| CITRIX SYSTEMS INC ITEM 1A RISK FACTORS Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors |
| From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties |
| In particular, statements contained in this Form 10-K, and in the documents incorporated by reference into this Form 10-K, that are not historical facts, including, but not limited to statements concerning new products, product development and offerings, Subscription Advantage, Citrix Presentation Server, Citrix NetScaler, Citrix Access Suite and Citrix Access Gateway, product and price competition, Online Services division, competition and strategy, customer diversification, product price and inventory, contingent consideration payments, deferred revenues, economic and market conditions, potential government regulation, seasonal factors, international operations and expansion, revenue recognition, profits, growth of revenues, composition of revenues, cost of revenues, operating expenses, sales, marketing and support expenses, general and administrative expenses, research and development expenses, valuations of investments and derivative instruments, technology relationships, reinvestment or repatriation of foreign earnings, gross margins, amortization expense and intangible assets, interest income, interest expense, impairment charges, anticipated operating and capital expenditure requirements, cash inflows, contractual obligations, our Credit Facility and Term Loan, in-process research and development, advertising campaigns, tax rates, SFAS 123R, leasing and subleasing activities, acquisitions, stock repurchases, investment transactions, liquidity, litigation matters, intellectual property matters, distribution channels, stock price, payment of dividends, Advisor Rewards Program, third party licenses and potential debt or equity financings constitute forward-looking statements and are made under the safe harbor provisions of the Section 27 of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended |
| These statements are neither promises nor guarantees |
| Our actual results of operations and financial condition have varied and could in the future vary significantly from those stated in any forward-looking statements |
| The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-K, in the documents incorporated by reference into this Form 10-K or presented elsewhere by our management from time to time |
| Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition |
| Our long sales cycle for enterprise-wide sales could cause significant variability in our revenue and operating results for any particular period |
| In recent quarters, a growing number of our large and medium-sized customers have decided to implement our enterprise customer license arrangements on a department or enterprise-wide basis |
| Our long sales cycle for these large-scale deployments makes it difficult to predict when these sales will occur, and we may not be able to sustain these sales on a predictable basis |
| We have a long sales cycle for these enterprise-wide sales because: • our sales force generally needs to explain and demonstrate the benefits of a large-scale deployment of our product to potential and existing customers prior to sale; • our service personnel typically spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services; • our customers are typically large and medium size organizations that carefully research their technology needs and the many potential projects prior to making capital expenditures for software infrastructure; and • before making a purchase, our potential customers usually must get approvals from various levels of decision makers within their organizations, and this process can be lengthy |
| The continued long sales cycle for these large-scale deployment sales could make it difficult to predict the quarter in which sales will occur |
| Delays in sales could cause significant variability in our revenue and operating results for any particular period |
| 11 ______________________________________________________________________ [35]Table of Contents We face intense competition, which could result in fewer customer orders and reduced revenues and margins |
| We sell our products in intensely competitive markets |
| Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do |
| For example, our ability to market the Access Suite and its individual products including: Presentation Server, Citrix Access Gateway, Password Manager, and other future product offerings could be affected by Microsoft’s licensing and pricing scheme for client devices, servers and applications |
| Further, the announcement of the release, and the actual release, of new Windows-based server operating systems or products incorporating similar features to our products could cause our existing and potential customers to postpone or cancel plans to license certain of our existing and future product and service offerings |
| In addition, alternative products for secure, remote access in the Internet software and hardware markets directly and indirectly compete with our current product lines and our online services |
| Existing or new products and services that extend Internet software and hardware to provide Web-based information and application access or high performance interactive computing can materially impact our ability to sell our products and services in this market |
| Our current competitors in this market include Microsoft, Cisco Systems, Inc, |
| and other makers of secure remote access solutions |
| As the markets for our products and services continue to develop, additional companies, including companies with significant market presence in the computer hardware, software and networking industries, could enter the markets in which we compete and further intensify competition |
| In addition, we believe price competition could become a more significant competitive factor in the future |
| As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition |
| Sales of products within our Access Suite product line constitute a majority of our revenue |
| We anticipate that sales of products within our Access Suite and related enhancements will constitute a majority of our revenue for the foreseeable future |
| Our ability to continue to generate revenue from our Access Suite products will depend on market acceptance of Windows Server Operating Systems and/or UNIX Operating Systems |
| Declines in demand for our Access Suite products could occur as a result of: • new competitive product releases and updates to existing products; • technological change; • general economic conditions; or • lack of success of entities with which we have a technology relationship |
