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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File Number 000-26785
PACKETEER, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE |
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77-0420107 |
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(State of incorporation) |
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(I.R.S. Employer
Identification No.) |
10201 NORTH DE ANZA BLVD.
CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(408) 873-4400
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by checkmark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Based on the closing sale price of the common stock on the
Nasdaq National Market on June 30, 2004, the aggregate
market value of the voting common stock held by non-affiliates
of the Registrant was $519,752,252. Shares of common stock held
by each officer and director and by each person known by the
Registrant to own 10% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of Registrant’s common
stock, $0.001 par value, was 33,700,334 at March 8,
2005.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III, Items 10, 11,
12, 13 and 14, of this Form 10-K is incorporated by
reference from the Registrant’s definitive Proxy Statement
for the Registrant’s 2005 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after
December 31, 2004.
TABLE OF CONTENTS
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PART I
In addition to historical information, this Annual Report on
Form 10-K contains forward-looking statements regarding our
strategy, financial performance and revenue sources that involve
a number of risks and uncertainties, including those discussed
below in “Risk Factors.” Forward-looking statements in
this report include, but are not limited to, those relating to
future revenues, revenue growth and profitability, markets for
our products, our ability to continue to innovate and obtain
patent protection, operating expense targets, liquidity, new
product development, the possibility of acquiring complementary
businesses, products, services and technologies, our
international expansion plans and our development of
relationships with providers of leading Internet technologies.
While this outlook represents our current judgment on the future
direction of the business, such risks and uncertainties could
cause actual results to differ materially from any future
performance suggested below due to a number of factors,
including the perceived need for our products, our ability to
convince potential customers of our value proposition, the costs
of competitive solutions, our reliance on third party contract
manufacturers, continued capital spending by prospective
customers and macro economic conditions. Readers are cautioned
not to place undue reliance on the forward-looking statements,
which speak only as of the date of this Annual Report. Packeteer
undertakes no obligation to publicly release any revisions to
forward-looking statements to reflect events or circumstances
arising after the date of this document. See “Risk
Factors.”
OVERVIEW
Packeteer is a leading provider of WAN Application Traffic
Management systems designed to deliver a broad set of
visibility, control, compression and protocol acceleration
capabilities to enterprise customers and service providers. For
enterprise customers, Packeteer systems are designed to enable
Information Technology, or IT, organizations to effectively
optimize application and network resources, while providing
measurable cost savings in wide area network, or WAN,
investments. For service providers, Packeteer systems are
designed to provide a platform for delivering
application-intelligent network services that control quality of
service, or QoS, expand revenue opportunities and offer
compelling differentiation from other potential solutions.
The Packeteer application traffic management system consists of
a family of scalable appliances that can be deployed within
large data centers as well as smaller remote sites throughout a
distributed enterprise. Each appliance can be configured with
software modules to deliver a range of WAN Application Traffic
Management capabilities. PacketSeeker® provides visibility,
PacketShaper® provides control, and PacketShaper
Xpresstm
provides compression. In addition, each appliance can be managed
individually or as an integrated policy-based WAN Application
Traffic Management system distributed across multiple locations,
using our
PolicyCentertm
software product. Centralized reporting for multiple appliances
is also available using our
ReportCentertm
software product.
In December 2004, Packeteer acquired Mentat, Inc., or Mentat.
This acquisition expands our solution portfolio with technology
for accelerating applications over satellite and long-haul
networks. The Mentat SkyX® products enhance the performance
and efficiency of internet and private network access. With a
unique connection splitting and protocol–translation
system, the SkyX Gateway is designed to improve Transmission
Control Protocol/ Internet Protocol, or TCP/IP, performance over
satellite-based or long haul networks while remaining entirely
transparent to end users.
Packeteer’s products are deployed at more than
7,000 companies in more than 50 countries. Our sales force
and marketing efforts are used to develop brand awareness, drive
demand for system solutions and support our indirect channels.
We were incorporated in Delaware in January 1996 and began
shipping our products in February 1997. To date we have shipped
more than 40,000 units. We have subsidiaries or branch
offices in Australia, Canada, China, Denmark, France, Germany,
Hong Kong, India, Italy, Japan, Malaysia, Singapore, Spain,
South Korea, the Netherlands and the United Kingdom. In this
report, “Company”, “Packeteer,”
“we,” “us,” and
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“our” refer to Packeteer, Inc. and its subsidiaries.
Investors may access our filings with the Securities and
Exchange Commission including our annual report on
Form 10-K, our quarterly reports on Form 10-Q, our
current reports on Form 8-K and amendments to such reports
on our website, free of charge, at www.packeteer.com, but
the information on our website does not constitute part of this
Annual Report.
INDUSTRY BACKGROUND
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The Emergence of Internet Computing |
The Internet and TCP/IP have enabled a new generation of
interactive applications to allow information to be exchanged
and business processes to be distributed beyond the traditional
boundaries of the enterprise. As a result, these distributed
applications empower companies to conduct business with
employees, customers, partners and suppliers regardless of their
physical location. Protocols are predefined mechanisms for
computers to communicate over networks. TCP/IP is a two-layer
program. The higher layer, TCP, manages the assembly of a file
into smaller packets that are transmitted over the Internet and
received by a TCP layer that reassembles the packets into the
original message. The lower layer, IP, handles the address part
of each packet so it gets to the right destination.
The emergence of Internet computing has created new challenges
for IT managers. As more core business applications, such as
SAP, Oracle, and Siebel, become distributed and web-enabled, and
the use of video over IP and voice over IP increases, the amount
of network data increases dramatically. This increase in data
makes it difficult for businesses to ensure the performance of
their applications. Further, enterprise users access
graphic-intensive web sites, download large files, view
streaming media presentations, monitor news and stock quotes and
access peer-to-peer applications, instant messaging and other
critical and non-critical information over the Internet. The
resulting traffic deluge impacts network resources that serve
point-of-sale, order processing, enterprise resource planning,
supply-chain management and other vital business functions.
Unlike early non-interactive applications that did not require
real-time responsiveness, today’s business applications
depend on timely access to data and real-time transaction
responses to ensure productivity and a high quality of
experience for end users. The shift toward real-time,
delay-sensitive data is accelerating as corporations begin to
converge database transactions and multimedia traffic onto their
enterprise networks. TCP/IP is unable to differentiate between
traffic types and is designed so that each transmission attempts
to consume all available bandwidth. These characteristics, which
make TCP/IP suitable for non-interactive traffic, threaten the
performance of today’s mission-critical applications.
