we finance future acquisitions by using equity or convertible debt securities, this would dilute our existing stockholders |
| Any amortization of intangible assets, or other charges resulting from the costs of these acquisitions, could have an adverse effect on the results of our operations |
| In addition, we may pay more for an acquisition than the acquired products, services, technology, or businesses are ultimately worth |
| IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND OUR MANAGEMENT’S TIME AND ATTENTION COULD BE DIVERTED As we continue to increase the scope of our operations, we will need an effective planning and management process to implement our business plan successfully in the rapidly evolving Internet advertising market |
| Our business, results of operations and financial condition will be substantially harmed if we are unable to manage our expanding operations effectively |
| We plan to continue to expand our sales and marketing, customer support and technology organizations |
| Past growth has placed, and any future growth will continue to place, a significant strain on our management systems and resources |
| We will likely need to continue to improve our financial and managerial controls and our reporting systems and 14 ______________________________________________________________________ procedures |
| In addition, we will need to expand, train and manage our work-force |
| Our failure to manage our growth effectively could increase our expenses and divert management’s time and attention |
| WE MIGHT NOT REMAIN PROFITABLE Although we achieved profitability in 2003 and have been profitable ever since, events could arise that prevent us from achieving net income in future periods |
| Because we have a relatively limited operating history, it may be difficult to evaluate our business and prospects |
| You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by early-stage companies in the rapidly-changing Internet market |
| These risks include, but are not limited to, our ability to: · maintain and increase our inventory of advertising space on websites and with email list owners and newsletter publishers; · maintain and increase the number of advertisers that use our products and services; · continue to expand the number of products and services we offer and the capacity of our systems; · adapt to changes in Web advertisers’ promotional needs and policies, and the technologies used to generate Web advertisements; · respond to challenges presented by the large number of competitors in the industry; · adapt to changes in legislation regarding Internet usage, advertising and commerce; · adapt to changes in technology related to online advertising filtering software; and · adapt to changes in the competitive landscape |
| If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations and financial condition could be materially and adversely affected |
| IF ADVERTISING ON THE INTERNET LOSES ITS APPEAL TO DIRECT MARKETING COMPANIES, OUR REVENUE COULD DECLINE Our Media segment accounted for 69dtta3prca of our revenue for the year ended December 31, 2005 in part by delivering advertisements that generate impressions, click-throughs and other actions to our advertisers’ websites |
| This business model may not continue to be effective in the future for a number of reasons, including the following: click rates have always been low and may decline as the number of banner advertisements on the Web increases; Internet users can install “filter” software programs which allow them to prevent advertisements from appearing on their computer screens or email boxes; Internet advertisements are, by their nature, limited in content relative to other media; direct marketing companies may be reluctant or slow to adopt online advertising that replaces, limits or competes with their existing direct marketing efforts; and direct marketing companies may prefer other forms of Internet advertising we do not offer, including certain forms of search engine placements |
| If the number of direct marketing companies who purchase online advertising from us does not continue to grow, we may experience difficulty in attracting publishers, and our revenue could decline |
| IF OUR BUSINESS MODEL IS NOT ACCEPTED BY INTERNET ADVERTISERS OR WEB PUBLISHERS, OUR REVENUE COULD DECLINE Historically, a significant portion of our revenue has been derived from our Media segment |
| Although we intend to continue to grow our Affiliate Marketing and Technology segments, we expect that our Media segment will continue to generate a substantial amount of our revenue in the future |
| Our Media segment 15 ______________________________________________________________________ includes products and services that are based on a cost-per-click (“CPC”), cost-per-action (“CPA”), cost-per-lead (“CPL”) or cost-per-thousand-impressions (“CPM”) pricing model |
| Our ability to generate significant revenue from advertisers will depend, in part, on our ability to demonstrate the effectiveness of our various pricing models to advertisers and to Web publishers; and, on our ability to attract and retain advertisers and Web publishers by differentiating our technology and services from those of our competitors |
| One component of our strategy is to enhance advertisers’ ability to measure their return on investment and track the performance and effectiveness of their advertising campaigns |
| To date, not all advertisers have taken advantage of the most sophisticated tools we offer for tracking Internet users’ activities after they have reached advertisers’ websites |
| Intense competition among websites, Internet search services and Internet advertising services has led to the proliferation of a number of alternative pricing models for Internet advertising |
| These alternatives, and the likelihood that additional pricing alternatives will be introduced, make it difficult for us to project the levels of advertising revenue or the margins that we, or the Internet advertising industry in general, will realize in the future |