| If our customers do not continue to purchase our Access Suite products as a result of these or other factors, our revenue would decrease and our results of operations and financial condition would be adversely affected |
| If we do not develop new products and services or enhancements to our existing products and services, our business, results of operations and financial condition could be adversely affected |
| The markets for our products and services are characterized by: • rapid technological change; • evolving industry standards; • fluctuations in customer demand; • changes in customer requirements; and • frequent new product and service introductions and enhancements |
| Our future success depends on our ability to continually enhance our current products and services and develop and introduce new products and services that our customers choose to buy |
| If we are unable to keep pace with technological 12 ______________________________________________________________________ [36]Table of Contents developments and customer demands by introducing new products and services and enhancements, our business, results of operations and financial condition could be adversely affected |
| Our future success could be hindered by: • delays in our introduction of new products and services; • delays in market acceptance of new products and services or new releases of our current products and services; and • our, or a competitor’s, announcement of new product or service enhancements or technologies that could replace or shorten the life cycle of our existing product and service offerings |
| For example, we cannot guarantee that our access infrastructure software will achieve the broad market acceptance by our channel and entities with which we have a technology relationship, customers and prospective customers necessary to generate significant revenue |
| In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others |
| If we experience material delays or sales shortfalls with respect to our new products and services or new releases of our current products and services, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition |
| We believe that we could incur additional costs and royalties as we develop, license or buy new technologies or enhancements to our existing products |
| These added costs and royalties could increase our cost of revenues and operating expenses |
| However, we cannot currently quantify the costs for such transactions that have not yet occurred |
| In addition, we may need to use a substantial portion of our cash and investments to fund these additional costs |
| Our business could be adversely impacted by the failure to renew our agreements with Microsoft for source code access |
| In December 2004, we entered into a five-year technology collaboration and licensing agreement with Microsoft Corporation |
| The arrangement includes a new technology initiative for closer collaboration on terminal server functionality in future server operating systems, continued access to source code for key components of Microsoft’s current and future server operating systems, and a patent cross-licensing agreement |
| This technology collaboration and licensing agreement replaces the agreement we signed with Microsoft in May 2002 that provided us access to Microsoft Windows Server source code for current and future Microsoft server operating systems, including access to Windows Server 2003 and terminal services source code |
| There can be no assurances that our current agreements with Microsoft will be extended or renewed by Microsoft after their respective expirations |
| In addition, Microsoft could terminate the current agreements before the expiration of the term for breach or upon a change of control |
| The early termination or the failure to renew certain terms of these agreements with Microsoft in a manner favorable to us could negatively impact the timing of our release of future products and enhancements |
| If we fail to manage our operations and grow revenue or fail to continue to effectively control expenses, our future operating results could be adversely affected |
| Historically, the scope of our operations, the number of our employees and the geographic area of our operations and our revenue have grown rapidly |
| In addition, we have acquired both domestic and international companies |
| This growth and the assimilation of acquired operations and their employees could continue to place a significant strain on our managerial, operational and financial resources |
| To manage our current growth and any future growth effectively, we need to continue to implement and improve additional management and financial systems and controls |
| We may not be able to manage the current scope of our operations or future growth effectively and still exploit market opportunities for our products and services in a timely and cost-effective way |
| Our future operating results could also depend on our ability to manage: • our expanding product lines; • our marketing and sales organizations; and • our client support organization as installations of our products increase |
| In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and certain operating expenses could also increase |
| We believe that we could incur additional costs, including royalties, as we develop, license or buy new technologies or enhancements to our existing products and services |
| These added costs and royalties could increase our cost of revenues and operating expenses and lower our gross margins |
| For example, due to our recent acquisitions, we currently expect that our future revenue will include a greater level of revenue from hardware sales as compared to our historical level of hardware sales, which we expect will reduce our gross margins from their historical levels |
| However, we cannot currently quantify the costs for such transactions that have not yet occurred or of these developing trends in our business |
| In addition, we may need to use a substantial portion of our cash and investments or issue additional shares of our common stock to fund these additional costs |
| 13 ______________________________________________________________________ [37]Table of Contents We attribute most of our growth during recent years to the introduction of the Presentation Server for Windows operating systems in mid-1998 |
| We cannot assure you that the access infrastructure software market, in which we operate, will grow |
| We cannot assure you that the release of our access infrastructure software suite of products or other new products or services will increase our revenue growth rate |
| We cannot assure you that our operating expenses will be lower than our estimated or actual revenues in any given quarter |
| If we experience a shortfall in revenue in any given quarter, we likely will not be able to further reduce operating expenses quickly in response |
