SuccessFactors, Inc. - FORM 10-Q

SuccessFactors, Inc. - FORM 10-Q - May 7, 2010

Attached files

Attached files

SuccessFactors, Inc. Reports

file	filename
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350 - SuccessFactors, Inc.	dex321.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) OR 15(D)-14(A) - SuccessFactors, Inc.	dex311.htm
EX-10.2 - DESCRIPTION OF CORPORATE BONUS PLAN - SuccessFactors, Inc.	dex102.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) OR 15(D)-14(A) - SuccessFactors, Inc.	dex312.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350 - SuccessFactors, Inc.	dex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-33755

SUCCESSFACTORS, INC.

(Exact name of registrant as specified in its charter)

Delaware

94-3398453

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1500 Fashion Island Blvd., Suite 300

San Mateo, California

94404

(Address of principal executive offices)

(Zip Code)

(650) 645-2000

(Registrant’s telephone number, including area code)

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 (the “Exchange Act”) 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: x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of April 30, 2010, there were approximately 72,402,333 shares of the registrant’s common stock outstanding.

SUCCESSFACTORS, INC.

Table of Contents


		Page No.
PART I. FINANCIAL INFORMATION		3

Item 1. Condensed Consolidated Financial Statements (unaudited):		3
Condensed Consolidated Balance Sheets-March 31, 2010 and December 31, 2009		3
Condensed Consolidated Statements of Operations-Three months ended March 31, 2010 and 2009		4
Condensed Consolidated Statements of Cash Flows-Three months ended March 31, 2010 and 2009		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		17
Item 4. Controls and Procedures		17

PART II. OTHER INFORMATION		18

Item 1. Legal Proceedings		18
Item 1A. Risk Factors		18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3. Defaults Upon Senior Securities		24
Item 4. Reserved		24
Item 5. Other Information		24
Item 6. Exhibits		25
Signatures		26

PART I: FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(unaudited)


	March 31, 2010			December 31, 2009
ASSETS:
Current assets:
Cash and cash equivalents	$	102,604		$	76,618
Marketable securities		234,774			246,629
Accounts receivable, net of allowance for doubtful accounts of $1,109 and $1,161, respectively		42,462			57,611
Deferred commissions		6,327			5,950
Prepaid expenses and other current assets		7,187			5,679

Total current assets		393,354			392,487
Restricted cash		928			931
Property and equipment, net		5,488			5,787
Deferred commissions, less current portion		8,665			9,233
Other assets		655			259

Total assets	$	409,090		$	408,697


LIABILITIES AND STOCKHOLDERS’ EQUITY:

Current liabilities:
Accounts payable	$	459		$	794
Accrued expenses and other current liabilities		7,533			7,220
Accrued employee compensation		8,522			14,546
Deferred revenue		163,091			160,356

Total current liabilities		179,605			182,916
Deferred revenue, less current portion		22,819			21,268
Long-term tax payable		1,608			1,643
Other long-term liabilities		273			367

Total liabilities		204,305			206,194
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value; 200,000 shares authorized; 72,358 and 71,748 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively		72			72
Additional paid-in capital		428,387			421,419
Accumulated other comprehensive (loss)		(123	)		(89	)
Accumulated deficit		(223,551	)		(218,899	)

Total stockholders’ equity		204,785			202,503

Total liabilities and stockholders’ equity	$	409,090		$	408,697

See accompanying notes to unaudited condensed consolidated financial statements.

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Revenue	$	43,776		$	35,220
Cost of revenue		10,588			8,489

Gross profit		33,188			26,731


Operating expenses:
Sales and marketing		22,226			19,556
Research and development		7,725			5,551
General and administrative		7,495			7,244

Total operating expenses		37,446			32,351

Loss from operations		(4,258	)		(5,620	)
Interest income (expense) and other, net		(266	)		132

Loss before provision for income taxes		(4,524	)		(5,488	)
Provision for income taxes		(128	)		(194	)

Net loss	$	(4,652	)	$	(5,682	)

Net loss per common share, basic and diluted	$	(0.06	)	$	(0.10	)

Shares used in computing net loss per common share, basic and diluted		72,008			56,315

See accompanying notes to unaudited condensed consolidated financial statements.

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(4,652	)	$	(5,682	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,273			1,067
Amortization of deferred commissions		2,083			1,776
Stock-based compensation expense		5,026			2,414
Gain on retirement of fixed assets		—			(64	)
Changes in assets and liabilities:
Accounts receivable		15,149			9,019
Deferred commissions		(1,892	)		(901	)
Prepaid expenses and other current assets		(1,508	)		(111	)
Other assets		(396	)		(181	)
Accounts payable		(335	)		952
Accrued expenses and other current liabilities		244			(1,837	)
Accrued employee compensation		(6,024	)		(1,741	)
Long-term tax payable		(35	)		140
Other liabilities		(87	)		(161	)
Deferred revenue		4,285			(2,003	)

Net cash provided by operating activities		13,131			2,687


Cash flows from investing activities:
Restricted cash		3			29
Capital expenditures		(632	)		(73	)
Proceeds from sale of fixed assets		1			88
Purchases of available-for-sale securities		(34,459	)		(55,674	)
Proceeds from maturities of available-for-sale securities		26,100			26,849
Proceeds from sales of available-for-sale securities		20,000			546

Net cash provided by (used in) investing activities		11,013			(28,235	)


Cash flows from financing activities:
Proceeds from exercise of stock options		1,936			539
Principal payments on capital lease obligations		10			(9	)

Net cash provided by financing activities		1,946			530

Effect of exchange rate changes on cash and cash equivalents		(104	)		(68	)

Net increase (decrease) in cash and cash equivalents		25,986			(25,086	)
Cash and cash equivalents at beginning of period		76,618			69,859

Cash and cash equivalents at end of period	$	102,604		$	44,773


Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	21		$	—

Income taxes	$	214		$	112

See accompanying notes to unaudited condensed consolidated financial statements.

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Significant Accounting Policies

Organization

Success Acquisition Corporation was incorporated in Delaware in 2001. In April 2007, the name was changed to SuccessFactors, Inc. (the Company). The Company provides on-demand business execution software solutions that enable organizations to bridge the execution gap between business strategy and results. The Company’s goal is to enable organizations to substantially increase employee productivity worldwide by enhancing our existing people performance solutions with business alignment solutions to enable customers to achieve business results. Our integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Learning and Development; Recruiting Management; Analytics and Reporting; Employee Profile; 360-Degree Review; Execution Survey; Stack Ranker; Business Performance Accelerators; Employee Central; Metrics Navigator; Strategy Deployment Solution and proprietary and third-party content. The Company’s headquarters are located in San Mateo, California. The Company conducts its business worldwide with additional locations in other regions in the United States, Europe, Asia, Canada and Latin America.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, for any other interim period or for any other future year.

The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 26, 2010. There have been no significant changes in the Company’s critical accounting policies from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments the Company makes about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company bases its estimates and judgments on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. GAAP requires the Company to make estimates and judgments in several areas, including those related to revenue recognition, recoverability of accounts receivable, provision for income taxes, commission and bonus payments, fair values of marketable securities and the determination of the fair market value of stock options, including the use of forfeiture estimates. These estimates are based on management’s knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ materially from those estimates.

Revenue Recognition

Revenue consists of subscription fees for the Company’s cloud-based software and fees for the provision of other services. The Company’s customers do not have the contractual right to take possession of software in substantially all of the transactions. Instead, the software is delivered through the cloud from the Company’s hosting facilities. Therefore, these arrangements are treated as service agreements. The Company commences revenue recognition when all of the following conditions are met:

•

there is persuasive evidence of an arrangement;

•

the subscription or services have been delivered to the customer;

•

the collection of related fees is reasonably assured; and

•

the amount of related fees is fixed or determinable.