| Moreover, an increase in the amount of advertising on the Web may result in a decline in click rates |
| Since we rely heavily on performance-based pricing models to generate revenue, any decline in click rates may make our pricing models less viable or less attractive solutions for Web publishers and advertisers, and our revenue could decline |
| OUR REVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW ADVERTISING SPACE Our success depends in part on our ability to effectively manage our existing advertising space |
| The Web publishers and email list owners that list their unsold advertising space with us are not bound by long-term contracts that ensure us a consistent supply of advertising space, which we refer to as inventory |
| In addition, websites can change the amount of inventory they make available to us at any time |
| If a Web publisher or email list owner decides not to make advertising space from its websites, newsletters or email lists available to us, we may not be able to replace this advertising space with advertising space from other websites or email list owners that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers’ requests |
| This would result in lost revenue |
| We expect that our customers’ requirements will become more sophisticated as the Web matures as an advertising medium |
| If we fail to manage our existing advertising space effectively to meet our customers’ changing requirements, our revenue could decline |
| Our growth depends on our ability to expand our advertising inventory |
| To attract new customers, we must maintain a consistent supply of attractive advertising space |
| We intend to expand our advertising inventory by selectively adding to our networks new Web publishers and email list owners that offer attractive demographics, innovative and quality content and growing Web user traffic and email volume |
| Our ability to attract new Web publishers and email list owners to our networks and to retain Web publishers and email list owners currently in our networks will depend on various factors, some of which are beyond our control |
| These factors include: our ability to introduce new and innovative product lines and services, our ability to efficiently manage our existing advertising inventory, our pricing policies, and the cost-efficiency to Web publishers and email list owners of outsourcing their advertising sales |
| In addition, the number of competing intermediaries that purchase advertising inventory from Web publishers and email list owners continues to increase |
| We will not be able to assure you that the size of our inventory will increase or even remain constant in the future |
| Our pay-per-click search service is dependent upon a limited number of sources to direct Internet users to our search service |
| Our sources for users conducting searches are members of our affiliate network, including portals, browsers, or other affiliates and our own websites |
| Revenues are generated when users conducting searches are directed to advertisers through a paid search link in our search results |
| 16 ______________________________________________________________________ The more traffic our sources direct to our advertisers through our search technology, the more revenue we will generate |
| Unfavorable changes in our relationship with these sources or loss of these relationships would adversely affect our revenue and results of operations |
| WE MAY FACE INTELLECTUAL PROPERTY ACTIONS THAT ARE COSTLY OR COULD HINDER OR PREVENT OUR ABILITY TO DELIVER OUR PRODUCTS AND SERVICES We may be subject to legal actions alleging intellectual property infringement (including patent infringement), unfair competition or similar claims against us |
| Companies may apply for or be awarded patents or have other intellectual property rights covering aspects of our technology or business |
| One of the primary competitors of our Search123 subsidiary, Overture Services, Inc, purports to be the owner of US Patent Nodtta 6cmam269cmam361, which was issued on July 31, 2001 and is entitled “System and method for influencing a position on a search result list generated by a computer network search engine |
| ” Overture has aggressively pursued its alleged patent rights by filing lawsuits against other pay-per-click search engine companies such as MIVA and Google |
| MIVA and Google have asserted counter-claims against Overture including, but not limited to, invalidity, unenforceability and non-infringement |
| BTG International, Inc |
| (“BTG”) purports to own two patents related to affiliate marketing |
| The patents allegedly cover methods and apparatuses for “Attaching Navigational History Information to Universal Resource Locator Links on a World Wide Web Page” (US Patent Nodtta 5cmam712cmam979) and for “Tracking the Navigational Path of a User on the World Wide Web” (US Patent Nodtta 5cmam717cmam860) |
| BTG has brought suit to enforce its patent rights against, among others, Barnesandnoble |
| IF THE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINE ADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORKS IS RESTRICTED OR BECOMES SUBJECT TO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY Websites typically place small files of non-personalized (or “anonymous”) information, commonly known as cookies, on an Internet user’s hard drive, generally without the user’s knowledge or consent |
| Cookies generally collect information about users on a non-personalized basis to enable websites to provide users with a more customized experience |
| Cookie information is passed to the website through an Internet user’s browser software |
| We currently use cookies to track an Internet user’s movement through the advertiser’s website and to monitor and prevent potentially fraudulent activity on our networks |