| Any significant shortfall in revenue could immediately and adversely affect our results of operations for that quarter |
| Also, due to the fixed nature of many of our expenses and our current expectation for revenue growth, our income from operations and cash flows from operating and investing activities could be lower than in recent years |
| Acquisitions present many risks, and we may not realize the financial and strategic goals we anticipate at the time of an acquisition |
| Our growth is dependent upon market growth, our ability to enhance existing products and services, and our ability to introduce new products and services on a timely basis |
| We intend to continue to address the need to develop new products and services and enhance existing products and services through acquisitions of other companies, product lines and/or technologies |
| Acquisitions, including those of high-technology companies, are inherently risky |
| We cannot assure anyone that our previous acquisitions, including our recent acquisitions of NetScaler, Inc, or NetScaler, and Teros, Inc, together the 2005 Acquisitions, or any future acquisitions will be successful in helping us reach our financial and strategic goals either for that acquisition or for us generally |
| The risks we commonly encounter are: • difficulties and delays integrating the operations, technologies, and products of the acquired companies; • undetected errors or unauthorized use of a third-party’s code in products of the acquired companies; • the risk of diverting management’s attention from normal daily operations of the business; • potential difficulties in completing projects associated with purchased in-process research and development; • risks of entering markets in which we have no or limited direct prior experience and where competitors have stronger market positions and which are highly competitive; • the potential loss of key employees of the acquired company; and • an uncertain sales and earnings stream from the acquired company, which could unexpectedly dilute our earnings |
| These factors could have a material adverse effect on our business, results of operations and financial condition |
| We cannot guarantee that the combined company resulting from any acquisition can continue to support the growth achieved by the companies separately |
| We must also focus on our ability to manage and integrate any acquisition |
| Our failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results |
| Our anticipated benefits of acquiring NetScaler may not be realized |
| We acquired NetScaler with the expectation that the acquisition would result in various benefits including, among other things, enhanced revenue and profits, greater market presence and development, and enhancements to our product portfolio and customer base |
| We expect that the acquisition will enhance our position in the access infrastructure market through the combination of our technology, products, services, distribution channels and customer contacts with NetScaler’s |
| Moreover, by adding NetScaler products to our current product portfolio, we expect to enable our customers to further lower costs and increase the performance of their Presentation Server systems and offer greater performance and lower costs for customers deploying our online applications and services |
| In addition, we may not achieve the anticipated benefits of our acquisition of NetScaler as rapidly as, or to the extent, anticipated by our management and certain financial or industry analysts, and others may not perceive the same benefits of the acquisition as we do |
| For example, NetScaler’s contribution to our financial results may not meet the current expectations of our management for a number of reasons, including the integration risks described below, and could dilute our profits beyond the current expectations of our management |
| In addition, operations and costs incurred and potential liabilities assumed in connection with our acquisition of NetScaler also could have an adverse effect on our business, financial condition and operating results |
| If these risks materialize, our stock price could be materially and adversely affected |
| 14 ______________________________________________________________________ [38]Table of Contents If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations |
| We have a significant amount of goodwill and other intangible assets, such as product and core technology, related to our 2004 Acquisitions and our 2005 Acquisitions |
| We do not amortize goodwill and intangible assets that are deemed to have indefinite lives |
| However, we do amortize certain product and core technologies, trademarks, patents and other intangibles |
| We periodically evaluate our intangible assets, including goodwill, for impairment at the reporting unit level (operating segment) |
| As of December 31, 2005, we had dlra592dtta0 million of goodwill, of which approximately dlra234dtta7 million of goodwill was recorded in connection with our 2005 Acquisitions |
| We review for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value |
| Fair values are based on discounted cash flows using a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model |
| Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill and other intangible assets could change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition |
| Furthermore, impairment testing requires significant judgment, including the identification of reporting units based on our internal reporting structure that reflects the way we manage our business and operations and to which our goodwill and intangible assets would be assigned |
| Significant judgments are required to estimate the fair value of our goodwill and intangible assets, including estimating future cash flows, determining appropriate discount rates, estimating the applicable tax rates, foreign exchange rates and interest rates, projecting the future industry trends and market conditions, and making other assumptions |
| Changes in these estimates and assumptions, including changes in our reporting structure, could materially affect our determinations of fair value |
| We recorded approximately dlra310dtta7 million of goodwill and intangible assets in connection with our 2005 Acquisitions |
| If the actual revenues and operating profit attributable to acquired intangible assets are less than the projections we used to initially value these intangible assets when we acquired them, then these intangible assets may be deemed to be impaired |
| If we determine that any of the goodwill or other intangible assets associated with our 2004 Acquisitions or our 2005 Acquisitions are impaired, then we would be required to reduce the value of those assets or to write them off completely by taking a related charge to earnings |