Additionally, if an agreement contains non-standard acceptance or non-standard performance criteria to be met, the Company defers revenues until the satisfaction of these conditions.

Signed agreements are used as evidence of an arrangement. The Company assesses cash collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If the Company determines that collectability is not reasonably assured, the Company defers the recognition of revenue until collectability becomes reasonably assured, generally upon receipt of cash. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company’s arrangements are typically noncancelable, though customers typically have the right to terminate their agreement for cause if the Company fails to perform.

The Company’s professional services include forms and workflow configuration, data integration, business process consulting and training related to the application suite. Professional services are generally sold in conjunction with the Company’s subscriptions, and the Company has determined that it does not have objective and reliable evidence of fair value for each element of its arrangements. As a result, professional services are not able to be accounted for separately from the Company’s subscriptions. As professional services do not qualify for separate accounting, the Company recognizes the professional services revenue together with the subscription

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

fees ratably over the noncancelable term of the subscription agreement, generally one to three years although terms can extend to as long as five years, commencing on the later of the start date specified in the subscription arrangement, the date the customer’s instance is provisioned (“initial access date”) or when all of the revenue recognition criteria have been met. The Company generally considers delivery to have occurred on the initial access date, which is the point in time that a customer is provided access to use the Company’s on-demand application suite. In the infrequent circumstance in which a customer of the Company has the contractual right to take possession of the software, the Company has determined that the customers would incur a significant penalty to take possession of the software. Therefore, these agreements have been accounted for as service contracts. Indirect taxes, including sales and use tax amounts and goods and service tax amounts, collected from customers have been recorded on a net basis.

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of revenue recognition from the Company’s subscription and other services described above and is recognized as revenue when all of the revenue recognition criteria are met. For subscription arrangements with terms of over one year, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year, noncancelable subscription agreements. The Company’s professional services, are generally sold in conjunction with the subscriptions. The Company recognizes revenue from these other services, together with the subscriptions, ratably over the noncancelable term of the subscription agreement, which can extend to as long as five years. The portion of deferred revenue that the Company anticipates will be recognized after the succeeding 12-month period is recorded as non-current deferred revenue and the remaining portion is recorded as current deferred revenue. Current deferred revenue also includes subscription agreements with an initial access date that has not yet been determined. Upon determination of the initial access date timing of such arrangements, amounts estimated to be recognized after more than 12 months are reclassified to long term.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting the Company’s application suite, compensation and related expenses for data center, professional services staff and customer support staff, payments to outside service providers, allocated overhead and depreciation expenses, license royalties and partner referral fees. Allocated overhead includes rent, information technology costs and employee benefits costs and is apportioned to all departments based on relative headcount.

Deferred Commissions

Deferred commissions are the incremental costs that are directly associated with noncancelable subscription agreements and consist of sales commissions paid to the Company’s direct sales force. The commissions are deferred and amortized over the noncancelable terms of the related customer contracts, typically one to three years, with some agreements having durations of up to five years. The deferred commission amounts are recoverable from the future revenue streams under the noncancelable subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenue from the noncancelable subscription agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying unaudited condensed consolidated statements of operations. Deferred commissions associated with subscription agreements for which revenue recognition has not commenced as of March 31, 2010 are classified as long-term deferred commissions.

During the three months ended March 31, 2010, the Company capitalized $1.9 million of deferred commissions, and amortized $2.1 million of deferred commissions, to sales and marketing expense. As of March 31, 2010, deferred commissions on the Company’s condensed consolidated balance sheet totaled $15.0 million.

Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive (loss) income includes certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments, net of tax, and unrealized gains (losses) on marketable securities, net of tax, are included in accumulated other comprehensive income (loss).

Income Taxes

As part of the process of preparing the unaudited condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the current tax liability under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the unaudited condensed consolidated balance sheets.

2. Recent Accounting Pronouncements

Effective January 2010, the Company adopted Accounting Standard Update No. 2010-06, “Fair Value Measurements and Disclosures”, which requires previous fair value hierarchy disclosures to be further disaggregated by class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. In addition, significant transfers between Levels 1 and 2 of the fair value hierarchy are required to be disclosed. These additional requirements became effective January 1, 2010 for quarterly and annual reporting. The adoption of this accounting update did not have any impact on the Company’s condensed consolidated financial statements. In addition, the fair value disclosure amendments also require more detailed disclosures of the changes in Level 3 instruments. This change will be effective January 1, 2011 and is not expected to have an impact on the Company’s unaudited condensed consolidated financial statements.

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. It updates the existing multiple-element revenue arrangements guidance. The revised guidance primarily provides two significant changes: 1) requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of either vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices, and 2) eliminates the residual method to allocate the arrangement consideration. This standard will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently evaluating both the timing and method of our adoption of this standard. Upon adoption of this standard, the Company anticipates to account separately for professional services from subscription arrangements.

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

3. Cash, Cash Equivalents and Marketable Securities

The Company classifies its marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Fair value is determined based on quoted market rates. The cost of securities sold is based on the specific-identification method. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included as a component of interest income (expense). Interest on securities classified as available-for-sale is included as a component of interest income (expense).

Cash, cash equivalents and marketable securities as of March 31, 2010, consisted of the following (unaudited, in thousands):


	As of March 31, 2010
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	8,208	$	—	$	—		$	8,208
Cash equivalents:
Money market funds		34,805		—		—			34,805
U.S. Treasury bills and bonds		10,599		—		—			10,599
U.S. Government and Agency securities		21,396		—		—			21,396
Commercial paper		27,596		—		—			27,596

Total cash equivalents		94,396		—		—			94,396

Total cash and cash equivalents		102,604		—		—			102,604
Marketable securities:
U.S. Treasury bills and bonds		101,436		14		(1	)		101,449
U.S. Government and Agency securities		131,283		28		(73	)		131,238
Corporate debt securities		2,019		—		—			2,019
Marketable equity securities		50		18		—			68

Total marketable securities		234,788		60		(74	)		234,774

Total cash, cash equivalents and marketable securities	$	337,392	$	60	$	(74	)	$	337,378

The Company did not realize any significant gains or losses during the three months ended March 31, 2010. As of March 31, 2010, the stated maturities of the Company’s short term investments are (unaudited, in thousands):


	As of March 31, 2010
Due within 1 year	$	296,407
Due within 1 year through 5 years		32,695
Due within 5 years through 10 years		—
Due after 10 years		—

Total marketable debt securities	$	329,102

The Company did not recognize any other-than-temporary impairments as of March 31, 2010. The Company did not have any investments in marketable securities that were in an unrealized loss position for 12 months or greater. Investments with unrealized losses for less than 12 months and their related fair values were as follows:


	As of March 31, 2010
	Less than 12 Months					Total
Security Description	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government and Agency securities	$	98,990	$	(73	)	$	98,990	$	(73	)
U.S. Treasury bills and bonds		21,593		(1	)		21,593		(1	)

Total	$	120,583	$	(74	)	$	120,583	$	(74	)

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Cash, cash equivalents and marketable securities as of December 31, 2009, consisted of the following (in thousands):


	As of December 31, 2009
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	8,914	$	—	$	—		$	8,914
Cash equivalents:
Money market funds		67,704		—		—			67,704

Total cash equivalents		67,704		—		—			67,704

Total cash and cash equivalents		76,618		—		—			76,618
Marketable securities:
U.S. Treasury bills and bonds		115,478		—		—			115,478
U.S. government and agency securities		131,248		—		(158	)		131,090
Marketable equity securities		50		11		—			61

Total marketable securities		246,776		11		(158	)		246,629

Total cash, cash equivalents and marketable securities	$	323,394	$	11	$	(158	)	$	323,247

The Company did not recognize any other-than-temporary impairments as of December 31, 2009. The Company did not have any investments in marketable securities that were in an unrealized loss position for 12 months or greater. Investments with unrealized losses for less than 12 months and their related fair values were as follows:


	As of December 31, 2009
	Less than 12 Months					Total
Security Description	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government and Agency securities	$	131,090	$	(158	)	$	131,090	$	(158	)

Total	$	131,090	$	(158	)	$	131,090	$	(158	)

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of March 31, 2010 and December 31, 2009 consisted of (in thousands):


	As of March 31, 2010		As of December 31, 2009
	(unaudited)
Accrued royalties	$	1,360	$	1,136
Accrued partner referral fees		167		114
Indirect taxes		1,063		2,091
Accrued other liabilities		4,933		3,879

	$	7,523	$	7,220

Accrued employee compensation as of March 31, 2010 and December 31, 2009 consisted of (in thousands):


	As of March 31, 2010		As of December 31, 2009
	(unaudited)
Accrued bonuses payable	$	2,660	$	5,356
Accrued commissions payable		4,064		7,356
Accrued vacation		888		875
All other accrued employee compensation payable		910		959

	$	8,522	$	14,546

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

5. Fair Value Measurements

The Company accounts for certain financial assets at fair value. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are:


Level 1:		Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2:		Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3:		Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

The Company measures cash equivalents, which consist of money market funds with original maturity dates of three months or less, and marketable securities, which consist of U.S. treasury bills, government and agency securities and marketable equity securities, at fair value. Cash equivalents and marketable securities are classified within Level 1 or Level 2. The Company prices Level 1 instruments using quoted market prices for transactions in active exchange markets involving identical assets. The Company prices Level 2 instruments using available market information through processes such as such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing for comparable instruments. As of March 31, 2010, the Company did not have any financial assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).

The following table presents the cash equivalents and marketable securities carried at fair value as of March 31, 2010 (unaudited, in thousands):


			Fair Value Measurements Using
Assets:	As of March 31, 2010		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	34,805	$	34,805	$	—
U.S. Treasury bills and bonds		112,048		112,048		—
U.S. Government and Agency securities		152,634		—		152,634
Commercial paper		27,596		—		27,596
Corporate debt securities		2,019		—		2,019
Marketable equity securities		68		68		—

Total	$	329,170	$	146,921	$	182,249

As of March 31, 2010 the Company reclassified $34,802 money market funds out of Level 2 into Level 1. The Company has determined Level 1 to be more appropriate, as these instruments are priced using the quoted market prices. The Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

6. Commitments and Contingencies

The Company is involved in various legal proceedings arising from the normal course of its business activities. In management’s opinion, resolution of these matters is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s future results of operations, cash flows or financial position in a future period.

7. Stock-Based Compensation

Stock Plans

In June 2001, the Company’s Board of Directors adopted and its stockholders approved the 2001 Stock Option Plan, and in November 2007 the Company’s Board of Directors adopted and its stockholders approved the 2007 Equity Incentive Plan (collectively, the “Plans”). The Plans provide for the issuance of incentive and nonstatutory stock options to employees and non-employees of the Company, and the 2007 Equity Incentive Plan additionally provides for the issuance of restricted stock awards, stock bonus awards, stock appreciation rights and restricted stock units. Options issued under the Plans are generally for periods not to exceed ten years and must be issued at prices not less than 85% of the estimated fair value of the shares of common stock on the date of grant as determined by the Board of Directors. The Plans provide for grants of immediately exercisable options. Options become vested and exercisable at such times and under such conditions as determined by the Board of Directors at the date of grant. Options, or shares issued upon early exercise of options, generally vest over four years, with 25% vesting after one year and the balance vesting monthly over the remaining period. Any shares exercised prior to vesting may be repurchased by the Company at the original option exercise price in the event of the employee’s termination. The right to repurchase unvested shares lapses at the rate of the vesting schedule.

Common Stock Options

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and recognized on a straight line basis over the requisite service period, which, for the Company, is generally the vesting period. The following table presents stock-based compensation included in our consolidated statement of income:


	Three Months Ended March 31,
	2010		2009
Cost of revenue	$	603	$	331
Sales and marketing		1,955		1,124
Research and development		875		285
General and administrative		1,593		674

	$	5,026	$	2,414

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the three months ended March 31, 2010 stock based compensation expense includes $1.6 million paid in lieu of cash bonuses to our senior management with the majority accounted for in general administrative for $759,000 and sales and marketing for $600,000. We did not capitalize any stock-based compensation related costs for the three months ended March 31, 2010 and 2009.

The fair value of options granted to employees during the quarters ended March 31, 2010 and 2009 were determined using the following weighted-average assumptions for employee grants:


	Three Months Ended March 31,
	2010			2009
	(Unaudited)
Expected life from grant date (in years)		4.37			4.36
Risk-free interest rate		2.04	%		1.72	%
Expected volatility		65	%		67	%
Dividend yield		—			—
Weighted-average estimated fair value of options granted during the period	$	10.17		$	2.82

The following table summarizes the activity for the Company’s options for the three months ended March 31, 2010 (unaudited):


	Shares Subject to Options Outstanding		Weighted-Average Exercise Price per Share
	(Shares in thousands)
Balance at December 31, 2009	10,879		$	6.58
Granted	478			19.47
Exercised (1)	(428	)		4.28
Canceled/forfeited	(82	)		8.70

Balance at March 31, 2010	10,847		$	7.22

(1)	Includes previously early exercised option awards that vested during the period.

As of March 31, 2010, unrecognized compensation cost under the Company’s stock option plans for employee stock options was $18.0 million. The unrecognized compensation cost is expected to be recognized over a weighted-average remaining vesting period of 2.26 years.

The following table summarizes the activity for the Company’s restricted stock units (RSUs) for the three months ended March 31, 2010 (unaudited):


	Unvested Restricted Stock Units
	Number of Shares		Weighted-Average Grant-Date Fair Value
	(Shares in thousands)
Unvested at December 31, 2009	1,390		$	11.52
Granted	481			19.65
Vested	(175	)		18.88
Forfeited	(10	)		16.34

Unvested at March 31, 2010	1,686		$	13.05

As of March 31, 2010, unrecognized compensation cost under the Company’s equity incentive plans for employee RSUs was $18.1 million. The unrecognized compensation cost is expected to be recognized over a weighted-average remaining vesting period of 3.32 years.

8. Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments, net of tax, and unrealized gain (loss) on marketable securities, net of tax, are included in accumulated other comprehensive (loss). The following table sets forth the calculation of comprehensive loss (unaudited, in thousands):


	Three Months Ended March 31,
	2010			2009
Net loss	$	(4,652	)	$	(5,682	)
Change in foreign currency translation (loss), net		(104	)		(68	)
Change in unrealized gain (loss) on marketable securities, net		70			(34	)

Comprehensive loss	$	(4,686	)	$	(5,784	)

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

9. Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including options and warrants. Basic and diluted net loss per common share was the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive. Securities that could potentially dilute basic EPS in the future as of March 31, 2010 and 2009 were 12.5 million and 12.7 million, respectively.

The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share data):


	Three Months Ended March 31, (unaudited)
	2010			2009
Net loss	$	(4,652	)	$	(5,682	)

Shares used in computing net loss per common share, basic and diluted		72,008			56,315

Net loss per common share, basic and diluted	$	(0.06	)	$	(0.10	)

10. Income Tax

Income tax expense for the quarter ended March 31, 2010 was $128,000 or 2.8% of pre-tax loss compared to $194,000, or 3.3% of pre-tax loss for the three months ended March 31, 2009. The effective tax rate for the first quarter of 2009 and 2010 differs from the U.S. federal statutory rate of 34% primarily due to stock based compensation, permanent tax adjustments, foreign withholding taxes partially offset with foreign operational rate benefits and a valuation allowance against the Company’s deferred tax assets.