| Most currently available Internet browsers allow Internet users to modify their browser settings to prevent cookies from being stored on their hard drive, and some users currently do so |
| Internet users can also delete cookies from their hard drives at any time |
| Some Internet commentators and privacy advocates have suggested limiting or eliminating the use of cookies, and legislation (including, but not limited to, Spyware legislation such as US House of Representatives Bill HR 29 the “Spy Act”) has been introduced in some jurisdictions to regulate the use of cookie technology |
| The effectiveness of our technology could be limited by any reduction or limitation in the use of cookies |
| If the use or effectiveness of cookies were limited, we would have to switch to other technologies to gather demographic and behavioral information |
| While such technologies currently exist, they are substantially less effective than cookies |
| We would also have to develop or acquire other technology to prevent fraud |
| Replacement of cookies could require significant reengineering time and resources, might not be completed in time to avoid losing customers or advertising inventory, and might not be commercially feasible |
| Our use of cookie technology or any other technologies designed to collect Internet usage information may subject us to litigation or investigations in the future |
| Any litigation or government action against us could be costly and time-consuming, could require us to change our business practices and could divert management’s attention |
| 17 ______________________________________________________________________ WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASURE IMPRESSIONS, CLICKS AND ACTIONS ON ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERS AND WEB PUBLISHERS We earn revenue from advertisers and make payments to Web publishers based on the number of impressions, clicks and actions from advertisements delivered on our networks of websites and email lists |
| Advertisers’ and Web publishers’ willingness to use our services and join our networks will depend on the extent to which they perceive our measurements of impressions, clicks and actions to be accurate and reliable |
| Advertisers and Web publishers often maintain their own technologies and methodologies for counting impressions, clicks and actions, and from time to time we have had to resolve differences between our measurements and theirs |
| Any significant dispute over the proper measurement of user responses to advertisements could cause us to lose customers or advertising inventory |
| IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHER INTERNET ADVERTISING COMPANIES, WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY AND OUR REVENUE AND RESULTS OF OPERATIONS COULD DECLINE The Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing client demands |
| The introduction of new services embodying new technologies and the emergence of new industry standards and practices could render our existing services obsolete and unmarketable or require unanticipated technology or other investments |
| Our failure to adapt successfully to these changes could harm our business, results of operations and financial condition |
| The market for Internet advertising and related services is highly competitive |
| We expect this competition to continue to increase because there are no significant barriers to entry |
| Increased competition may result in price reductions for advertising space, reduced margins and loss of our market share |
| Our principal competitors include other companies that provide advertisers with Internet advertising solutions and companies that offer pay-per-click search services |
| We directly compete with a number of competitors in the CPC market segment, such as Advertising |
| com, acquired by AOL We compete in the performance-based marketing segment with CPL and CPA performance-based companies such as Advertising |
| com, Performics, acquired by DoubleClick, Direct Response, acquired by Digital River, and Linkshare, acquired by Rakuten, and we compete with other Internet advertising networks that focus on the traditional CPM model, including 24/7 Real Media |
| Further, both Google and Yahoo have announced plans to pursue the creation of display ad networks |
| We also compete with pay-per-click search companies such as Overture, acquired by Yahoo, Google and MIVA In addition, we now compete in the online comparison shopping market with focused comparison shopping websites such as Shopping |
| com, acquired by eBay, Kelkoo, acquired by Yahoo, NexTag, Shopzilla, acquired by EW Scripps, and Pricegrabber, acquired by Experian, and with search engines and portals such as Yahoo, Google and MSN, and with online retailers such as Amazon |
| Large websites with brand recognition, such as Yahoo, AOL and MSN, have direct sales personnel and substantial proprietary inventory that provide significant competitive advantages compared to our networks and have a significant impact on pricing for online advertising |
| These companies have longer operating histories, greater name recognition and have greater financial, technical and sales and marketing resources than we have |
| Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers, or ISPs, as well as competition with other media for advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue |
| Google has made available offline public-domain works through its search engine, which creates additional competition for advertisers |
| In addition, as we continue to expand the scope of our Web services, we may compete with a greater number of Web publishers and other media companies across an increasing range of different Web services, including in 18 ______________________________________________________________________ vertical markets where competitors may have advantages in expertise, brand recognition and other areas |
| If existing or future competitors develop or offer services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition would be negatively affected |