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The Traffic Bottleneck at the WAN Access Link |
In recent years, the adoption of Fast Ethernet and Gigabit
Ethernet technologies has reduced network congestion on the
local area network, or LAN. Simultaneously, the deployment of
fiber infrastructure in the service provider backbone has also
reduced bandwidth contention in that portion of the network.
However, the bridge between the two, the wide area network, or
WAN, access link, has remained the slow, weak link in the chain,
forming a bandwidth bottleneck. WAN access link capacity is
often constrained, expensive and difficult to upgrade. When
faced with bandwidth contention at the bottleneck, TCP/IP
provides neither a means to give preferential treatment to
select applications nor a good mechanism to effectively control
data flows because TCP flow control is handled only by end
systems. TCP/IP reacts to network congestion by discarding data
packets and sporadically reducing packet transmissions from the
host computer. In enterprise networks that are overwhelmed by
increasing amounts of both non-critical and mission-critical
traffic, unmanaged congestion at the WAN access link undermines
application performance and can result in impaired productivity
and lost revenues.
Today’s enterprise networks require solutions that ensure
mission-critical application performance, increase network
efficiency, and enable the convergence of data, voice and video
traffic. Enterprises are seeking to align their networks with
their business priorities by making them adaptive to the unique
requirements of the growing mix of mission-critical
applications. At the same time, they seek to leverage
investments in application software and proactively control
recurring network costs by optimizing bandwidth utilization.
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Many existing and newly emerging telecommunications service
providers are also seeking to address the needs of enterprises
that are adopting Internet computing. Service providers have
traditionally functioned as WAN bandwidth suppliers, leasing
data lines and selling Internet access to businesses and
consumers. In the face of heightened competition, service
providers are seeking to differentiate themselves by offering
tiered services in order to attract and retain customers and
increase profitability. These offerings include web hosting,
application outsourcing and managed network services. To deliver
these services, service providers must be able to ensure network
and application performance and better manage and allocate
network resources.
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Limitations of Existing Approaches |
Businesses and service providers currently employ several
approaches in an attempt to alleviate network congestion at the
WAN access link. These approaches include the following:
Adding bandwidth and infrastructure to over-provision the
network. This approach requires expensive upgrades to WAN
access links and associated network equipment. Additional
bandwidth may be unavailable in many international markets.
Moreover, incremental increases in bandwidth may only
temporarily alleviate network congestion, and do not ensure that
the additional bandwidth is available to mission critical
applications, leaving the following problems unresolved:
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Increases in bandwidth tend to be consumed quickly by latent
demand within LAN and backbone infrastructure, and often
disproportionately by non-mission critical traffic; |
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Deployment costs and increases in recurring service charges can
be prohibitively expensive, especially for networks with many
remote sites and for international networks; |
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There is no application performance visibility to enable
effective capacity planning; and |
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Over-provisioning results in under-utilization of the network
during non-peak periods. |
Implementing queuing-based approaches. Queuing
technologies provide some degree of prioritization and are
frequently incorporated in routers, which are devices that
forward data packets from one LAN or WAN to another. These
implementations engage only after queues form, and attempt to
provide QoS by reordering packets and then discarding packets
when the queues overflow. Queuing-based approaches typically
identify and prioritize traffic based on rudimentary
characteristics such as port number, a simplistic mechanism to
coordinate the transmission of application data, IP address or
protocol type. While these approaches can alleviate some of the
bandwidth contention problems, they are inadequate to handle an
increasingly complex mix of interactive and real-time
mission-critical applications for the following reasons:
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Queuing-based approaches do not control inbound traffic flowing
from the WAN to the LAN; |
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Queuing-based approaches are reactive in nature and can only
address congestion after the fact, rather than preventing it
from occurring; |
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Congested queues result in packet loss, retransmissions and
delays that waste bandwidth and undermine application response
times; |
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Limited traffic classification capabilities inadequately
distinguish between different types of applications, resulting
in sub-optimal prioritization of traffic; and |
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Queuing does not directly control end-to-end application
performance. |
Deploying traditional compression technologies. Products
are available which only compress traffic. Although compression
alone can increase available bandwidth, which effectively
increases network capacity, the network and application
performance problems are not necessarily eliminated. The TCP/IP
protocol is inherently bursty, so even compressed non-critical
applications may still consume the available bandwidth. In
addition, the following problems are also introduced when
deploying traditional compression technologies:
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Latency, or the amount of time it takes a packet to travel from
source to destination, which can negatively affect performance; |
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Non selective compression, which results in some already
compressed application traffic being delayed with no discernable
benefit to performance; and |
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Difficulty in configuring and maintaining compression tunnels. |
Installing network management tools. Several vendors
provide software that analyzes and monitors network traffic.
While these products enable network administrators to determine
how bandwidth is being utilized, thereby identifying where
bandwidth management is required, they do not comprise a
complete solution for the following reasons:
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Traditional network management tools only monitor and report
network performance and bandwidth utilization, offering no means
of fixing or resolving performance problems; and |
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As is the case with queuing-based approaches, traditional
network management tools are reactive in nature in that they
detect problems once they occur, but do not prevent similar
problems in the future. |
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The Packeteer Opportunity |
As the “webification” of enterprise applications
expands, VoIP becomes more widely deployed and MPLS and IP-VPN
strategies used for network consolidation, both businesses and
service providers are seeking ways to cost-effectively manage
bandwidth, ensure application performance and increase network
efficiency. As mission-critical applications compete with
bandwidth-hungry non-critical traffic for limited network
resources, enterprises require a solution that not only monitors
and reports on network performance problems, but also provides
the means to fix such problems. As the complexity of their
network infrastructures increases, enterprises seek solutions
that integrate easily into the existing network and are
cost-effective to deploy and maintain. In response to growing
competition, service providers are looking to create new revenue
streams by offering differentiated network and application-based
services that meet the needs of enterprise customers. Whether
the solution is implemented by the enterprise or purchased from
a service provider, effectively managing the performance of
mission-critical WAN applications is essential for fast business.
THE PACKETEER SOLUTION
Packeteer is a leading provider of WAN Application Traffic
Management systems designed to deliver a broad set of
visibility, control, compression and protocol acceleration
capabilities to enterprise customers and service providers. For
enterprise customers, Packeteer systems are designed to enable
IT organizations to effectively optimize applications and
network resources while providing measurable cost savings in WAN
investments. For service providers, Packeteer systems are
designed to provide a platform for delivering
application-intelligent network services that control QoS,
expand revenue opportunities and offer compelling
differentiation from other potential solutions. Packeteer’s
WAN Application Traffic Management system is based on the
following:
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Visibility. Before an organization can control
application performance on the WAN, it needs to know what is
running on its network and how the network is performing.