| If we are required to write down or write off all or a portion of those assets, or if financial analysts or investors believe we may need to take such action in the future, our stock price and operating results could be materially adversely affected |
| At December 2005, we had dlra137dtta3 million, net, of unamortized identified intangibles, which include core and product technology we purchased in acquisitions or under third party licenses, of which approximately dlra76dtta0 million of identified intangible assets was recorded in connection with our 2005 Acquisitions |
| We currently market the technologies acquired in our 2004 Acquisitions through our Online Services and Citrix Access Gateway products and the technologies acquired in the 2005 Acquisitions through our Citrix NetScaler products |
| However, our channel distributors and entities with which we have technology relationships, customers or prospective customers may not purchase or widely accept our new appliances and continue to accept our Online Services |
| If we fail to complete the development of our anticipated future product and service offerings, including product offerings acquired through the NetScaler acquisition, if we fail to complete them in a timely manner, or if we are unsuccessful in selling any new lines of products, appliances and services, we could determine that the value of the purchased technology is impaired in whole or in part and take a charge to earnings |
| We could also incur additional charges in later periods to reflect costs associated with completing those projects that could not be completed in a timely manner |
| An impairment charge could have a material adverse effect on our results of operations |
| If the actual revenues and operating profit attributable to acquired product and core technologies are less than the projections we used to initially value product and core technologies when we acquired it, such intangible assets may be deemed to be impaired |
| If we determine that any of our intangible assets are impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations |
| Our business could be adversely impacted by conditions affecting the information technology market |
| The demand for our products and services depends substantially upon the general demand for business-related computer hardware and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers and general economic conditions |
| Fluctuations in the demand for our products and services could have a material adverse effect on our business, results of operations and financial condition |
| In the past, adverse economic conditions decreased demand for our products and negatively impacted our financial results |
| Future economic projections for the information technology sector are uncertain |
| If an uncertain information technology spending environment persists, it could negatively impact our business, results of operations and financial condition |
| 15 ______________________________________________________________________ [39]Table of Contents Our business could be adversely affected if we are unable to expand and diversify our distribution channels |
| We currently intend to continue to expand our distribution channels by leveraging our relationships with independent hardware and software vendors and system integrators to encourage them to recommend or distribute our products |
| In addition, an integral part of our strategy is to diversify our base of channel relationships by adding more channel members with abilities to reach larger enterprise customers and to sell our newer products |
| This will require additional resources, as we will need to expand our internal sales and service coverage of these customers |
| If we fail in these efforts and cannot expand or diversify our distribution channels, our business could be adversely affected |
| In addition to this diversification of our base, we will need to maintain a healthy mix of channel members who cater to smaller customers |
| We may need to add and remove distribution members to maintain customer satisfaction and a steady adoption rate of our products, which could increase our operating expenses |
| Through our accessPARTNER network, Citrix Authorized Learning Centers and other programs, we are currently investing, and intend to continue to invest, significant resources to develop these channels, which could reduce our profits |
| We could change our licensing programs, which could negatively impact the timing of our recognition of revenue |
| We continually re-evaluate our licensing programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services |
| We could implement new licensing programs, including offering specified and unspecified enhancements to our current and future product and service lines |
| Such changes could result in recognizing revenues over the contract term as opposed to upon the initial shipment or licensing of our software product |
| We could implement different licensing models in certain circumstances, for which we would recognize licensing fees over a longer period |
| Changes to our licensing programs, including the timing of the release of enhancements, discounts and other factors, could impact the timing of the recognition of revenue for our products, related enhancements and services and could adversely affect our operating results and financial condition |
| Sales of our Subscription Advantage product constitute substantially all of our License Updates revenue and a large portion of our deferred revenue |
| We anticipate that sales of our Subscription Advantage product will continue to constitute a substantial portion of our License Updates revenue |
| Our ability to continue to generate both recognized and deferred revenue from our Subscription Advantage product will depend on our customers continuing to perceive value in automatic delivery of our software upgrades and enhancements |
| A decrease in demand for our Subscription Advantage product could occur as a result of a decrease in demand for our Access Suite products |
| If our customers do not continue to purchase our Subscription Advantage product, our License Updates revenue and deferred revenue would decrease significantly and our results of operations and financial condition would be adversely affected |
| As our international sales and operations grow, we could become increasingly subject to additional risks that could harm our business |
| We conduct significant sales and customer support, development and engineering operations in countries outside of the United States including, as a result of our acquisition of NetScaler, product development in Bangalore, India |