| We will also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers’ total advertising budgets |
| Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical and sales and marketing resources |
| As a result, we may not be able to compete successfully |
| If we fail to compete successfully, we could lose customers or advertising inventory and our revenue and results of operations could decline |
| OUR REVENUE AND RESULTS OF OPERATIONS COULD BE NEGATIVELY IMPACTED IF INTERNET USAGE AND THE DEVELOPMENT OF INTERNET INFRASTRUCTURE DO NOT CONTINUE TO GROW Our business and financial results will depend on continued growth in the use of the Internet |
| Internet usage may be inhibited for a number of reasons, such as: inadequate network infrastructure; security concerns; inconsistent quality of service; and, unavailability of cost-effective, high-speed service |
| If Internet usage grows, our infrastructure may not be able to support the demands placed on it and our performance and reliability may decline |
| In addition, websites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure, and as a result of sabotage, such as electronic attacks designed to interrupt service on many websites |
| The Internet could lose its viability as a commercial medium due to delays in the development or adoption of new technologies required to accommodate increased levels of Internet activity |
| If use of the Internet does not continue to grow, or if the Internet infrastructure does not effectively support our growth, our revenue and results of operations could be materially and adversely affected |
| OUR LONG-TERM SUCCESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE MARKET FOR E-COMMERCE DOES NOT GROW OR GROWS SLOWER THAN EXPECTED Because many of our customers’ advertisements encourage online purchasing, our long-term success may depend in part on the growth and market acceptance of e-commerce |
| Our business may be adversely affected if the market for e-commerce does not continue to grow or grows slower than now expected |
| A number of factors outside of our control could hinder the future growth of e-commerce, including the following: · the network infrastructure necessary for substantial growth in Internet usage may not develop adequately or our performance and reliability may decline; · insufficient availability of telecommunication services or changes in telecommunication services could result in inconsistent quality of service or slower response times on the Internet; · negative publicity and consumer concern surrounding the security of e-commerce could impede our growth; and · financial instability of e-commerce customers |
| In particular, any well-publicized compromise of security involving Web-based transactions could deter people from purchasing items on the Internet, clicking on advertisements, or using the Internet generally, any of which could cause us to lose customers and advertising inventory and which could materially, adversely affect our revenue and results of operations |
| 19 ______________________________________________________________________ WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS The successful integration of the companies we have acquired will depend in part on the retention of personnel critical to our combined business operations due to, for example, unique technical skills or management expertise |
| We may be unable to retain existing management, finance, engineering, sales, customer support, and operations personnel that are critical to the success of the integrated company, resulting in disruption of operations, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs, and otherwise diminishing anticipated benefits of these acquisitions |
| Our future success is substantially dependent on the continued service of our key senior management |
| Our employment agreements with our key personnel are short-term and on an at-will basis |
| We do not have key-person insurance on any of our employees |
| The loss of the services of any member of our senior management team, or of any other key employees, could divert management’s time and attention, increase our expenses and adversely affect our ability to conduct our business efficiently |
| Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees |
| We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future |
| We have experienced difficulty from time to time in attracting the personnel necessary to support the growth of our business, and may experience similar difficulties in the future |
| DELAWARE LAW AND OUR STOCKHOLDER RIGHTS PLAN CONTAIN ANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders |
| Section 203 of the Delaware General Corporation Law may make the acquisition of the Company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15prca or more of our outstanding voting stock from acquiring the Company, without the board of directors’ consent, for at least three years from the date they first hold 15prca or more of the voting stock |
| In addition, our Stockholder Rights Plan has significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors |
| SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE US TO LOSE CUSTOMERS OR ADVERTISING INVENTORY Our success depends on the continuing and uninterrupted performance of our systems |
| Sustained or repeated system failures that interrupt our ability to provide services to customers, including failures affecting our ability to deliver advertisements quickly and accurately and to process users’ responses to advertisements, would reduce significantly the attractiveness of our solutions to advertisers and Web publishers |
| Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that impacts data integrity or interrupts or delays our operations |
| Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious or accidental human acts, and natural disasters |