11. Subsequent Event

On May 3, 2010, the Company announced that it had entered into a definitive agreement to acquire CubeTree, Inc., a provider of social media and collaboration software. Subject to the terms and conditions of the Agreement, SuccessFactors has agreed to acquire all of the outstanding capital stock and other securities of CubeTree for shares of SuccessFactors’ common stock having an aggregate value of approximately $20 million, subject to working capital and other adjustments (the “Consideration”). Subject to certain limitations set forth in the Agreement, the former stockholders of CubeTree will be eligible to receive a contingent cash payment on the three-year anniversary of the closing of the Merger (the “Closing”) or at such time as a change of control of SuccessFactors occurs (such earlier time, the “Top-Up Payment Date”). If, on the Top-Up Payment Date, the value of the Consideration issued at the closing and still held by former the CubeTree stockholders (the “Market Value”) is less than an amount equal to approximately $50 million, subject to the working capital and other adjustments above (the “Guaranteed Value”), SuccessFactors shall make a payment to such holders in an amount equal to the difference between the Guaranteed Value and the Market Value (the “Top-Up Payment”). The aggregate Top-Up Payment will be reduced to the extent of any sale, transfer or other disposition of any of the Consideration (subject to certain limited exceptions). Such right to receive the Top-Up Payment will terminate in the event the value of the shares of the Consideration equals or exceeds approximately $50 million at any time prior to the Top-Up Payment Date. SuccessFactors will not assume any CubeTree stock options at Closing. Any unvested CubeTree stock options outstanding as of the Closing will be terminated at Closing and SuccessFactors will issue to holders of such terminated options restricted stock units of SuccessFactors with a value based on the ratio specified in the Agreement. The Company currently anticipates that this transaction will be consummated in the third quarter of 2010. It is expected the transaction will be accounted for as a purchase of a business.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the federal securities laws, including statements referencing our expectations relating to operating expenses, including as a percentage of total revenues; the sufficiency of our cash balances and cash flows for the next 12 months; investment and potential investments of cash or stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth under Part II, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Report.

Overview

SuccessFactors provides on-demand business execution software solutions that enable organizations to bridge the gap between business strategy and results. Our goal is to enable organizations to substantially increase employee productivity worldwide by enhancing our existing people performance solutions with business alignment solutions to enable customers to achieve business results. Our integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Learning and Development; Recruiting Management; Analytics and Reporting; Employee Profile; 360-Degree Review; Execution Survey; Stack Ranker; Business Performance Accelerators; Employee Central; Metrics Navigator; Strategy Deployment and proprietary and third-party content. We deliver our application suite to organizations of all sizes across all industries and geographies. During the past twelve months our customer base has grown from 1,750 to more than 3,100 customers, across 60 industries in over 185 countries with more than 8 million end users.

We generate sales primarily through our global direct sales organization and, to a much lesser extent, indirectly through channel partners, with sales through channel partners constituting approximately 7% of revenue for the three months ended March 31, 2010. However, in the future we anticipate that revenue from channel partners will increase. For the three months ended March 31, 2010, we did not have any single customer that accounted for more than 5% of our revenue. The Company targets its sales and marketing efforts at large enterprises as well as small and mid-sized organizations.

Historically, most of our revenue has been from sales of our application suite to organizations located in the United States. For the three months ended March 31, 2010, the percentage of our revenue generated from customers in the United States was 80%. We intend to continue to grow our international business. Accordingly, we expect the percentage of our revenue generated outside of the United States to continue to increase.

We have historically experienced significant seasonality in sales of subscriptions to our application suite, with a higher percentage of our customers renewing or entering into new subscription agreements in the fourth quarter of the year. Also, a significant percentage of our customer agreements within a given quarter are generally entered into during the last month of the quarter. We have derived a substantial portion of our historical revenue from sales of our Performance Management and Goal Management modules, but the percentage of revenue from these modules has decreased over time as customers have purchased additional modules.

We believe the market for business execution software is large and underserved. Accordingly, we might incur additional operating expenses, particularly for sales and marketing and professional services activities to pursue this opportunity, and in research and development to develop new products. We expect operating losses to continue but at lower rates as we intend to continue to pursue new customers, develop new products and acquire or invest in businesses, products or technologies that we believe could complement or expand our application suite, enhance our technical capabilities or otherwise offer growth opportunities.

While we have experienced strong growth in revenues in recent periods, the overall global economy has experienced a severe downturn, with the United States and many other countries experiencing slow overall growth in 2008 and 2009. This weakening of the overall global economy has affected customers demand for our software and services. In fiscal year 2010 we believe we could possibly see an improvement in customer demand and therefore billings growth in comparison to what we experienced in 2009. However, due to the ratable nature of our revenue stream, 2010 revenue will be strongly influenced by customer activity that occurred in 2009. As a result, we expect revenue growth to continue in 2010, but most likely at a slower rate than the growth we experienced in 2009 even if customer demand does begin to improve.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

As discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, we consider our estimates of the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements:

•

Revenue Recognition

•

Accounting for Commission Payments

•

Accounting for Stock-Based Awards

•

Allowance for Doubtful Accounts

There have been no changes to our critical accounting policies since December 31, 2009.

Results of Operations

The following table presents certain financial data for the three month periods ended March 31, 2010 and 2009 as a percentage of revenue (unaudited):


	Three Months Ended March 31,
	2010		2009
Revenue	100	%	100	%
Cost of revenue	24		24

Gross margin	76		76

Operating expenses:
Sales and marketing	51		56
Research and development	18		16
General and administrative	17		21

Total operating expenses	86		93

Loss from operations	(10	)	(17	)
Interest income (expense) and other, net	(1	)	1

Loss before provision for income taxes	(11	)	(16	)
Provision for income taxes	—		—

Net loss	(11	)%	(16	)%

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Revenue

The following table presents our revenue for the periods presented (unaudited):


	Three Months Ended March 31,
	2010		2009		Change
	(Dollars in thousands)
Revenue	$	43,776	$	35,220	24	%

Revenue for the three months ended March 31, 2010 increased by $8.6 million, or 24%, as compared to the same period in 2009. The increase was primarily due to a $10.6 million increase in revenue from existing customers, which includes renewals and subscriptions for additional modules and end users, offset by a $2.0 million decrease in revenue from new customers. As of March 31, 2010, we had more than 3,100 customers, as compared to approximately 2,700 at March 31, 2009. In the future, we expect the revenue from existing customers to continue to increase at a higher rate than from new customers.

Revenue from customers in the United States accounted for $34.9 million, or 80%, of revenue in the three months ended March 31, 2010, compared to $29.4 million, or 84% of revenue, in the three months ended March 31, 2009.

Cost of Revenue and Gross Margin

The following table presents our revenue, cost of revenue, gross profit and gross margin for the periods presented (unaudited):


	Three Months Ended March 31,
	2010			2009			Change
	(Dollars in thousands)
Revenue	$	43,776		$	35,220		24	%
Cost of revenue		10,588			8,489		25	%

Gross profit	$	33,188		$	26,731		24	%

Gross margin		76	%		76	%

Cost of revenue increased by $2.1 million, or 25%, from the three months ended March 31, 2009 to the three months ended March 31, 2010, primarily due to an increase of $1.4 million in employee-related costs due to higher headcount, an increase of $0.2 million in data center costs, $0.2 million increase in professional and outside services and to a lesser extent an increase in travel and entertainment and license royalties and partner referral costs. Gross margin remained flat at 76% for the three months ended March 31, 2010 and 2009.