Packeteer’s monitoring capabilities involve automatic
identification and classification of traffic through
Layer 7, the applications layer, which is the highest layer
in the industry standard Open Systems Interconnection, or OSI,
model. This application-layer insight is designed to enable
organizations to analyze application performance and network
utilization accurately. Packeteer’s performance analysis
determines response times, delays, link utilization, and other
crucial metrics. Depending on the size of the Packeteer
deployment, performance analysis may be captured via onboard or
centralized reporting. |
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Control. Once an organization knows what is running on
its network and how the network is performing, it can use
Packeteer’s control capabilities to set policies that align
application performance in support of business needs.
PacketShaper systems allow mission-critical applications to
perform efficiently and reliably by allocating varying amounts
of bandwidth to applications depending on their relative
importance. For instance, network managers can tailor policy
management and bandwidth allocation to suit the requirements of
particular applications or traffic, such as Citrix, SAP, Siebel,
Video over IP and Voice over IP. Meanwhile, peer-to-peer file
sharing, casual web browsing and other |
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unsanctioned traffic can be eliminated or minimized, depending
on an organization’s available network resources and
business priorities. |
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Compression and Acceleration. Once an organization sets
controls to protect critical applications and contain
non-critical traffic, the next step is to deploy compression to
stretch the current network capacity and further improve
application performance by ensuring that the extra capacity goes
to critical applications first. PacketShaper Xpress provides a
software option that utilizes application-intelligent
compression, latency management and tunnel management to
accelerate policy-managed business traffic. Packeteer SkyX
provides protocol acceleration (TCP and Web) over satellite,
long-haul and other latency sensitive WAN links. Capabilities
include Xpress Transport Protocol, or XTP, Web prefetch and
multicast content distribution. |
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Centralized Management. Packeteer systems provide reports
describing current and historical network performance.
Comprehensive reports, graphs and tables enable network managers
to refine bandwidth management policies, evaluate efficiency and
plan capacity. Packeteer systems automatically measure per-
transaction response times for each application. Managers can
set, enforce and monitor service-level agreements, which
quantify desired QoS for a particular application or customer.
Packeteer’s PolicyCenter, a Windows based software
solution, is designed to simplify deployment of multiple
Packeteer appliances by centralizing policy and software upgrade
distribution and providing a summary view of all managed
appliances. Packeteer’s ReportCenter, also a Windows based
software solution, is designed to provide centralized analysis
and reporting for Packeteer system deployments. |
Our WAN Application Traffic Management systems are designed to
enable businesses and service providers to realize the following
key benefits:
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Gain Network Performance Visibility and Insight.
Packeteer systems provide valuable historical and real-time
information about application performance and network
utilization through an easy-to-use browser interface. Network
managers gain a better understanding of the nature of traffic
running on their networks and the problems and inefficiencies
associated with that traffic. |
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Ensure Bandwidth to Mission-Critical Applications.
Policy-based bandwidth allocation protects bandwidth for
mission-critical applications such as SAP, Oracle and Siebel,
and video over IP or voice over IP, preventing disruptions from
bandwidth-hungry but less urgent applications such as file
transfers, peer-to-peer file sharing or casual web browsing. |
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Permit Easy Deployment. Packeteer systems install easily,
and automatically start to discover, classify and analyze
network traffic and suggest policies to optimize performance.
They complement the existing network infrastructure, require no
router reconfiguration or desktop changes and are designed not
to disrupt network connectivity in the event of software or
hardware failure. |
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Increase Effective Bandwidth. Packeteer systems
intelligently increase effective bandwidth and, through
integration with our advanced monitoring and shaping
capabilities, enable the additional bandwidth to be utilized by
mission-critical applications. |
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Enable Interactive Services. Voice over IP, video over IP
and other streaming media require guaranteed bandwidth in order
to achieve minimum quality requirements. By using Packeteer
systems to set minimum bandwidth guarantees and priority,
enterprises and service providers can deliver smooth and
predictable performance of these delay-sensitive multimedia
services. |
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Increase Network Efficiency. Packeteer systems improve
network efficiency and help delay expensive capacity upgrades by
managing non-critical traffic to reduce retransmission overhead
and smooth the variability in bandwidth utilization. |
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STRATEGY
Our objective is to be the leading provider of WAN Application
Traffic Management systems that give enterprises and service
providers a new layer of control for applications delivered
across intranets, extranets and the Internet. Key elements of
our strategy include:
Focus on Bandwidth Management Needs of Enterprises. We
are focused on providing high performance, easy-to-use and
cost-effective bandwidth management solutions to distributed
enterprises whose businesses rely on networked applications. For
these businesses, managing mission-critical application
performance and optimizing the value of the network will
continue to be competitive requirements. As network applications
and services continue to proliferate, we believe that effective
bandwidth management will become an increasingly important
requirement for maintaining an efficient enterprise network. We
believe we have established a differentiated market position
based on our development of a comprehensive solution that
provides for effective bandwidth management and our early market
leadership and brand awareness. We intend to continue to direct
our development, sales and marketing efforts toward addressing
the bandwidth management needs of large, distributed enterprises.
Continue to Build Indirect Distribution Channels. We
currently have over 300 value-added resellers, distributors and
systems integrators that sell our products in over 50 countries.
These relationships include: ADN Distribution GmbH, Alternative
Technology Inc., Comstor PTE Ltd., Equant, Intechnology plc,
Kanematsu USA, Macnica, Inc., and Westcon, Inc. We intend to
continue to develop and support new reseller and distribution
relationships, as well as to establish additional indirect
channels with service providers and systems integrators. We
believe this strategy will enable us to increase the worldwide
deployment of our products.
Expand Presence in Telecommunications Service Provider
Market. We are actively pursuing opportunities in the
telecommunications service provider market and currently have a
variety of telecommunications service provider customers,
including: Equant and NTT Communications. We believe service
providers are under increasing pressure to attract new
subscribers, reduce subscriber turnover, improve operating
margins and develop new revenue streams. Specifically, service
providers seek to differentiate themselves through value-added
service offerings, such as web hosting, application outsourcing
and application service-level management. We believe our
Packeteer systems enable service providers to deliver these
higher value services by enhancing network and application
performance and better managing and allocating network
resources. Our goal is to increase demand for our solutions with
service providers by leveraging our strong enterprise presence.