| We lease data center space in El Segundo, San Jose and Sunnyvale, California; Louisville, Kentucky; Mechanicsburg, Pennsylvania; Ashburn, Virginia; Stockholm, Sweden, and several small scale data centers or office locations throughout the United States and Europe |
| Therefore, any of the above factors affecting any of these areas could substantially harm our business |
| Moreover, despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems in part because we cannot control the maintenance and operation of our third-party data centers |
| Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future and our ability to provide a record of past 20 ______________________________________________________________________ transactions |
| Our data centers and systems incorporate varying degrees of redundancy |
| All data centers and systems may not automatically switch over to their redundant counterpart |
| Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems |
| WE MAY EXPERIENCE CAPACITY CONSTRAINTS THAT COULD REDUCE OUR REVENUE Our future success depends in part on the efficient performance of our software and technology, as well as the efficient performance of the systems of third-parties |
| As the numbers of Web pages and Internet users increase, our services and infrastructure may not be able to grow to meet the demand |
| A sudden and unexpected increase in the volume of advertising delivered through our servers or in click rates could strain the capacity of the software or hardware that we have deployed |
| Any capacity constraints we experience could lead to slower response times or system failures and adversely affect the availability of advertisements, the number of advertising views delivered and the level of user responses received, which would harm our revenue |
| To the extent that we do not effectively address capacity constraints or system failures, our business, results of operations and financial condition could be harmed substantially |
| We also depend on ISPs that provide consumers with access to the websites on which our customers’ advertisements appear |
| Internet users have occasionally experienced difficulties connecting to the Web due to failures of their ISPs’ systems |
| Any disruption in Internet access provided by ISPs or failures by ISPs to handle the higher volumes of traffic expected in the future could materially and adversely affect our revenue |
| IT MAY BE DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE Our revenue and operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control |
| You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance |
| Our results of operations may fall below the expectations of market analysts and investors or our own forecasts in some future periods |
| If this happens, the market price of our common stock may fall |
| The factors that may affect our quarterly operating results include, but are not limited to, the following: · fluctuations in demand for our advertising solutions; · fluctuations in click, lead, action, and impression rates; · fluctuations in the amount of available advertising space, or views, on our networks; · the timing and amount of sales and marketing expenses incurred to attract new advertisers; · fluctuations in sales of different types of advertising; for example, the amount of advertising sold at higher rates rather than lower rates; · seasonal patterns in Internet advertisers’ spending; · fluctuations in our stock price which may impact the amount of stock-based compensation expense we are required to record; · changes in our pricing policies, the pricing policies of our competitors or the pricing policies for advertising on the Internet generally; · timing differences at the end of each quarter between our payments to Web publishers for advertising space and our collection of advertising revenue for that space; and · costs related to acquisitions of technology or businesses |
| 21 ______________________________________________________________________ Expenditures by advertisers also tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns |
| Any decline in the economic prospects of advertisers or the economy generally may alter advertisers’ current or prospective spending priorities, or may increase the time it takes us to close sales with advertisers, and could materially and adversely affect our business, results of operations and financial condition |
| IF WE DO NOT SUCCESSFULLY EXECUTE OUR INTERNATIONAL STRATEGY, OUR REVENUE AND THE GROWTH OF OUR BUSINESS COULD BE HARMED We initiated operations, through wholly-owned subsidiaries or divisions, in the United Kingdom in 1999, France and Germany in 2000 and Sweden in 2004 |
| Our foreign operations subject us to foreign currency exchange risks |
| We currently do not utilize hedging instruments to mitigate foreign currency exchange risks |
| Our international expansion will subject us to additional foreign currency exchange risks and will require management’s attention and resources |
| We cannot assure you that we will be successful in our efforts overseas |
| International operations are subject to other inherent risks, including, but not limited to: · the impact of recessions in economies outside the United States; · changes in and differences between regulatory requirements, domestic and foreign; · export restrictions, including export controls relating to encryption technologies; · reduced protection for intellectual property rights in some countries; · potentially adverse tax consequences; · difficulties and costs of staffing and managing foreign operations; · political and economic instability; · tariffs and other trade barriers; and · seasonal reductions in business activity |
| Our failure to address these risks adequately could materially and adversely affect our business, results of operations and financial condition |
| WE MAY BE LIABLE FOR CONTENT DISPLAYED ON OUR NETWORKS OF PUBLISHERS WHICH COULD INCREASE OUR EXPENSES We may be liable to third-parties for content in the advertising we deliver if the artwork, text or other content involved violates copyright, trademark, or other intellectual property rights of third-parties or if the content is defamatory |