Operating Expenses

Sales and Marketing

The following table presents our sales and marketing expenses for the periods presented (unaudited):


	Three Months Ended March 31,
	2010			2009			Change
	(Dollars in thousands)
Sales and marketing	$	22,226		$	19,556		14	%
Percent of revenue		51	%		56	%

Sales and marketing expenses increased by $2.7 million, or 14%, from the three months ended March 31, 2009 to the three months ended March 31, 2010, primarily due to an increase of $3.2 million in employee-related costs, primarily resulting from higher headcount in sales and marketing, an increase of $0.5 million in travel and entertainment and $0.4 million increase in outside services. These increases were offset by a $1.4 million decrease in marketing and promotional spending. We expect sales and marketing spending to increase modestly for the rest of 2010 as we continue to expand our business on a worldwide basis.

Research and Development

The following table presents our research and development expenses for the periods presented (unaudited):


	Three Months Ended March 31,
	2010			2009			Change
	(Dollars in thousands)
Research and development	$	7,725		$	5,551		39	%
Percent of revenue		18	%		16	%

Research and development expenses increased by $2.2 million, or 39%, primarily due to a $1.6 million increase in employee-related costs, resulting from higher headcount in research and development, as we continue to expand our offshore development efforts. In addition, there was an increase of $0.4 million in outside services and to a lesser extent an increase in allocated expenses and travel and entertainment. We expect research and development costs to increase for the rest of 2010, as we continue to expand our domestic and offshore research and development efforts.

General and Administrative

The following table presents our general and administrative expenses for the periods presented (unaudited):


	Three Months Ended March 31,
	2010			2009			Change
	(Dollars in thousands)
General and administrative	$	7,495		$	7,244		3	%
Percent of revenue		17	%		21	%

General and administrative expenses increased by $0.3 million, or 3%, from the three months ended March 31, 2009 to the three months ended March 31, 2010, primarily due to an increase of $1.1 million in professional and outside services, primarily due to acquisition-related costs, an increase of $0.3 million in employee related costs, due to higher headcount in general and administrative and an increase of $0.1 million in travel and entertainment and offset by a decrease of $0.8 million in sale and use tax and a decrease of $0.4 million in bad debt expense. We expect general and administrative expense to increase at a faster pace in 2010 and future periods as we continue to invest in our business and potential acquisitions.

Interest Income (Expense) and Other, Net

The following table presents our interest and other income, net for the periods presented (unaudited):


	Three Months Ended March 31,
	2010			2009			Change
	(Dollars in thousands)
Interest income (expense) and other, net	$	(266	)	$	132		(302	)%
Percent of revenue		(1	)%		1	%

Interest income (expense) and other, net decreased from $0.1 million, for the three months ended March 31, 2009 to $(0.3 million) for the three months ended March 31, 2010. The decrease is primarily due to net foreign exchange loss of $0.4 million.

Provision for Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets or liabilities for the tax-effected temporary differences between the financial reporting and tax bases of our assets and liabilities, and for net operating loss and tax credit carryforwards.

Further, compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between each of its legal entities that are located in several countries. Our determinations include many decisions based on management’s knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third parties. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. We may be periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews may include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves when it is more likely than not that an uncertain tax position will be sustained upon examination by a taxing authority. These estimates are subject to change.

Income tax expense for the three months ended March 31, 2010 was $128,000, compared to $194,000 for the three months ended March 31, 2009. The effective tax rates for 2010 and 2009 differ from the U.S. federal statutory rates of 34% primarily due to stock based compensation and permanent tax adjustments, foreign withholding taxes partially offset with foreign operational rate benefits and a valuation allowance against the Company’s deferred tax assets.

Liquidity and Capital Resources

To date, substantially all of our operations have been financed through the sale of equity securities, including net cash proceeds in connection with our initial public offering of common stock completed in the fourth quarter of 2007 of approximately $104.6 million, after deducting underwriting discounts and commissions and offering costs. In June 2008, we completed a public offering raising approximately $27.4 million in net proceeds after deducting underwriting discounts and commissions of $1.5 million and other offering expenses of approximately $0.6 million. In October 2009, we completed a follow-on public offering raising approximately $203.0 million in net proceeds, after deducting underwriting discounts and commissions of $10.4 million and other offering expenses of approximately $0.5 million. In addition, we have been generating cash flow from operations since the fourth quarter of 2008.

The following table sets forth a summary of our cash flows for the periods indicated (in thousands):


	Three Months Ended March 31,
	2010		2009
	(Unaudited)
Net cash provided by operating activities	$	13,131	$	2,687
Net cash provided by (used in) investing activities		11,013		(28,235	)
Net cash provided by financing activities		1,946		530

Net Cash Provided By Operating Activities

Our cash flows from operating activities are significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated future growth of our business, increases in the number of customers using our subscription services and the amount and timing of customer payments. Cash provided by operating activities has historically resulted from losses from operations, changes in working capital accounts, offset by the add back of non-cash expense items such as depreciation, amortization and expense associated with stock-based compensation awards.

Cash provided by operating activities in the three months ended March 31, 2010 of $13.1 million primarily resulted from net loss of $4.7 million adjusted for certain non-cash items of $8.4 million (including stock-based compensation of $5.0 million of which $1.6 million was from stock issued in lieu of cash bonuses to certain executives of the Company, amortization of deferred commissions of $2.1 million and depreciation of $1.3 million). In addition, the increase in cash provided by operating activities resulted from a decrease of $15.1 million in accounts receivable and an increase of $4.3 million in deferred revenue. These increases were offset by $6.0 million decrease in accrued employee compensation, $1.9 million decrease in deferred commissions, $1.9 million increase in prepaid expenses and other assets and $0.2 million decrease in accounts payable, accrued expenses and other liabilities.

Net Cash Provided By (Used In) Investing Activities

Cash provided by investing activities in the three months ended March 31, 2010 of $11.0 million primarily resulted from proceeds from sales and maturities of available-for-sale securities of $46.1 million, offset by $34.5 million of purchases of available-for-sale securities and $0.6 million of capital expenditures.

Net Cash Provided by Financing Activities

Cash provided by financing activities in the three months ended March 31, 2010 was $1.9 million primarily due to proceeds from the exercise of stock options.

Capital Resources

We believe our existing cash, cash equivalents and marketable securities and currently available resources will be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue and bookings growth, future acquisitions, the level of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new services and enhancements to existing services, the timing of general and administrative expenses as we grow our administrative infrastructure, and the continuing market acceptance of our application suite. Our capital expenditures for the rest of 2010 are expected to grow in line with business activities. To the extent that existing cash and cash from operations are not sufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. On February 4, 2010, we announced that we had entered into a definitive agreement to acquire Inform, a privately held company focused on performance measurement and workforce planning software. We anticipate closing this transaction in July of 2010 and that we will pay approximately $25 million in cash and issue approximately 907,000 shares of common stock as consideration for 100% of the outstanding shares of Inform. On May 3, 2010, we announced that we had entered into a definitive agreement to acquire CubeTree, a leader in social software and collaboration. We anticipate closing this transaction in the third quarter of 2010 and that we will issue approximately $20.0 million worth of shares of our common stock plus contingent consideration as consideration for 100% of the outstanding shares of CubeTree. This contingent consideration, if payable, would be payable on the three year anniversary of the closing, or sooner upon certain changes in control of us. The transaction is expected to be accounted for as an acquisition of a business.

Off-Balance Sheet Arrangements

We do not have any special purpose entities and, other than operating leases for office space and computer equipment, we do not engage in off-balance sheet financing arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As we expand internationally our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our revenue is generally denominated in the local currency of the contracting party. The substantial majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. Our expenses are incurred primarily in the United States, with a lesser portion of our expenses incurred where our other international sales and operations offices are located. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in currency exchange rates could harm our business in the future. The effect of an immediate 10% adverse change in exchange rates on foreign denominated receivables as of March 31, 2010 would not be material. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future.