Expand Presence in the Managed Application Services
Market. We are actively pursuing opportunities in the
managed application services market and currently have several
managed application service provider customers, including NTT
Communications, Equant and AT&T using our managed
application service features. Our software’s application
discovery and policy based application management features are
designed to enable managed application service providers to
quickly and cost-effectively deliver secure, measured and
performance-assured application services tailored to the needs
of specific markets and customers. Such features enable service
providers to deliver managed services which provide ongoing
visibility into customer network traffic and enhance the
application performance of their customers’ priority
applications.
Extend Bandwidth Management Technology Leadership. Our
technological leadership is based on our sophisticated traffic
classification, flexible policy setting capabilities, precise
rate control expertise, compression and acceleration
technologies and ability to measure response time and network
performance. We intend to invest our research and development
resources to increase performance by handling higher speed WAN
connections, increase functionality by identifying and managing
additional applications or traffic types and increase system
modularity. We also plan to invest our research and development
resources to develop new leading-edge technologies for emerging
markets. These development plans include extending our bandwidth
management solutions to incorporate in-depth
application-management techniques that will improve performance
over the Internet and reduce bandwidth requirements. We plan to
extend our current portfolio by offering solutions that target
the specific needs of three primary market opportunities:
enterprise bandwidth management, application service-level
management and service provider bandwidth management.
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PRODUCTS
Packeteer’s WAN Application Traffic Management system is
designed to solve network and application performance problems
through a family of appliances with multiple software options
that provide visibility into application performance and network
utilization, control over network performance and network
utilization, compression and protocol acceleration to accelerate
performance and increase WAN capacity.
PacketSeeker is designed to provide application traffic
monitoring that builds on the Company’s industry-leading
Layer 7 traffic classification, analysis and reporting
technology to provide visibility into network utilization and
application performance. PacketSeeker distinguishes itself from
“passive” monitoring solutions currently available by
giving the user the ability to seamlessly upgrade the software
to become a PacketShaper when traffic shaping is required to
enforce QoS.
PacketShaper is designed to provide application-based
traffic and bandwidth management to deliver predictable,
efficient performance for applications running over the WAN and
Internet. PacketShaper is designed to provide effective
application QoS using state-of-the-art bandwidth, traffic,
service-level and policy management technology. PacketShaper ISP
is designed to enable service providers to create differentiated
services through fast and efficient bandwidth provisioning and
management. The PacketShaper family currently includes models in
the 1550, 2500, 6500, 9500 and 10000 series.
PacketShaper Xpress is designed to provide application
traffic acceleration by leveraging Packeteer’s expertise in
advanced Web acceleration and content compression technology to
create a “universal” traffic acceleration solution
that is highly efficient, scalable and simple to administer.
Combining Layer 7 classification, traffic shaping and
application-intelligent acceleration raises the level of control
customers have over the performance of their network
applications and associated bandwidth costs.
PolicyCenter is a directory-based policy management
application that is designed to enable Packeteer’s
enterprise and service provider customers to broadly deploy,
scale and manage application QoS throughout the network,
PolicyCenter is a lightweight directory access protocol, or
LDAP, directory-enabled application running under Windows that
enables customers to centrally administer and update policies,
software versions, and device status for Packeteer-based
networks.
ReportCenter is an application that is designed to
aggregate metrics from large deployments and create
organization–wide reports to manage trends and provide
support for capacity planning and usage analysis, ReportCenter
lowers the cost of ownership for large deployments of
PacketWise-enabled appliances, improves the quality of
information and eases administrative overhead.
Mentat SkyX products are designed to provide protocol
acceleration over satellite and long-haul networks. Capabilities
include Xpress Transport Protocol, or XTP, Web prefetch and
multicast content distribution. The product line includes the
XR10, XH45 and XH155 models.
TECHNOLOGY
We differentiate our solution by combining our knowledge of
enterprise applications with our expertise in underlying network
protocols. We have invested heavily in developing proprietary
software and related technologies and, as of December 31,
2004, we have 17 issued U.S. patents and 56 pending
U.S. patent applications. In particular, we have developed
technology in these major areas: sophisticated traffic discovery
and classification, application-based response time measurement,
flexible policy definition and enforcement, precise traffic flow
management and intelligent compression algorithms. These
technologies help define Packeteer’s core value proposition
and meet customer requirements for an WAN Application Traffic
Management system capable of delivering comprehensive
visibility, control and compression technologies.
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Sophisticated Traffic Discovery and Classification |
We believe the ability to automatically detect and classify an
extensive collection of applications and protocols differentiate
Packeteer systems from other bandwidth management technologies.
Sophisticated traffic classification is crucial to understanding
network congestion and to targeting appropriate bandwidth-
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allocation policies. Network software or devices that claim QoS
features typically offer rudimentary solutions that can identify
traffic based only on protocol type or port numbers. This
approach limits application-specific QoS capabilities because
these products do not recognize the detailed information
required to make intelligent classification decisions. Packeteer
systems discover and classify traffic by focusing on content and
applications where value to the end user lies.
Relying only on more basic traffic classification prevents
network managers from discovering important traffic trends and
limits policy setting. Sophisticated application traffic types
such as Voice over IP, Oracle and Citrix cannot be identified
using rudimentary traffic classification schemes. Packeteer
systems identify traffic markers, detect changing or dynamic
port assignments and track transactions with changing port
assignments. This allows network managers with Packeteer systems
to set policies and control the traffic related to an individual
application, session, client, server or traffic type. Packeteer
systems permit a network manager to isolate each published
application running on a centralized server and can also
differentiate among various applications using the same port.
This ability to individually classify applications is a highly
valuable tool for network managers, since both non-critical
applications such as web browsing and music downloading through
peer-to-peer applications and mission-critical applications such
as Citrix, Oracle or SAP and critical web sites may all be
assigned to the same TCP port number on a network but can be
individually classified using a Packeteer system.
Packeteer systems need no assistance from network managers to
automatically detect and identify over 450 different traffic
types. Without a sophisticated identification and classification
capability, managers are usually unaware of the diversity of
their own network traffic. In addition, managers can use our
technology to define proprietary applications so that their
traffic can be recognized and reported. Our technology is
differentiated by its ability to recognize older enterprise
protocols, such as AppleTalk, DECnet, IPX and SNA. We frequently
enhance our classification capability to include new traffic
types. Any traffic category can be made even more specific by
adding more detailed criteria — for example, Oracle
traffic to or from a particular database.