| During 2005, we derived approximately 50prca of our revenues from sales outside the United States |
| Our continued growth and profitability could require us to further expand our international operations |
| To successfully expand international sales, we must establish additional foreign operations, hire additional personnel and recruit additional international resellers |
| Our international operations are subject to a variety of risks, which could cause fluctuations in the results of our international operations |
| These risks include: • compliance with foreign regulatory and market requirements; • variability of foreign economic, political and labor conditions; • changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by United States export laws; • longer accounts receivable payment cycles; • potentially adverse tax consequences; 16 ______________________________________________________________________ [40]Table of Contents • difficulties in protecting intellectual property; • burdens of complying with a wide variety of foreign laws; and • as we generate cash flow in non-US jurisdictions, if required, we may experience difficulty transferring such funds to the US in a tax efficient manner |
| Our results of operations are also subject to fluctuations in foreign currency exchange rates |
| In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks one year in advance of anticipated foreign currency expenses |
| As a result of this practice, foreign currency denominated expenses will be higher in the current year if the dollar was weak in the prior year |
| If the dollar is strong in the current year, most of the benefits will be reflected in our operating costs |
| There is a risk that there will be fluctuations in foreign currency exchange rates beyond the one year timeframe for which we hedge our risk |
| Because the dollar was weak in 2004, operating expenses were generally higher in 2005, although there was some moderating impact due to a stronger dollar since April 2005 |
| Our success depends, in part, on our ability to anticipate and address these risks |
| We cannot guarantee that these or other factors will not adversely affect our business or operating results |
| Our proprietary rights could offer only limited protection |
| Our products, including products obtained through acquisitions, could infringe third-party intellectual property rights, which could result in material costs |
| Our efforts to protect our proprietary rights may not be successful |
| We rely primarily on a combination of copyright, trademark, patent and trade secret laws, confidentiality procedures and contractual provisions, to protect our proprietary rights |
| The loss of any material trade secret, trademark, trade name, patent or copyright could have a material adverse effect on our business |
| Despite our precautions, it could be possible for unauthorized third parties to copy or reverse engineer certain portions of our products or to otherwise obtain and use our proprietary information |
| If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive |
| Any patents owned by us could be invalidated, circumvented or challenged |
| Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope we seek, if at all, and if issued, may not provide any meaningful protection or competitive advantage |
| In addition, our ability to protect our proprietary rights could be affected by: • Differences in International Law; Enforceability of Licenses |
| The laws of some foreign countries do not protect our intellectual property to the same extent as do the laws of the United States and Canada |
| For example, we derive a significant portion of our sales from licensing our packaged products under “shrink wrap” or “click-to-accept” license agreements that are not signed by licensees and electronic enterprise customer licensing arrangements that are delivered electronically, all of which could be unenforceable under the laws of many foreign jurisdictions in which we license our products |
| • Third Party Infringement Claims |
| As we expand our product lines, through product development and acquisitions, including the recently completed acquisition of NetScaler, and the number of products and competitors in our industry segments increase and the functionality of these products overlap, we could become increasingly subject to infringement claims and claims to the unauthorized use of a third-party’s code in our products |
| Companies and inventors are more frequently seeking to patent software and business methods because of developments in the law that could extend the ability to obtain such patents |
| As a result, we could receive more patent infringement claims |
| Responding to any infringement claim, regardless of its validity, could result in costly litigation; injunctive relief or require us to obtain a license to intellectual property rights of those third parties |
| Licenses may not be available on reasonable terms, on terms compatible with the protection of our proprietary rights, or at all |
| In addition, attention to these claims could divert our management’s time and attention from developing our business |
| If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be materially adversely affected |
| We are subject to risks associated with our strategic and technology relationships |
| Our business depends on strategic and technology relationships |
| We cannot assure you that those relationships will continue in the future |
| In addition to our relationship with Microsoft, we rely on strategic or technology relationships with such companies as SAP, International Business Machines Corporation, Hewlett-Packard Company, Dell Inc |
| We depend on the entities with which we have strategic or technology relationships to successfully test our products, to incorporate our technology into their products and to market and sell those products |
| We cannot assure you that we will be able to maintain our current strategic and technology relationships or to develop additional strategic and technology 17 ______________________________________________________________________ [41]Table of Contents relationships |
| If any entities in which we have a strategic or technology relationship are unable to incorporate our technology into their products or to market or sell those products, our business, operating results and financial condition could be materially adversely affected |
| If we lose access to third party licenses, releases of our products could be delayed |
| We believe that we will continue to rely, in part, on third party licenses to enhance and differentiate our products |