Interest Rate Sensitivity

We had cash and cash equivalents of $102.6 million and marketable securities of $234.8 million as of March 31, 2010. Cash, cash equivalents and marketable securities are held for working capital purposes and restricted cash amounts are held as security against credit card deposits and various lease obligations. Our exposure to market rate risk for changes in interest rates relates to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We placed our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our investment funds by limiting default, market and reinvestment risk. Our investments in marketable securities consist of high-grade government securities, corporate debt securities and equity securities. Investments purchased with the original maturity of three months or less are considered to be cash equivalents. We classify all of our investments as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax reported in a separate component of stockholder’s equity. As of March 31, 2010, the average maturity of our investment portfolio is approximately 146 days; therefore the movement of interest rates should not have a material impact on our condensed consolidated balance sheet or statement of operations.

At any time, a significant increase/decrease in interest rates will have an impact on the fair market value and interest earnings of our investment portfolio. We do not currently hedge this interest exposure. We have performed a sensitivity analysis as of March 31, 2010 using a modeling technique that measures the change in the fair values arising from a hypothetical 50 basis points and 100 basis points adverse movements in the levels of interest rates across the entire yield curve, which are representative of historical movements in the Federal Funds rate with all other variables held constant. The analysis is based on the weighted-average maturity of our investments as of March 31, 2010. The sensitivity analysis indicated that a hypothetical 100 basis points adverse movement in interest rates would not result in a material loss in the fair values of our investment instruments.

Fair Value of Financial Instruments

We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments that approximate their fair values due to their short period of time to maturity. We do not have any cash invested in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this annual report, including the consolidated financial statements and the related notes included elsewhere in this annual report. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or even all of your investment.

The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.

We have a history of losses and we may not achieve or sustain profitability in the future.

We have incurred significant losses in each fiscal period since our inception in 2001. We experienced a net loss of $4.7 million for the quarter ended March 31, 2010. At March 31, 2010 we had an accumulated deficit of $223.6 million. The losses and accumulated deficit were due to the substantial investments we made to grow our business and acquire customers. Despite recent moderation in spending, we still expect to incur significant operating expenses in the future due to our investment in sales and marketing, research and development expenses, and operations costs, expenses related to stock-based compensation and acquisition related charges arising from the proposed purchase of Inform Business Impact (“Inform”), CubeTree and other future acquisitions we may undertake and therefore we may continue to incur losses for the foreseeable future. In pursuing acquisitions, it is also likely that our operating expenses will increase. Furthermore, to the extent we are successful in increasing our customer base we could also incur increased losses because costs associated with generating customer agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. You should not consider our historic revenue growth as indicative of our future performance. Accordingly, we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability.

Current uncertainty in global economic conditions makes it particularly difficult to predict demand and other related matters and makes it more likely that our actual results could differ materially from expectations.

Our operations and performance depend on worldwide economic conditions, which may remain depressed for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and may cause our customers and potential customers to slow or reduce spending on our application suite. Furthermore, during these challenging economic times, our customers may face issues gaining timely access to sufficient credit and decreasing cash flow, which are impacting their willingness to make purchases and their ability to make timely payments to us. We cannot predict the timing, strength or duration of the economic slowdown or any subsequent economic recovery, worldwide, in the United States, or in our industry. These and other economic factors could continue to have an adverse effect on demand for our application suite, including new bookings and renewal and upsell rates, on our ability to predict future operating results, and on our financial condition and operating results.

Because we recognize revenue from our customers over the term of their agreements, downturns or upturns in sales may not be immediately reflected in our operating results.

We recognize revenue over the terms of our customer agreements, which typically range from one to three years, with some up to five years. As a result, most of our quarterly revenue results from agreements entered into during previous quarters. Consequently, a shortfall in demand for our application suite in any quarter may not significantly reduce our revenue for that quarter, but could negatively affect revenue in future quarters. In particular, if such a shortfall were to occur in our fourth quarter, it may be more difficult for us to increase our customer sales to recover from such a shortfall as we have historically entered into a significant portion of our customer agreements during the fourth quarter. In addition, we may be unable to adjust our cost structure to reflect this potential reduction in revenue. Accordingly, the effect of significant downturns in sales of our application suite may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Because we recognize revenue from our customers over the term of their agreements but incur most costs associated with generating customer agreements upfront, rapid growth in our customer base will result in increased losses.

Because the expenses associated with generating customer agreements are generally incurred up front, but the resulting revenue is recognized over the life of the customer agreement, increased growth in the number of customers will result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements even though the customer is expected to be profitable for us over the term of the agreement.

Our business depends substantially on customers renewing their agreements and purchasing additional modules or users from us. Any decline in our customer renewals would harm our future operating results.

In order for us to improve our operating results, it is important that our customers renew their agreements with us when the initial contract term expires and also purchase additional modules or additional users. Our customers have no obligation to renew their subscriptions after the initial subscription period, and we cannot assure you that customers will renew subscriptions at the same or higher level of service, if at all. Although our renewal rates have been high historically and above 90% for 2009, some of our customers have elected not to renew their agreements with us, and some are declining to renew as a result of the global economic slowdown. Moreover, under some circumstances, some of our customers have the right to cancel their agreements prior to the expiration of the term. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our application suite, pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, the effects of economic downturns, including the current global economic recession, and global economic conditions, or reductions in our customers’ spending levels. If our customers do not renew their subscriptions, renew on less favorable terms or fail to purchase additional modules or users, our revenue may decline, and we may not realize significantly improved operating results from our customer base.

We have recently launched our business execution strategy and this strategy may not result in additional customers or revenues.

We recently launched our business execution product and marketing strategy in order to expand our reach beyond the People Performance solutions market. We did this in part, because we believe that the market for business execution software presents a significantly larger potential market opportunity than the market for People Performance solutions. This belief is based on a number of assumptions that may vary materially from actual future results. These assumptions include user adoption by a substantial majority of the estimated current worldwide work force, with estimated long-term per user rates that are significantly higher than the current average per user rates. The business execution solutions market is an emerging market, and therefore, its ultimate size and any share of this new market that we might obtain is inherently unpredictable and will likely be impacted by, among other factors, the breadth and depth of our solutions, the productivity enhancements realized by customers using these solutions and emergence of competitive solutions. It is possible that our assumptions and estimates as to market size could be incorrect and inaccurate or otherwise not come to fruition, in which case we may not realize the benefits of this anticipated market opportunity. Accordingly, you should not place undue reliance on these estimates.

We are still developing a full suite of business execution solutions, and we will need to develop or acquire additional software solutions as well as content and best practices knowledge. Accordingly, we intend to continue to invest heavily in sales and marketing and product development and intend to pursue acquisitions to implement and execute on this strategy. These activities have required significant time and attention of our management and employees. We expect to incur significant expenses to pursue this strategy. We cannot assure you that these efforts will result in significant additional customers, revenues or profitability. Moreover, these efforts may adversely impact our existing business by diverting management attention and other resources. If we are not successful in these efforts, or if the market does not develop as we anticipate, our business will not grow as we expect and our future operating results could be negatively affected.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for business execution applications is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry in some segments. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do, and with the introduction of new technologies and market entrants, we expect to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our application suite to achieve or maintain more widespread market acceptance, any of which could harm our business.

We face competition from paper-based processes and desktop software tools. We also face competition from custom-built software that is designed to support the needs of a single organization, and from third-party human resources application providers. These software vendors include, without limitation, Authoria, Inc., Cornerstone OnDemand, Inc., Halogen Software Inc., Kenexa Corporation, Oracle Corporation, Plateau Systems, Ltd., Salary.com, Inc., SAP AG, Softscape, Inc., StepStone Solutions, SumTotal Systems Inc., Taleo Corporation and Workday, Inc.

Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing relationships, access to larger customer bases and major distribution agreements with consultants, system integrators and resellers. Moreover, many software vendors could bundle human resources products or offer them at a low price as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of strategic human resource functions at lower prices or with greater depth than our application suite. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Further, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

We entered into agreements to acquire two companies and expect to acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.