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Application-Based Response Time Measurement |
The Packeteer system’s position in the enterprise
network — monitoring and controlling all the traffic
that passes — gives it an opportunity to provide
accurate response time measurements to network managers. Because
it handles and classifies every packet, the Packeteer system can
calculate the amount of time traffic spends traveling between a
client and a server and the amount of time used by the server
itself.
Packeteer systems are designed to break each response time
measurement into network delay, which is the amount of time
spent in transit, and server delay, which is the amount of time
the server is used to process the request. It can highlight
clients and servers with the slowest performance. The Packeteer
system allows network managers to set acceptability standards
and then track whether performance adheres to the standards.
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Flexible Policy Definition and Enforcement |
Packeteer provides network managers flexible tools to tailor
solutions for different applications or traffic types. Unlike
queuing-based approaches, Packeteer systems allow network
managers to do more than just prioritize one traffic type over
another. Our policy features offer the flexibility required to
tune bandwidth to specific applications and dynamically utilize
available bandwidth. These policy features, which may be used
individually or in conjunction with each other, include:
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Per-session rate policies. These policies enable network
managers to limit or guarantee bandwidth to each individual
session of an application’s traffic. Per-session policies
allocate each session an appropriate amount of bandwidth and
prevent one large session from inappropriately impacting others.
Network managers specify a minimum-guaranteed rate and allow the
session scaled access to additional available bandwidth. For
example, a bandwidth cap for traffic prevents web browsers from
competing for bandwidth required by mission-critical
applications. Likewise, a guaranteed rate for audio or video
streams ensures that they are not interrupted by traffic that
tends to consume any available bandwidth. |
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Partitions. Partitions allow for the creation of a
separate, exclusive channel within a WAN access link. Partitions
represent aggregate bandwidth minimums or maximums governing how
much of the network can be used by a single application or
traffic category. Partitions can be fixed, dedicated virtual
circuits, or flexible, virtual circuits whose unused bandwidth
can be shared. |
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Dynamic Subscriber Bandwidth Provisioning. Dynamic
Subscriber Bandwidth Provisioning allocates bandwidth and
enforces QoS policies automatically by mapping a
subscriber’s traffic profile (e.g. source/ destination IP
address, traffic type, URL, etc.) to a prescribed policy. This
feature is a scaleable and easy-to-deploy solution that actively
provisions minimum and maximum bandwidth to up to 20,000
subscribers accessing the network concurrently. Using a 5-to-1
over subscription model, not uncommon in today’s service
provider market, bandwidth for as many as 100,000 subscribers
can be managed with a single Packeteer appliance. This feature
also gives service providers additional revenue opportunities
through multi-tiered Internet access services (e.g. bronze,
silver, gold) for dial-up, DSL, cable and wireless subscribers. |
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Priority policies. This policy feature enables network
managers to assign one of eight possible priority levels to each
application or traffic category. Priority policies are ideal for
traffic that does not burst, non-IP traffic and traffic
characterized by small, high-priority flows. |
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Admission-control policies. Network managers can use
admission-control policy features to determine the response if a
bandwidth guarantee cannot be satisfied. Such responses may
include denying access, accommodating an additional user with
less than guaranteed performance, or, for web requests,
redirecting the request to another server. For example, if an
online streaming-video service suffers a high-demand period and
all available bandwidth is consumed, an admission-control policy
could present a web page explaining that resources are busy.
This allows a maximum number of users to receive a targeted
service quality without degradation as new users seek to access
the service. |
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Discard and never-admit policies. These policies
intentionally block traffic. Discard policies toss packets
without sending feedback to the sender. Never-admit policies are
similar to discard policies except that the policy informs the
sender that service is blocked. |
One of TCP/IP’s primary weaknesses is an inability to
guarantee QoS. Unlike systems network architecture, or SNA, and
asynchronous transfer mode, or ATM, protocols, which have an
embedded concept of rate, TCP/IP’s attempt to consume all
available bandwidth conflicts with the goal of predictable,
consistent, mission-critical application performance.
Packeteer’s standards-based TCP rate control technology
overcomes TCP/IP’s shortcomings by proactively preventing
congestion on both inbound and outbound traffic flows and
increasing overall network throughput. Rather than discarding
packets from a congested queue, TCP rate control paces packet
delivery to prevent congestion. Rate control uses the remote
user’s access speed and real-time network latency to
calculate the optimal transmission speed. Evenly paced packet
transmissions — instead of packet bursts that consume
all available bandwidth — yield significant efficiency
gains in the network. TCP rate control is a proactive and
precise way to increase network efficiency by avoiding
retransmissions and packet loss. TCP rate control also creates a
smooth and even flow rate that maximizes throughput. By
employing TCP rate control, Packeteer systems manage the
majority of traffic at the WAN access link before network
congestion occurs.
For non-TCP-based traffic, such as User Datagram Protocol, or
UDP, alternative rate-based management techniques must be
implemented. Typically UDP does not rely on acknowledgments to
signal successful receipt of data, and it therefore offers no
means for flow control. By directly controlling other TCP flows,
however, PacketShaper systems are designed to effectively make
bandwidth available for UDP flows. The combination of per flow
rate scheduling and explicit delay boundaries removes latency
and variability, or jitter, for the UDP flows traversing the WAN
access link.
For example, Voice over IP is a UDP-based application that is
particularly latency-sensitive, requiring packets to be evenly
spaced to eliminate jitter. Packeteer enhances Voice over IP
performance in two ways.
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First, Packeteer manages competing traffic by using rate control
to constrain bursty TCP traffic. In addition, a rate policy for
Voice over IP gives a minimum bandwidth guarantee to each flow,
ensuring that each voice stream gets the bandwidth it needs for
predictable performance. When there is a lull in the
conversation, any unused bandwidth is re-allocated to other
traffic.
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Intelligent Compression Algorithms to Enhance
Performance |
Traffic can be accelerated by compression. Compression reduces
traffic primarily by eliminating repeated sequences. Although
compression effectively increases network capacity and avoids
bandwidth upgrades, introducing compression or bandwidth
upgrades does not necessarily eliminate network and application
performance problems. As TCP/IP is an inherently bursty
protocol, non-critical applications frequently consume all
available bandwidth. Therefore, applying compression may
increase the “virtual size” of a WAN connection, but
does not ensure that mission-critical application traffic takes
advantage of the newly created bandwidth. In addition, standard
compression adds latency to the compressed traffic. This
latency, which is caused by the act of compressing itself and by
trying to compress traffic that cannot be compressed further,
increases configuration and management complexity.