| Third party licensing arrangements are subject to a number of risks and uncertainties, including: • undetected errors or unauthorized use of another person’s code in the third party’s software; • disagreement over the scope of the license and other key terms, such as royalties payable; • infringement actions brought by third party licensees; and • termination or expiration of the license |
| If we lose or are unable to maintain any of these third party licenses or are required to modify software obtained under third party licenses, it could delay the release of our products |
| Any delays could have a material adverse effect on our business, results of operations and financial condition |
| Our success depends on our ability to attract and retain and further penetrate large enterprise customers |
| We must retain and continue to expand our ability to reach and penetrate large enterprise customers by adding effective channel distributors and expanding our consulting services |
| Our inability to attract and retain large enterprise customers could have a material adverse effect on our business, results of operations and financial condition |
| Large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact our revenues |
| By granting special pricing, such as bundled pricing or discounts, to these large customers, we may have to defer recognition of some or all of the revenue from such sales |
| This deferral could reduce our revenues and operating profits for a given reporting period |
| Additionally, as we attempt to attract and penetrate large enterprise customers, we may need to increase corporate branding and marketing activities, which could increase our operating expenses |
| These efforts may not proportionally increase our operating revenues and could reduce our profits |
| Our success may depend on our ability to attract and retain small-sized customers |
| In order to successfully attract new customer segments to our Presentation Server products and expand our existing relationships with enterprise customers, we must reach and retain small-sized customers and small project initiatives within our larger enterprise customers |
| We have begun a marketing initiative to reach these customers that includes extending our Advisor Rewards program to include a broader range of license types |
| In 2005, we also introduced a new product, Citrix Access Essentials^TM, specifically developed, packaged and priced to bring secure application virtualization and efficient centralized management of information resources to small and mid-sized businesses |
| We cannot guarantee that our small-sized customer marketing initiative or new product will be successful |
| Our failure to attract and retain small sized customers and small project initiatives within our larger enterprise customers could have a material adverse effect on our business, results of operations and financial condition |
| Additionally, as we attempt to attract and retain small sized customers and small project initiatives within our larger enterprise customers, we may need to increase corporate branding and broaden our marketing activities, which could increase our operating expenses |
| These efforts may not proportionally increase our operating revenues and could reduce our profits |
| We rely on indirect distribution channels and major distributors that we do not control |
| We rely significantly on independent distributors and resellers to market and distribute our products and appliances |
| We do not control our distributors and resellers |
| Additionally, our distributors and resellers are not obligated to buy our products and could also represent other lines of products |
| Some of our distributors and resellers maintain inventories of our packaged products for resale to smaller end-users |
| If distributors and resellers reduce their inventory of our packaged products, our business could be adversely affected |
| Further, we could maintain individually significant accounts receivable balances with certain distributors |
| The financial condition of our distributors could deteriorate and distributors could significantly delay or default on their payment obligations |
| Any significant delays or defaults could have a material adverse effect on our business, results of operations and financial condition |
| 18 ______________________________________________________________________ [42]Table of Contents Our products could contain errors that could delay the release of new products and may not be detected until after our products are shipped |
| Despite significant testing by us and by current and potential customers, our products, especially new products or releases or acquired products, could contain errors |
| In some cases, these errors may not be discovered until after commercial shipments have been made |
| Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products |
| Additionally, our products depend on third party products, which could contain defects and could reduce the performance of our products or render them useless |
| Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers |
| If we lose key personnel or cannot hire enough qualified employees, our ability to manage our business could be adversely affected |
| Our success depends, in large part, upon the services of a number of key employees |
| Except for certain key employees of acquired businesses, we do not have long-term employment agreements with any of our key personnel |
| Any officer or employee can terminate his or her relationship with us at any time |
| The effective management of our growth, if any, could depend upon our ability to retain our highly skilled technical, managerial, finance and marketing personnel |
| If any of those employees leave, we will need to attract and retain replacements for them |
| We also need to add key personnel in the future |
| The market for these qualified employees is competitive |
| We could find it difficult to successfully attract, assimilate or retain sufficiently qualified personnel in sufficient numbers |
| Furthermore, we may hire key personnel in connection with our future acquisitions; however, any of these employees will be able to terminate his or her relationship with us at any time |
| If we cannot retain and add the necessary staff and resources for these acquired businesses, our ability to develop acquired products, markets and customers could be adversely affected |
| Also, we may need to hire additional personnel to develop new products, product enhancements and technologies |
| If we cannot add the necessary staff and resources, our ability to develop future enhancements and features to our existing or future products could be delayed |
| Any delays could have a material adverse effect on our business, results of operations and financial condition |