We entered into agreements to acquire Inform and CubeTree, and we expect to acquire or invest in other businesses, products or technologies that we believe could complement or expand our application suite, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

There are inherent risks in integrating and managing corporate acquisitions, and the Company has limited experience with acquisitions. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

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unanticipated costs or liabilities associated with the acquisition;

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incurrence of acquisition-related costs, which would be recognized as a current period expense under FASB Accounting Standards Codification (“ASC”) 805-20, Business Combinations;

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diversion of management’s attention from other business concerns;

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harm to our existing business relationships with business partners and customers as a result of the acquisition;

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the potential loss of key employees;

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use of resources that are needed in other parts of our business; and

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use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other indefinite lived intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer.

Although we have entered into agreements to acquire Inform and CubeTree, the closing of these acquisitions are subject to a number of closing conditions. Accordingly, we cannot assure you as to when these acquisitions will be completed. In addition, we cannot assure you that we will realize the anticipated benefits of these acquisitions.

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our application suite may be perceived as not being secure, customers may curtail or stop using our application suite, and we may incur significant liabilities.

Our operations involve the storage and transmission of our customers’ confidential information, and security breaches could expose us to a risk of loss of this information, litigation, indemnity obligations and other 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 our customers’ data, including personally identifiable information regarding users, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential sales and existing customers.

Because our application suite collects, stores and reports personal information of job applicants and employees, privacy concerns could result in liability to us or inhibit sales of our application suite.

Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. Because many of the features of our application suite collect, store and report on personal information, any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm our business.

Furthermore, the costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our application suite and reduce overall demand for it. Privacy concerns, whether or not valid, may inhibit market adoption of our application suite in certain industries.

We have experienced rapid changes in our organization in recent periods. If we fail to manage these changes effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

We have experienced rapid changes in our headcount and operations in recent periods. For example, we grew from 188 employees at December 31, 2005 to 723 employees as March 31, 2010. We have increased the size of our customer base from 341 customers at December 31, 2005 to approximately 3,100 customers at March 31, 2010. In addition, Inform has approximately 120 employees and locations in Australia, the UK and the U.S. The growth in our customer base has placed, and any future growth will place, a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage these changes effectively. We will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage organizational changes could result in difficulty in implementing customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

Failure to adequately expand and ramp our direct sales force and develop and expand our indirect sales channel will impede our growth.

We will need to continue to optimize our sales and marketing infrastructure in order to grow our customer base and our business. We plan to continue to expand and ramp our direct sales force and engage additional third-party channel partners, both domestically and internationally. Identifying and recruiting these people and entities and training them in the use of our application suite require significant time, expense and attention. This expansion will require us to invest significant financial and other resources. We typically have no long-term agreements or minimum purchase commitments with any of our channel partners, and our agreements with these channel partners do not prohibit them from offering products or services that compete with ours. Our business will be seriously harmed if our efforts to expand and ramp our direct sales force and expand our indirect sales channels do not generate a corresponding significant increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, whether due to the global economic slowdown or for other reasons, we may not be able to significantly increase our revenue and grow our business.

The market for our application suite depends on widespread adoption of business execution.

Widespread adoption of our solution depends on the widespread adoption of business execution by organizations. It is uncertain whether they will purchase software or on-demand applications for this function. Accordingly, we cannot assure you that an on-demand model for business execution will achieve and sustain the high level of market acceptance that is critical for the success of our business.

We have historically derived a significant portion of our subscription revenue from sales of our performance management and goal management modules. If these modules are not widely accepted by new customers, our operating results will be harmed.

We have historically derived a significant portion of our historical revenue from sales of our Performance Management and Goal Management modules. If these modules do not remain competitive, or if we experience pricing pressure or reduced demand for these modules, our future revenue could be negatively affected, which would harm our future operating results.

The market for on-demand applications is at an early stage of development, and if it does not develop or develops more slowly than we expect, our business will be harmed.

The market for on-demand applications is at an early stage of development, and these applications may not achieve and sustain high levels of demand and market acceptance. Our success will depend on the willingness of organizations to increase their use of on-demand applications. Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand applications. We have encountered customers in the past that have been unwilling to subscribe to our application suite because they could not install it on their premises. Other factors that may affect the market acceptance of on-demand applications include:

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perceived security capabilities and reliability;

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perceived concerns about ability to scale operations for large enterprise customers;

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concerns with entrusting a third party to store and manage critical employee data; and

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the level of configurability of on-demand applications.

If organizations do not perceive the benefits of on-demand applications, then the market for these applications may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business.

Our quarterly results can fluctuate and, if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Fluctuations in our quarterly financial results may be caused by a number of factors, including, but not limited to, those listed below:

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our ability to attract new customers;

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customer renewal rates;

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the extent to which customers increase or decrease the number of modules or users upon any renewal of their agreements;

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the effects of changes in global economic conditions and announcements of economic data and government initiatives to address the global economic downturn;

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the level of new customers as compared to renewal customers in a particular period;

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the addition or loss of large customers, including through acquisitions or consolidations;

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the mix of customers between small, mid-sized and enterprise customers;

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changes in our pricing policies or those of our competitors;

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seasonal variations in the demand for our application suite, which has historically been highest in the fourth quarter of a year;

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the amount and timing of operating expenses, particularly sales and marketing, related to the maintenance and expansion of our business, operations and infrastructure;

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the timing and success of new product and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners;

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network outages or security breaches;

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the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and

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other general economic, industry and market conditions.

We believe that our quarterly results of operations, including the levels of our revenue and changes in deferred revenue, may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of any one quarter as an indication of future performance.

The market for our application suite among large customers may be limited if they require customized features or functions that we do not intend to provide.

Prospective customers, especially large enterprise customers, may require customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, then the market for our application suite will be more limited among these types of customers and our business could suffer.

We depend on our management team, particularly our Chief Executive Officer and our development personnel, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our executive officers, particularly our Chief Executive Officer, and other key employees, including key development personnel. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. We are also substantially dependent on the continued service of our existing development personnel because of the complexity of our application suite and technologies.

We do not have employment agreements with any of our personnel that require these personnel to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees or groups could seriously harm our business.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, and our business may be harmed.

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for customers and focus on execution. As we grow and change, we may find it difficult to maintain these important aspects of our corporate culture. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, and otherwise adversely affect our future success.

Our growth depends in part on the success of our strategic relationships with third parties.

We anticipate that we will continue to depend on various third-party relationships in order to grow our business. In addition to growing our indirect sales channels, we intend to pursue additional relationships with other third parties, such as technology and content providers and implementation partners. Identifying partners, negotiating and documenting relationships with them require significant time and resources as does integrating third-party content and technology. Our agreements with technology and content providers are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our application suite. In addition, the current global economic slowdown could adversely affect the businesses of our partners, and it is possible that they may not be able to devote the resources we expect to the relationship.

If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer usage of our application suite or revenue.

We rely on a small number of third-party service providers to host and deliver our application suite and any interruptions or delays in services from these third parties could impair the delivery of our application suite and harm our business.

We currently host our application suite from four data centers—two located in the United States and two in Europe. We do not control the operation of any of these facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions, which would have a serious adverse impact on our business. Additionally, our data center agreements are of limited duration and are subject to early termination rights in certain circumstances, and the providers of our data centers have no obligation to renew their agreements with us on commercially reasonable terms, or at all.

We also depend on access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our bandwidth providers for any reason, we could experience disruption in delivering our application suite or we could be required to retain the services of a replacement bandwidth provider.

Our operations also rely heavily on the availability of electricity, which also comes from third-party providers. If we or the third-party data center facilities that we use to deliver our services were to experience a major power outage or if the cost of electricity were to increase significantly, our operations could be harmed. If we or our third-party data centers were to experience a major power outage, we would have to rely on back-up generators, which might not work properly or might not provide an adequate supply during a major power outage. Such a power outage could result in a disruption of our business.