| Any claims or counterclaims could be time-consuming, could result in costly litigation and could divert management’s attention |
| IF WE FAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR BUSINESS AND MARKETING ALLIANCES AND PARTNERSHIPS, OUR ABILITY TO GROW COULD BE LIMITED, WE MAY NOT ACHIEVE DESIRED REVENUE AND OUR STOCK PRICE MAY DECLINE In order to grow our business, we must generate, retain and strengthen successful business and marketing alliances |
| 22 ______________________________________________________________________ We depend, and expect to continue to depend, on our business and marketing alliances, which are companies with which we have written or oral agreements to work together to provide services to our clients and to refer business from their customers to us |
| If companies with which we have business and marketing alliances do not refer their customers to us to perform their online campaign and message management, our revenue and results of operations could be severely harmed |
| WE WILL BE DEPENDENT UPON TECHNOLOGIES, INCLUDING OUR MOJO, MEDIAPLEX SYSTEMS, COMMISSION JUNCTION, HI-SPEED MEDIA, SEARCH123, PRICERUNNER, WEBCLIENTS, AND FASTCLICK TECHNOLOGIES, FOR OUR FUTURE REVENUE, AND IF THESE TECHNOLOGIES DO NOT GENERATE SUFFICIENT REVENUE, OUR BUSINESS WOULD BE HARMED Our future revenue is likely to be dependent on the acceptance by advertisers and Web publishers of the use of our technologies |
| If these technologies do not perform as anticipated or otherwise do not attract advertisers and Web publishers to use our services, our operations will suffer |
| In addition, we may incur significant expenses in the future enhancing our existing and purchased technologies |
| If our revenue generated from the use of our technologies does not cover these development costs, our results of operations and financial condition would suffer |
| IF OUR TECHNOLOGIES SUFFER FROM DESIGN DEFECTS, WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO ADDRESS RESULTING PRODUCT LIABILITY CLAIMS Our business will be harmed if our technologies suffer from design or performance defects and, as a result, we could become subject to significant product liability claims |
| Technologies as complex as our technologies may contain design and/or performance defects which are not detectable even after extensive internal testing |
| Such defects may become apparent only after widespread commercial use |
| Our contracts with our clients currently do not contain provisions to completely limit our exposure to liabilities resulting from product liability claims |
| Although we have not experienced any product liability claims to date, we cannot assure you that we will not do so in the future |
| A product liability claim brought against us, which is not adequately covered by our insurance, could materially harm our business |
| TECHNOLOGY SALES AND IMPLEMENTATION CYCLES ARE LENGTHY, WHICH COULD DIVERT OUR FINANCIAL AND OTHER RESOURCES, AND ARE SUBJECT TO DELAYS, WHICH COULD RESULT IN DELAYED REVENUE If the sales and implementation cycle of our technology products and services are delayed, our revenue will likewise be delayed |
| Our technology sales and implementation cycles are often lengthy, causing us to recognize revenue long after our initial contact with a prospective client |
| During our sales effort, we spend significant time educating prospective clients on the use and benefits of our products and services |
| As a result, the sales cycle for our technology products and services may range from a few weeks to several months to over one year for our larger clients |
| The sales cycle is likely to be longer because we believe that clients may require more extensive approval processes related to integrating internal business information with their advertising campaigns |
| In addition, in order for a client to implement our services, the client must commit a significant amount of resources over an extended period of time |
| Furthermore, even after a client purchases our services, the implementation cycle is subject to delays |
| These delays may be caused by factors within our control, such as possible technology defects, as well as those outside our control, such as clients’ budgetary constraints, internal acceptance reviews, functionality enhancements, lack of appropriate client personnel to implement our applications, and the complexity of clients’ advertising needs |
| Also, failure to deliver service or application features consistent with delivery commitments could result in a delay or cancellation of a client agreement |
| 23 ______________________________________________________________________ WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM UNAUTHORIZED USE, WHICH COULD DIMINISH THE VALUE OF OUR SERVICES, WEAKEN OUR COMPETITIVE POSITION AND REDUCE OUR REVENUE Our success depends in large part on our proprietary technologies, including tracking management software, our affiliate marketing technologies and our MOJO platform |
| In addition, we believe that our trademarks are key to identifying and differentiating our services from those of our competitors |
| We may be required to spend significant resources to monitor and police our intellectual property rights |
| If we fail to successfully enforce our intellectual property rights, the value of our services could be diminished and our competitive position may suffer |
| We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights |
| Third-party software providers could copy or otherwise obtain and use our technology without authorization or develop similar technology independently which may infringe upon our proprietary rights |
| We may not be able to detect infringement and may lose competitive position in the market before we do so |
| In addition, competitors may design around our technology or develop competing technologies |
| Intellectual property protection may also be unavailable or limited in some foreign countries |
| We generally enter into confidentiality or license agreements with our employees, consultants, vendors, clients, and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information |
| Despite these efforts, unauthorized parties may attempt to disclose, obtain or use our services or technologies |
| Our precautions may not prevent misappropriation of our services or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States |
| IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERS AND ADVERTISING INVENTORY The Internet advertising market is characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands |
| The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices can render existing products and services obsolete and unmarketable or require unanticipated technology investments |
| Our success will depend on our ability to adapt to rapidly changing technologies, to enhance existing solutions and to develop and introduce a variety of new solutions to address our customers’ and publisher partners’ changing demands |
| For example, advertisers are increasingly requiring Internet advertising networks to have the ability to deliver advertisements utilizing new formats that surpass stationary images and incorporate rich media, such as video and audio, interactivity, and more precise consumer targeting techniques |
| Our systems do not support some types of advertising formats, such as certain video and audio formats, and many of the websites in our networks have not implemented systems to allow rich media advertisements |
| In addition, an increase in the bandwidth of Internet access resulting in faster data delivery may provide new products and services that will take advantage of this expansion in delivery capability |
| If we fail to adapt successfully to such developments, we could lose customers or advertising inventory |
| We purchase most of the software used in our business from third-parties |
| We intend to continue to acquire technologies necessary for us to conduct our business from third-parties |
| We cannot assure you that, in the future, these technologies will be available on commercially reasonable terms, or at all |
| We may also experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new solutions |
| Any new solution or enhancement that we develop will need to meet the requirements of our current and prospective customers and may not achieve significant market acceptance |
| If we fail to keep pace with technological developments and the introduction of new industry and technology standards on a cost-effective basis, our expenses could increase, and we could lose customers and advertising inventory |
| 24 ______________________________________________________________________ GOVERNMENT ENFORCEMENT ACTIONS, CHANGES IN GOVERNMENT REGULATION AND INDUSTRY STANDARDS, INCLUDING BUT NOT LIMITED TO, SPYWARE AND PRIVACY MATTERS, COULD DECREASE DEMAND FOR OUR SERVICES AND INCREASE OUR COSTS OF DOING BUSINESS Laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent |
| These regulations could affect the costs of communicating on the Web and could adversely affect the demand for our advertising solutions or otherwise harm our business, results of operations and financial condition |
| The United States Congress has enacted Internet legislation regarding children’s privacy, copyrights, sending of unsolicited commercial email (eg, the Federal CAN-SPAM Act of 2003), and taxation |
| The United States Congress has pending legislation regarding Spyware (eg, HR 29, the “Spy Act”) and the New York Attorney General’s office has sued a major Internet marketer for alleged violations of legal restrictions against false advertising and deceptive business practices related to Spyware |
| Other laws and regulations have been adopted and may be adopted in the future, and may address issues such as user privacy, Spyware, pricing, intellectual property ownership and infringement, copyright, trademark, trade secret, export of encryption technology, click fraud, acceptable content, taxation, and quality of products and services |
| This legislation could hinder growth in the use of the Web generally and could decrease the acceptance of the Web as a communications, commercial and advertising medium |
| The Company does not use any form of SPAM or Spyware and has policies to prohibit abusive Internet behavior, including prohibiting the use of SPAM and Spyware by our publisher partners |
| Due to the global nature of the Web, it is possible that, although our transmissions originate in California, Kentucky, Pennsylvania, Virginia, England, and Sweden, the governments of other states or foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities |
| In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business over the Internet |
| The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action |
| It may take years to determine how existing laws, including those governing intellectual property, privacy, libel and taxation, apply to the Internet and Internet advertising |
| Our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet, or the application of existing laws to the Internet or Internet-based advertising |
| WE COULD BE HELD LIABLE FOR OUR OR OUR CLIENTS’ FAILURE TO COMPLY WITH FEDERAL, STATE AND FOREIGN LAWS GOVERNING CONSUMER PRIVACY Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices |
| Any failure by us to comply with applicable foreign, federal and state laws and the requirements of regulatory authorities may result in, among other things, indemnification liability to our clients and the advertising agencies we work with, administrative enforcement actions and fines, class action lawsuits, cease and desist orders, and civil and criminal liability |
| Recently, class action lawsuits have been filed alleging violations of privacy laws by ISPs |