The Packeteer system merges application traffic management with
acceleration using compression, active tunnel management and
latency management. As a result, increased WAN capacity is
utilized by mission-critical applications by allocating the
newly created virtual bandwidth to the prioritized applications.
Packeteer manages by:
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making compression decisions based on application type; |
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utilizing application specific algorithms; and |
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working with TCP rate control and other traffic management
technology to manage flows of data through the compression
engine to ensure consistent, predictable responses. |
Packeteer systems also reduce configuration and management
complexity of compression through the use of an active tunnel
management feature. This feature uses dynamic discovery and
automatic establishment of tunnels to simplify deployment and
ongoing maintenance costs.
While traffic management prioritizes mission-critical
applications and smoothes bursty traffic, Packeteer systems
enhance performance by fostering greater throughput, faster
performance and increased network capacity.
CUSTOMERS
We sell all of our products primarily through an established
network of more than 300 distributors, value-added resellers and
system integrators in more than 50 countries, complemented by
our direct sales organization. In 2004, sales to Alternative
Technology, Inc. and Westcon, Inc. accounted for 22%, and 19% of
net revenues, respectively. In 2003, sales to Alternative
Technology, Inc., Westcon, Inc. and Macnica, Inc. accounted for
22%, 14% and 10% of net revenues, respectively. In 2002, sales
to the same three customers accounted for 21%, 13% and 11% of
net revenues, respectively. Sales to the top 10 indirect channel
partners accounted for 71%, 65% and 66%, of net revenues in
2004, 2003 and 2002, respectively.
MANUFACTURING
During 2004 we outsourced all of our manufacturing, including
warranty repair, to one contract manufacturer, SMTC
Manufacturing Corporation, or SMTC, located in San Jose,
California. The manufacturing processes and procedures for this
manufacturer are ISO 9001:2000 certified. Outsourcing our
manufacturing enables us to reduce fixed costs and to provide
flexibility in meeting market demand.
We design and develop a majority of the key components of our
products, including printed circuit boards and software. In
addition, we determine the components that are incorporated into
our products and select the appropriate suppliers of these
components. Product testing and burn-in is performed by our
contract
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manufacturer using tests and automated testing equipment that we
specify. We also use inspection testing and statistical process
controls to assure the quality and reliability of our products.
We use a rolling six-month forecast based on anticipated product
orders to determine our material requirements. Lead times for
the materials and components we order vary significantly and
depend on factors such as specific supplier, contract terms and
demand for a component at a given time. We submit purchase
orders for quantities needed within the next 60 days. SMTC
or Packeteer may terminate the contract without cause at any
time. At that time, the terminating party must honor all open
purchase orders. We believe that we carry sufficient finished
goods and component inventory to cover a portion of the
transition lead-time if we need to secure additional
manufacturing capacity.
In January 2005, Packeteer entered into agreements with Plexus
Services, Corp., an additional contract manufacturer, to
manufacture our products and provide fulfillment services. The
agreements are for one year and will automatically renew every
year thereafter. Either party can terminate the agreements
without cause upon 150 days written notice in the case of
the manufacturing agreement and 90 days written notice in
the case of the order fulfillment agreement.
MARKETING AND SALES
We target our marketing and sales efforts at enterprises and
service providers. Marketing and sales activities focus on
reaching the corporate information technology organization
managers responsible for the performance of mission-critical
applications and maintenance of network performance in the
enterprise. We also focus on reaching service providers that
provide valued-added service offerings, such as application
performance monitoring and management.
Our marketing programs support the sale and distribution of our
products and educate existing and potential enterprise and
service provider customers about the benefits of our WAN
Application Traffic Management systems. Our marketing efforts
include the following:
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publication of technical, educational and business articles in
industry magazines; |
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public speaking opportunities at tradeshows, conferences and
analyst events; |
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electronic marketing, including web site-based communication
programs, electronic newsletters and on-line end user seminars; |
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industry tradeshows, technical conferences and technology
seminars; and |
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focused advertising, direct mail, public relations and analyst
outreach. |
We classify our distribution channels in the following
categories:
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Channel Partners. Packeteer has teamed with value-added
resellers and distributors in the industry that are
distinguished by their ability to deliver comprehensive QoS
solutions, their industry expertise and their commitment to
customer satisfaction. We have established an indirect
distribution channel, which is comprised of a network of over
300 value-added resellers, distributors and system integrators
that sell our solutions in over 50 countries. These partners
sell our systems and software products as well as other
third-party products that are complementary to our WAN
Application Traffic Management systems. |
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Alliance Partners. Our Alliance Partners unite Packeteer
with organizations whose product offerings provide strategic
value to our customers. Our Alliance Partners include systems
integrators and service providers as well as technology vendors
whose products complement Packeteer’s WAN Application
Traffic Management solutions. In exchange, Packeteer presents
Alliance Partners with the opportunity to extend to their
customers our industry-leading application performance and QoS
solutions. For example, system integrators offer IT consulting,
network integration, system management and IT outsourcing
services. They choose Packeteer solutions to help their
customers ensure the performance of their business critical
applications. In addition to meeting customers’ bandwidth
needs, service providers offer Packeteer products and
value-added services such as application performance, on-going |
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performance monitoring and advanced application performance
management. Some of our Alliance Partners are Avaya, Citrix,
Equant, HP, InfoVista, NTT and Polycom. |
As of December 31, 2004, our worldwide sales and marketing
organization consisted of 114 individuals, including managers,
sales representatives and technical and administrative support
personnel. We have domestic sales offices located in California,
Colorado, Illinois, New Jersey, Texas and Washington. In
addition, we have international sales offices located in
Australia, China, Denmark, France, Germany, Hong Kong, India,
Italy, Japan, Malaysia, Singapore, South Korea, Spain, the
Netherlands and the United Kingdom.
We believe there is a strong international market for our WAN
Application Traffic Management solutions. Our international
sales are conducted primarily through our overseas offices.
Sales to customers outside of the Americas accounted for 59%,
55% and 56% of net revenues in 2004, 2003 and 2002, respectively.