If our application suite becomes unavailable or otherwise fails to perform properly, our reputation will be harmed, our market share would decline and we could be subject to liability claims.

The software used in our application suite is inherently complex and may contain material defects or errors. Any defects in product functionality or that cause interruptions in the availability of our application suite could result in:

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lost or delayed market acceptance and sales;

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breach of warranty claims;

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sales credits or refunds to our customers;

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loss of customers;

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diversion of development and customer service resources; and

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injury to our reputation.

The costs incurred in correcting any material defects or errors might be substantial and could adversely affect our operating results.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, the availability of our application suite could be interrupted by a number of factors, including customers’ inability to access the Internet, the failure of our network or software systems due to human or other error, security breaches or variability in user traffic for our application suite. We may be required to issue credits or refunds or indemnify or otherwise be liable to our customers for damages they may incur resulting from certain of these events. In addition to potential liability, if we experience interruptions in the availability of our application suite, our reputation could be harmed and we could lose customers.

Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

We rely on third-party computer hardware and software that may be difficult to replace or which could cause errors or failures of our service.

We rely on computer hardware, purchased or leased, and software licensed from third parties in order to deliver our application suite. This hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in our ability to provide our application suite until equivalent technology is either developed by us or, if available, identified, obtained and integrated, which could harm our business. In addition, errors or defects in third-party hardware or software used in our application suite could result in errors or a failure of our application suite, which could harm our business.

If we are not able to develop enhancements and new features that achieve market acceptance or that keep pace with technological developments, our business will be harmed.

Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing application suite and to introduce new features. The success of any enhancement or new product depends on several factors, including timely completion, introduction and market acceptance. Any new feature or module that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to successfully develop or acquire new features or modules or to enhance our existing application suite to meet customer requirements, our business and operating results will be adversely affected.

Because we designed our application suite to operate on a variety of network, hardware and software platforms using standard Internet tools and protocols, we will need to continuously modify and enhance our application suite to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. If we are unable to respond in a timely manner to these rapid technological developments in a cost-effective manner, our application suite may become less marketable and less competitive or obsolete and our operating results may be negatively impacted.

If we fail to develop widespread brand awareness cost-effectively, our business may suffer.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our application suite and attracting new customers, particularly in light of the current global economic downturn. Brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our application suite.

Because our long-term success depends, in part, on our ability to expand the sales of our application suite to customers located outside of the United States, our business will be susceptible to risks associated with international operations.

A key element of our growth strategy is to expand our international operations and develop a worldwide customer base. In addition, with the acquisition of Inform, we will add employees, offices and customers internationally. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our limited experience with international operations, we cannot assure you that our international expansion efforts will be successful. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

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our ability to comply with differing technical and certification requirements outside the United States;

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difficulties and costs associated with staffing and managing foreign operations;

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greater difficulty collecting accounts receivable and longer payment cycles;

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unexpected changes in regulatory requirements;

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the need to adapt our application suite for specific countries;

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difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions;

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tariffs, export controls and other non-tariff barriers such as quotas and local content rules;

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more limited protection for intellectual property rights in some countries;

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adverse tax consequences;

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fluctuations in currency exchange rates;

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restrictions on the transfer of funds; and

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new and different sources of competition.

Our failure to manage any of these risks successfully could harm our existing and future international operations and seriously impair our overall business.

Because competition for our target employees is intense, we may not be able to attract and retain the quality employees we need to support our planned growth.

Our future success will depend, to a significant extent, on our ability to attract and retain high quality personnel. Despite the global economic downturn, competition for qualified management, technical and other personnel is intense, and we may not be successful in attracting and retaining such personnel. If we fail to attract and retain qualified employees, our ability to grow our business could be harmed.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We primarily rely on patent, copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. We currently have only one issued patent.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could seriously harm our brand and adversely impact our business.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may receive claims that our application suite and underlying technology infringe or violate the claimant’s intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or application suite. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify products, or refund fees, which could further exhaust our resources. In addition, we may pay substantial settlement costs which could include royalty payments in connection with any such litigation and to obtain licenses, modify products, or refund fees, which could further exhaust our resources. In addition, we may pay substantial settlement costs which could include royalty payments in connection with any claim or litigation, whether or not successfully asserted against us. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Our use of open source and third-party technology could impose limitations on our ability to commercialize our application suite.

We use open source software in our application suite. Although we monitor our use of open source software closely, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our application suite. In such event, we could be required to seek licenses from third parties in order to continue offering our application suite, to re-engineer our technology or to discontinue offering our application suite in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition. We also incorporate certain third-party technologies into our application suite and may desire to incorporate additional third-party technologies in the future. Licenses to new third-party technology may not be available to us on commercially reasonable terms, or at all.

Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may cause our business to suffer.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the use of the Internet as a commercial medium. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications such as ours and reduce the demand for our application suite.

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If the Internet infrastructure is unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected. If we fail to meet service level commitments, customers may be entitled to credits, refunds to the extent of cash paid for future services, or termination.

Our business is subject to changing regulations regarding corporate governance and public disclosure that will increase both our costs and the risk of noncompliance.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, and rules subsequently implemented by the SEC and The NASDAQ Stock Market, have imposed a variety of requirements and restrictions on public companies, including requiring changes in corporate governance practices. In addition, the SEC and Congress are proposing additional significant corporate governance-related rules. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

If there are substantial sales of shares of our common stock, the price of our common stock could decline.

As of March 31, 2010 we had approximately 72.3 million shares of common stock outstanding. Substantially all of our outstanding shares of common stock are now freely tradable, subject to volume and other limitations under Rule 144 under the Securities Act in the case of stockholders who are our “affiliates.” The price of our common stock could decline if there are substantial sales of our common stock or if there is a large number of shares of our common stock available for sale.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Industry analysts that currently cover us may cease to do so. If industry analysts cease coverage of our company, the trading price for our stock would be negatively impacted. In the event one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer or proxy contest difficult, which could depress the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of Delaware law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:

•

our Board of Directors is classified into three classes of directors with staggered three-year terms;

•

only our Chairperson of the Board of Directors, our Chief Executive Officer, our President or a majority of our Board of Directors are authorized to call a special meeting of stockholders;

•

our stockholders can only take action at a meeting of stockholders and not by written consent;

•

vacancies on our Board of Directors can be filled only by our Board of Directors and not by our stockholders;

•

our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and

•

advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Form S-1 Registration Statement (Registration No. 333-144758) relating to our IPO was declared effective by the SEC on November 19, 2007, and the offering commenced November 19, 2007. As of March 31, 2010 we used approximately $40.5 million of the proceeds from this offering for working capital. We expect to use the remaining net proceeds of this offering for general corporate purposes, including working capital, potential capital expenditures, acquisitions and investing in available-for-sale securities.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Reserved

Item 5.

Other Information

None

Item 6.

Exhibits

EXHIBIT INDEX


Exhibit No.		Document

10.1		Share Purchase Agreement dated February 4, 2010, by and among the Registrant, the Shareholders of Infohrm listed therein, the Guarantors listed therein and the Shareholders’ agent ¹

10.2		Description of Corporate Bonus Plan

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

¹	Previously filed as Exhibit 2.01 to the Registrant’s Current Report on Form 8-K filed on February 9, 2010.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


SuccessFactors, Inc.

By:		/s/ BRUCE FELT
		Bruce Felt
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Date: May 10, 2010

EXHIBIT INDEX


Exhibit No.		Document

10.1		Share Purchase Agreement dated February 4, 2010, by and among the Registrant, the Shareholders of Infohrm listed therein, the Guarantors listed therein and the Shareholders’ agent ²

10.2		Description of Corporate Bonus Plan

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

²	Previously filed as Exhibit 2.01 to the Registrant’s Current Report on Form 8-K filed on February 9, 2010.

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