| The European Union’s directive addressing data privacy limits our ability to collect and use information regarding Internet users |
| These restrictions may limit our ability to target advertising in most European countries |
| Our failure to comply with these or other federal, state or foreign laws could result in liability and materially harm our business |
| In addition to government activity, privacy advocacy groups and the high-technology and direct marketing industries are considering various new, additional or different self-regulatory standards |
| This focus, and any legislation, regulations or standards promulgated, may impact us adversely |
| Governments, trade associations and industry self-regulatory groups may enact more burdensome laws, regulations and 25 ______________________________________________________________________ guidelines, including consumer privacy laws, affecting our clients and us |
| Since many of the proposed laws or regulations are just being developed, and a consensus on privacy and data usage has not been reached, we cannot yet determine the impact these regulations may have on our business |
| However, if the gathering of profiling information were to be curtailed, Internet advertising would be less effective, which would reduce demand for Internet advertising and harm our business |
| Our customers are also subject to various federal and state regulations concerning the collection and use of information regarding individuals |
| These laws include the Children’s Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley Act, the CAN-SPAM Act of 2003, HR 29, as well as other laws that govern the collection and use of consumer credit information |
| We cannot assure you that our clients are currently in compliance, or will remain in compliance, with these laws and their own privacy policies |
| We may be held liable if our clients use our technologies in a manner that is not in compliance with these laws or their own stated privacy standards |
| OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY Our common stock has been publicly traded since March 30, 2000 |
| The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering |
| The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies |
| As a result, the market price of our common stock may materially decline, regardless of our operating performance |
| In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company |
| We may become involved in this type of litigation in the future |
| Litigation of this type is often expensive and diverts management’s attention and resources |
| WE MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS IF OUR GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED As of December 31, 2005, we have total intangible assets, including goodwill, of dlra375dtta5 million |
| We are required under accounting principles generally accepted in the United States to review our amortizable intangible assets for impairment whenever events and circumstances indicate that the carrying value of such assets may not be recoverable |
| We are also required to review goodwill for impairment on an annual basis, or between annual tests whenever events and circumstances indicate that the carrying value of goodwill may not be recoverable |
| Events and circumstances considered in determining whether the carrying value of amortizable intangible assets and goodwill may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s business strategy |
| We may be required to record a significant charge to earnings in a period in which any impairment of our goodwill or amortizable intangible assets in determined |
| IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD AND OUR STOCK PRICE MAY BE ADVERSELY IMPACTED Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud |
| Any inability to provide reliable financial reports or to prevent fraud could harm our business |
| The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting |
| As a result of our assessment of our internal control over financial reporting as of December 31, 2004, we determined that we had a material weakness in our internal control over financial reporting related to the operation of our controls for evaluating and 26 ______________________________________________________________________ documenting our deferred tax assets |
| As further described in Item 9A “Controls and Procedures,” we remediated this material weakness during 2005 and determined that our internal control over financial reporting was effective as of December 31, 2005 |
| In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls |
| If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports |
| We cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective |
| If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our stock price may decline |
| DECREASED EFFECTIVENESS OF EQUITY COMPENSATION COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES, AND CHANGES IN ACCOUNTING FOR EQUITY COMPENSATION WILL ADVERSELY AFFECT EARNINGS We have historically used stock options as a key component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages |
| Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options, or attract additional highly-qualified personnel |
| A portion of our outstanding employee stock options have exercise prices in excess of our current stock price |
| To the extent these circumstances continue or recur, our ability to retain present employees may be adversely affected |
| In addition, the Financial Accounting Standards Board (“FASB”) has finalized changes to GAAP that will require an expense to be recorded by the Company for employee stock option grants and other equity incentives beginning January 1, 2006 |
| Moreover, applicable NASDAQ listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant stock options to employees in the future |
| As a result, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could materially adversely affect our business |