| Our synthetic lease is an off-balance sheet arrangement that could negatively affect our financial condition and results |
| In April 2002, we entered into a seven-year synthetic lease with a lessor for our headquarters office buildings in Fort Lauderdale, Florida |
| The synthetic lease qualifies for operating lease accounting treatment under SFAS Nodtta 13, Accounting for Leases, so we do not include the property or the associated lease debt on our consolidated balance sheet |
| However, if the lessor were to change its ownership of our property or significantly change its ownership of other properties that it currently holds, under FIN Nodtta 46, Consolidation of Variable Interest Entities (revised) we could be required to consolidate the entity, the leased facility and the debt at that time |
| If we elect not to purchase the property at the end of the lease term, we have guaranteed a minimum residual value of approximately dlra51dtta9 million to the lessor |
| Therefore, if the fair value of the property declines below dlra51dtta9 million, our residual value guarantee would require us to pay the difference to the lessor, which could have a material adverse effect on our results of operations and financial condition |
| We have entered into credit facility agreements that restrict our ability to conduct our business and failure to comply with such agreements may have an adverse effect on our business, liquidity and financial position |
| In August, 2005, the Company and its subsidiary, Citrix Systems International GmbH, entered into credit facility agreements that contain financial covenants tied to maximum consolidated leverage and minimum interest coverage, among other things |
| The credit facility agreements also contain affirmative and negative covenants, including limitations related to indebtedness, contingent obligations, liens, mergers, acquisitions, investments, sales of assets and other corporate changes of the Company, and payment of dividends, including dividends from our subsidiaries to us |
| If we fail to comply with these covenants or any other provision of the credit facility agreements, we may be in default under the credit facility agreements, and we cannot assure you that we will be able to obtain the necessary waivers or amendments of such default |
| Upon an event of default under our credit facility agreements not otherwise amended or waived, the affected lenders could accelerate the repayment of any outstanding principal and accrued interest on their outstanding loans and terminate their commitments to lend additional funds, which may have a material adverse effect on our liquidity and financial position |
| 19 ______________________________________________________________________ [43]Table of Contents If our security measures are breached and unauthorized access is obtained to our Online Services division customers’ data, our services may be perceived as not being secure and customers may curtail or stop using our service |
| Use of our GoToMyPC, GoToMeeting or GoToAssist services 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, and, as a result, someone obtains unauthorized access to one of our online customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability |
| Because techniques used to obtain unauthorized access to or 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 any compromises of security were to occur, it could have the effect of substantially reducing the use of the Web for commerce and communications |
| Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations |
| The Internet is a public network, and data are sent over this network from many sources |
| In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet |
| Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our network or make it inaccessible to our Online Services division customers |
| 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 for our Online Services division, which would significantly adversely affect our financial condition and the operating results for our Online Services division |
| Evolving regulation of the Web may adversely affect our Online Services division |
| As Web 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 online customers’ ability to use and share data and restricting our ability to store, process and share data with these customers |
| In addition, taxation of services provided over the Web or other charges imposed by government agencies or by private organizations for accessing the Web may also be imposed |
| Any regulation imposing greater fees for Web use or restricting information exchange over the Web could result in a decline in the use of the Web and the viability of Web-based services, which would significantly adversely affect our financial condition and the operating results for our Online Services division |
| Disruption of our operations at our corporate headquarters, particularly due to hurricanes, could negatively impact our results of operations |
| A significant portion of our computer equipment, intellectual property resources and personnel, including critical resources dedicated to research and development and administrative support functions, are presently located at our corporate headquarters in Fort Lauderdale, Florida, an area of the country that is particularly prone to hurricanes |
| The occurrence of a natural disaster or other unanticipated catastrophes, such as a hurricane, in southern Florida could cause interruptions in our operations |
| For example, in October 2005, Hurricane Wilma passed through southern Florida causing extensive damage to the region, including some minor damage to our corporate headquarters facility |
| Extensive or multiple interruptions in our operations due to future hurricanes, other natural disasters or unanticipated catastrophes could severely disrupt our operations and have a material adverse effect on our results of operations |
| If we do not generate sufficient cash flow from operations in the future, we may not be able to fund our product development and acquisitions and fulfill our future obligations |
| Our ability to generate sufficient cash flow from operations to fund our operations and product development, including the payment of cash consideration in acquisitions and the payment of our other obligations, depends on a range of economic, competitive and business factors, many of which are outside our control |
| We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to liquidate our investments, repatriate cash and investments held in our overseas subsidiaries, sell assets or raise equity or debt financings when needed or desirable |
| An inability to fund our operations or fulfill outstanding obligations could have a material adverse effect on our business, financial condition and results of operations |