RESEARCH AND DEVELOPMENT
As of December 31, 2004, our research and development
organization consisted of 99 employees providing expertise in
different areas of our software: control and compression
technologies, classification, central management, user
interface, platform engineering and protocol acceleration. Since
inception, we have focused our research and development efforts
on developing and enhancing our WAN Application Traffic
Management solutions.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Our customer service and support organization provides technical
support services. Our technical support staff is strategically
located in five regional service centers: California, Hong Kong,
Japan, Australia and the Netherlands providing our customers
with 24/7 support services. These services, which may include
telephone/ web support, next business day advance replacement
and access to all software updates and upgrades, are typically
sold as single or multi-year contracts to our resellers and end
users. In addition, Packeteer has formal agreements with two
third-party service providers to facilitate next business day
replacement for end user customers located outside the United
States covered by maintenance agreements providing this service
level. We believe that these programs improve service levels and
lead to increased customer satisfaction.
COMPETITION
We compete in a rapidly evolving and highly competitive sector
of the Internet application infrastructure system market. We
expect competition to persist and intensify in the future from a
number of different sources. Increased competition could result
in reduced prices and gross margins for our products and could
require increased spending by us on research and development,
any of which could harm our business. We compete with Cisco
Systems, Inc., other switch/router vendors, security vendors and
several small private companies that sell products that utilize
competing technologies to provide monitoring or bandwidth
management or compression. None of these companies offer an
integrated visibility, control and compression solution such as
Packeteer’s WAN Application Traffic Management system. Our
products compete for information technology budget allocations
with products that offer monitoring technologies, such as probes
and related software. Additionally, we face indirect competition
from companies that offer enterprises and service
providers’ increased bandwidth and infrastructure upgrades
that increase the capacity of their networks, and thereby may
lessen or delay the need for bandwidth management.
We believe the principal competitive factors in the traffic
management market are:
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expertise and in-depth knowledge of applications; |
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timeliness of new product introductions; |
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ability to integrate in the existing network architecture
without requiring network reconfigurations or desktop changes; |
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ability to ensure end user performance in addition to aggregate
performance of the WAN access link; |
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ability to compress traffic without decreasing throughput,
performance or network capacity; |
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ability to integrate traffic classification, management,
reporting and acceleration into a single platform; |
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compatibility with industry standards; |
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products that do not increase latency and packet loss; |
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size and scope of distribution network; |
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brand name; and |
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access to customers and size of installed customer base. |
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright and trademark
laws, and on trade secrets, confidentiality provisions and other
contractual provisions to protect our proprietary rights. These
measures afford only limited protection. As of December 31,
2004, we have 17 issued U.S. patents and 56 pending
U.S. patent applications. We cannot assure you that our
means of protecting our proprietary rights in the U.S. or
abroad will be adequate or that competitors will not
independently develop similar technologies. Our future success
depends in part on our ability to protect our proprietary rights
to the technologies used in our principal products. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use
trade secrets or other information that we regard as
proprietary. In addition, the laws of some foreign countries do
not protect our proprietary rights as fully as do the laws of
the U.S. We cannot assure you that any issued patent will
preserve our proprietary position, or that competitors or others
will not develop technologies similar to or superior to our
technology. Our failure to enforce and protect our intellectual
property rights could harm our business, operating results and
financial condition.
From time to time, third parties, including our competitors,
have asserted patent, copyright and other intellectual property
rights to technologies that are important to us. We expect that
we will increasingly be subject to infringement claims as the
number of products and competitors in the application-adaptive
bandwidth management market grows and the functionality of
products overlaps. The results of any litigation matter are
inherently uncertain. In the event of an adverse result in any
litigation with third parties that could arise in the future, we
could be required to pay substantial damages, including treble
damages if we are held to have willfully infringed, to cease the
manufacture, use and sale of infringing products, to expend
significant resources to develop non-infringing technology, or
to obtain licenses to the third-party technology. Licenses may
not be available from any third-party that asserts intellectual
property claims against us on commercially reasonable terms, or
at all. In addition, litigation frequently involves substantial
expenditures and can require significant management attention,
even if we ultimately prevail.
EMPLOYEES
As of December 31, 2004, Packeteer employed a total of 286
full-time employees. Of the total number of employees, 99 were
in research and development, 100 in sales and system
engineering, 14 in marketing, 44 in customer support and
operations and 29 in administration. Our employees are not
represented by any collective bargaining agreement with respect
to their employment by Packeteer.
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RISK FACTORS
You should carefully consider the risks described below
before making an investment decision. If any of the following
risks actually occur, our business, financial condition or
results of operations could be materially and adversely
affected. In such case, the trading price of our common stock
could decline, and you may lose all or part of your
investment.
IF THE WAN APPLICATION TRAFFIC MANAGEMENT SOLUTIONS MARKET
FAILS TO GROW, OUR BUSINESS WILL FAIL
The market for WAN Application Traffic Management is in an early
stage of development and its success is not guaranteed.
Therefore, we cannot accurately assess the size of the market,
the products needed to address the market, the optimal
distribution strategy, or the competitive environment that will
develop. In order for us to be successful, our potential
customers must recognize the value of more sophisticated
bandwidth management solutions, decide to invest in the
management of their networks and the performance of important
business software applications and, in particular, adopt our
bandwidth management solutions.
OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY
FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT OUR STOCK
PRICE
We believe that period-to-period comparisons of our operating
results cannot be relied upon as an indicator of our future
performance, and that the results of any quarterly period are
not necessarily indicative of results to be expected for a full
fiscal year. We have experienced fluctuations in our operating
results in the past and may continue to do so in the future. Our
operating results are subject to numerous factors both within
and outside of our control and are difficult to predict. As a
result, our quarterly operating results could fall below our
forecasts or the expectations of public market analysts or
investors in the future. If this occurs, the price of our common
stock would likely decrease. Factors that could cause our
operating results to fluctuate include variations in:
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the timing and size of orders and shipments of our products; |
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the mix of products we sell; |
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the mix of channels through which those products are sold; |
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the average selling prices of our products; and |
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the amount and timing of our operating expenses. |
In the past, revenue fluctuations resulted primarily from
variations in the volume and mix of products sold and variations
in channels through which products were sold. Total operating
expenses may fluctuate between quarters due to the timing of
spending. For example, research and development expenses,
specifically prototype expenses, consulting fees and other
program costs, have fluctuated relative to the specific stage of
product development of the various projects underway. Sales and
marketing expenses have fluctuated due to the timing of specific
events such as sales meetings or tradeshows, or the launch of
new products. Additionally, operating costs outside the United
States are incurred in local currencies, and are remeasured from
the local currency to the U.S. dollar upon consolidation.
As exchange rates vary, these operating costs, when remeasured,
may differ from our prior performance and our expectations. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for detailed
information on our operating results.
IF IN THE FUTURE WE ARE UNABLE TO FAVORABLY ASSESS THE
EFFECTIVENESS OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING,
OR IF OUR INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN
UNQUALIFIED ATTESTATION REPORT ON OUR ASSESSMENT, OUR STOCK
PRICE COULD BE ADVERSELY AFFECTED
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
our management is required to report on, and our independent
auditors to attest to, the effectiveness of our internal
controls over financial reporting in each of our annual reports.
The rules governing the standards that must be met for
management to assess our
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internal controls over financial reporting are new and complex,
and require significant documentation, testing and possible
remediation. As a result, our efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002 and related
regulations regarding our required assessment of our internal
controls and our external auditors’ audit of that
assessment has required the commitment of significant managerial
and financial resources. As we are committed to maintaining high
standards of public disclosure, our efforts to comply with
Section 404 are ongoing, and we are continuously in the
process of reviewing, documenting and testing our internal
controls over financial reporting, which will result in
continued commitment of significant financial and managerial
resources.
Although we received a favorable assessment of our internal
controls from our auditors for this annual report, in future
years we may encounter problems or delays in completing the
implementation of any changes necessary to make a favorable
assessment of our internal controls over financial reporting, or
we may encounter problems or delays in completing the
implementation of any requested improvements and receiving a
favorable attestation. If in future annual reports we cannot
favorably assess the effectiveness of our internal controls over
financial reporting, or if our independent auditors are unable
to provide an unqualified attestation report on our assessment,
investor confidence and our stock price could be adversely
affected.
WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES
IN OUR MARKET SECTOR WHO OFFER, OR MAY IN THE FUTURE OFFER,
COMPETING TECHNOLOGIES
We compete in a rapidly evolving and highly competitive sector
of the networking technology market. We expect competition to
persist and intensify in the future from a number of different
sources. Increased competition could result in reduced prices
and gross margins for our products and could require increased
spending by us on research and development, sales and marketing
and customer support, any of which could harm our business. We
compete with Cisco Systems, Inc., other switch/router vendors,
security vendors and several small private companies that
utilize competing technologies to provide bandwidth management
and compression. We expect this competition to increase
particularly due to the anticipated requirement from enterprises
to consolidate more functionality into a single appliance. In
addition, our products and technology compete for information
technology budget allocations with products that offer
monitoring capabilities, such as probes and related software.
Lastly, we face indirect competition from companies that offer
enterprise customers and service providers increased bandwidth
and infrastructure upgrades that increase the capacity of their
networks, which may lessen or delay the need for WAN Application
Traffic Management solutions.
Some of our competitors and potential competitors are
substantially larger than we are and have significantly greater
financial, sales and marketing, technical, manufacturing and
other resources and more established distribution channels.
These competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements or
devote greater resources to the development, promotion and sale
of their products than we can. We have encountered, and expect
to encounter, prospective customers who are extremely confident
in and committed to the product offerings of our competitors,
and therefore are unlikely to buy our products. Furthermore,
some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with
third parties to increase their ability to rapidly gain market
share by addressing the needs of our prospective customers. Our
competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance
or additional features or be introduced earlier than our
solutions. Given the market opportunity in the WAN Application
Traffic Management solutions market, we also expect that other
companies may enter or announce an intention to enter our market
with alternative products and technologies, which could reduce
the sales or market acceptance of our products and services,
perpetuate intense price competition or make our products
obsolete. If any technology that is competing with ours is or
becomes more reliable, higher performing, less expensive or has
other advantages over our technology, then the demand for our
products and services would decrease, which would harm our
business.
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IF WE DO NOT EXPAND OR ENHANCE OUR PRODUCT OFFERINGS OR
RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO TECHNOLOGICAL
CHANGE, OUR BUSINESS MAY NOT GROW OR WE MAY LOSE CUSTOMERS AND
MARKET SHARE
Our future performance will depend on the successful
development, introduction and market acceptance of new and
enhanced products that address customer requirements in a
cost-effective manner. We cannot assure you that our
technological approach will achieve broad market acceptance or
that other technologies or solutions will not supplant our
approach. The WAN Application Traffic Management solutions
market is characterized by ongoing technological change,
frequent new product introductions, changes in customer
requirements and evolving industry standards. The introduction
of new products, market acceptance of products based on new or
alternative technologies, or the emergence of new industry
standards, could render our existing products obsolete or make
it easier for other products to compete with our products.
Developments in router-based queuing schemes or alternative
compression technologies could also significantly reduce demand
for our product. Our future success will depend in part upon our
ability to:
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develop and maintain competitive products; |
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enhance our products by adding innovative features that
differentiate our products from those of our competitors; |
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bring products to market on a timely basis at competitive prices; |
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identify and respond to emerging technological trends in the
market; and |
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respond effectively to new technological changes or new product
announcements by others. |
We have in the past experienced delays in product development
which to date have not materially adversely affected us.
However, these delays may occur in the future and could result
in a loss of customers and market share.
THE AVERAGE SELLING PRICES OF OUR PRODUCTS COULD DECREASE
RAPIDLY, WHICH MAY NEGATIVELY IMPACT GROSS MARGINS AND
REVENUES
We may experience substantial period-to-period fluctuations in
future operating results due to the erosion of our average
selling prices. The average selling prices of our products could
decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions
by us or our competitors or other factors. Therefore, to
maintain our gross margins, we must develop and introduce on a
timely basis new products and product enhancements and
continually reduce our product costs. Our failure to do so could
cause our revenue and gross margins to decline.
IF OUR INTERNATIONAL SALES EFFORTS ARE UNSUCCESSFUL, OUR
BUSINESS WILL FAIL TO GROW
The failure of our indirect partners to sell our products
internationally will harm our business. Sales to customers
outside of the Americas accounted for 59%, 55% and 56% of net
revenues in 2004, 2003 and 2002, respectively. Our ability to
grow will depend in part on the expansion of international
sales, which will require success on the part of our resellers,
distributors and systems integrators in marketing our products.
We intend to expand operations in our existing international
markets and to enter new international markets, which will
demand management attention and financial commitment. We may not
be able to successfully sustain and expand our international
operations. In addition, a successful expansion of our
international operations and sales in foreign markets will
require us to develop relationships with suitable indirect
channel partners operating abroad. We may not be able to
identify, attract or retain these indirect channel partners.
Furthermore, to increase revenues in international markets, we
will need to continue to establish foreign operations, to hire
additional personnel to run these operations and to maintain
good relations with our foreign
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