| For further information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources |
| ” If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely affected |
| We provide most of our distributors with stock balancing return rights, which generally permit our distributors to return products to us by the forty-fifth day of a fiscal quarter, subject to ordering an equal dollar amount of our products prior to the last day of the same fiscal quarter |
| We also provide price protection rights to most of our distributors |
| Price protection rights 20 ______________________________________________________________________ [44]Table of Contents require that we grant retroactive price adjustments for inventories of our products held by distributors if we lower our prices for those products within a specified time period |
| To cover our exposure to these product returns and price adjustments, we establish reserves based on our evaluation of historical product trends and current marketing plans |
| However, we cannot assure you that our reserves will be sufficient to cover our future product returns and price adjustments |
| If we inadequately forecast reserves, our operating results could be adversely affected |
| Our stock price could be volatile, and you could lose the value of your investment |
| Our stock price has been volatile and has fluctuated significantly in the past |
| The trading price of our stock is likely to continue to be volatile and subject to fluctuations in the future |
| Your investment in our stock could lose some or all of its value |
| Some of the factors that could significantly affect the market price of our stock include: • actual or anticipated variations in operating and financial results; • analyst reports or recommendations; • changes in interest rates; and • other events or factors, many of which are beyond our control |
| The stock market in general, The Nasdaq National Market and the market for software companies and technology companies in particular, have experienced extreme price and volume fluctuations |
| These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance |
| Changes in financial accounting standards related to share-based payments are expected to have a material adverse impact on our reported results of operations |
| In December 2004, the Financial Accounting Standards Board issued SFAS Nodtta 123R, Share-Based Payment |
| SFAS Nodtta 123R is a very complex accounting standard that requires companies to expense the fair value of employee stock options and similar awards and is effective as of January 1, 2006 for us |
| The adoption of the new standard is expected to have a material adverse impact on our reported results of operations for periods after its implementation |
| SFAS Nodtta 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current financial accounting standards |
| This requirement will reduce our net operating cash flows and increase net financing cash flows in periods after implementation of the new standard |
| Additionally, SFAS Nodtta 123R could adversely impact our ability to provide accurate financial guidance concerning our expected results of operations on a GAAP basis for periods after its effectiveness due to the variability of the factors used to estimate the values of share-based payments |
| As a result, the adoption of the new standard in the first quarter of 2006 could negatively affect our stock price and our stock price volatility |
| Furthermore, the application of SFAS Nodtta 123R requires significant judgment and the use of estimates, particularly surrounding stock price volatility, option forfeiture rates and expected option lives, to build a model for appropriately valuing share-based compensation |
| There is little experience or guidance with respect to developing these assumptions and models |
| There is also uncertainty as to how SFAS Nodtta 123R will be interpreted and applied as more companies adopt the standard and companies and their advisors gain more experience with the standard |
| There is a risk that, as we and others gain experience with SFAS 123R or as a result of subsequent accounting guidelines, we could determine that the assumptions or model we used requires modification |
| Any such modification could result in significantly different charges in future periods and, potentially, could require us to correct the charges taken in prior periods |
| Any such corrections of charges taken in a prior period could negatively affect our results of operations, stock price and our stock price volatility |
| Our business is subject to seasonal fluctuations |
| Our business is subject to seasonal fluctuations |
| Historically, our net revenues have fluctuated quarterly and have generally been the highest in the fourth quarter of our fiscal year due to corporate calendar year-end spending trends |
| In addition, quarterly results are affected by the timing of the release of new products and services |
| Because of the seasonality of the Company’s business, results for any quarter, especially our fourth quarter, are not necessarily indicative of the results that may be achieved for the full fiscal year |
| 21 ______________________________________________________________________ [45]Table of Contents Our business and investments could be adversely impacted by unfavorable economic political and social conditions |
| General economic and market conditions, and other factors outside our control including terrorist and military actions, could adversely affect our business and impair the value of our investments |
| Any downturn in general economic conditions could result in a reduction in demand for our products and services and could harm our business |
| These conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations |
| In addition, an economic downturn could result in an impairment in the value of our investments requiring us to record losses related to such investments |
| Impairment in the value of these investments may disrupt our ongoing business and distract management |
| As of December 31, 2005, we had dlra78dtta1 million of short and long-term investments, including restricted investments, with various issuers and financial institutions |
| In many cases we do not attempt to reduce or eliminate our market exposure on these investments and could incur losses related to the impairment of these investments |
| Fluctuations in economic and market conditions could adversely affect the value of our investments, and we could lose some of our investment portfolio |
| A total loss of an investment could adversely affect our results of operations and financial condition |
| For further information on these investments, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources |