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 June 30, 2011

OR

o 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:      Yes   x No o

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  x No  o

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):

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	o

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

As of July 31, 2011, there were approximately 83,429,762 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-June 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations-Three and six months ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows-Six months ended June 30, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 5.	Other Information	48
Item 6.	Exhibits	48
Signature		49

2

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	June 30, 2011			December 31, 2010
ASSETS:
Current assets:
Cash and cash equivalents	$	120,767		$	75,384
Marketable securities	131,627			281,073
Accounts receivable, net of allowance for doubtful accounts of $1,039 and $1,039	74,805			80,440
Deferred commissions	7,116			7,106
Prepaid expenses and other current assets	14,994			8,022
Total current assets	349,309			452,025
Restricted cash	1,747			913
Property and equipment, net	14,380			8,737
Deferred commissions, less current portion	9,552			12,854
Goodwill	260,909			64,077
Intangible assets	109,649			37,832
Other assets	2,599			975
Total assets	$	748,145		$	577,413
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	5,807		$	7,254
Accrued expenses and other current liabilities	25,326			11,433
Accrued employee compensation	26,911			23,467
Deferred revenue	229,207			219,868
Notes payable	900			—
Acquisition-related contingent consideration	4,000			5,200
Total current liabilities	292,151			267,222
Deferred revenue, less current portion	12,472			14,577
Notes payable, less current portion	1,643			—
Long-term income taxes payable	2,477			1,987
Acquisition-related contingent considerations, less current portion	21,046			21,050
Other long-term liabilities	2,486			1,248
Total liabilities	332,275			306,084
Commitments and contingencies (Note 9)
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; 82,791 and 77,137 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively	83			77
Additional paid-in capital	646,143			499,343
Accumulated other comprehensive income	5,235			3,258
Accumulated deficit	(235,591		)	(231,349		)
Total stockholders’ equity	415,870			271,329
Total liabilities and stockholders’ equity	$	748,145		$	577,413

See accompanying notes to unaudited condensed consolidated financial statements.

3

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenue
Subscription and support	$	55,119		$	38,471		$	106,311		$	74,951
Professional services and other	17,731			11,032			34,137			19,287
Total revenue	72,850			49,503			140,448			94,238
Cost of revenue
Subscription and support	11,976			5,762			21,411			10,907
Professional services and other	12,411			5,975			23,046			11,419
Total cost of revenue	24,387			11,737			44,457			22,326
Total gross profit	48,463			37,766			95,991			71,912
Operating expenses:
Sales and marketing	36,387			22,177			67,358			44,419
Research and development	15,525			8,926			29,291			16,651
General and administrative	15,771			8,203			28,718			15,697
Revaluation of contingent considerations	10,303			—			(1,356		)	—
Gain on settlement of litigation, net	(3,619		)	—			(2,906		)	—
Total operating expenses	74,367			39,306			121,105			76,767
Loss from operations	(25,904		)	(1,540		)	(25,114		)	(4,855		)
Unrealized foreign exchange gain on intercompany loan	965			—			1,501			—
Interest income (expense) and other, net	508			(268		)	1,292			(535		)
Loss before benefit for (provision of) income taxes	(24,431		)	(1,808		)	(22,321		)	(5,390		)
Benefit for (provision of) income taxes	17,470			(67		)	18,079			(194		)
Net loss	$	(6,961	)	$	(1,875	)	$	(4,242	)	$	(5,584	)
Net loss per common share, basic and diluted	$	(0.09	)	$	(0.03	)	$	(0.05	)	$	(0.08	)
Shares used in computing net loss per common share, basic and diluted	78,902			72,645			78,225			72,328

See accompanying notes to unaudited condensed consolidated financial statements.

4

SUCCESSFACTORS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(4,242	)	$	(5,584	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	3,613			2,605
Amortization of deferred commissions	8,278			4,325
Stock-based compensation expense	17,091			9,547
Amortization of intangible assets	3,564			—
Revaluation of contingent considerations	(1,356		)	—
Unrealized foreign exchange gain on intercompany loan	(1,501		)	—
Income tax benefit in connection with acquisition	(18,022		)	—
Changes in assets and liabilities, net of acquired assets and assumed liabilities:
Accounts receivable, net	16,332			11,391
Deferred commissions	(4,986		)	(4,209		)
Prepaid expenses and other current assets	4,524			(1,186		)
Other assets	1,533			(545		)
Accounts payable	(1,756		)	280
Accrued expenses and other current liabilities	8,694			470
Accrued employee compensation	(2,485		)	(3,396		)
Long-term income taxes payable	139			(116		)
Other liabilities	(7,815		)	(216		)
Deferred revenue	(3,041		)	6,570
Net cash provided by operating activities	18,564			19,936
Cash flows from investing activities:
Restricted cash	(6		)	12
Advances to principal shareholders of Inform	—			(2,175		)
Capital expenditures	(3,040		)	(1,782		)
Proceeds from sale of assets	—			1
Acquisitions, net of cash acquired	(130,296		)	—
Purchases of available-for-sale securities	(46,283		)	(145,641		)
Proceeds from maturities of available-for-sale securities	102,996			92,103
Proceeds from sales of available-for-sale securities	91,897			43,244
Net cash provided by (used in) investing activities	15,268			(14,238		)
Cash flows from financing activities:
Offering costs	—			(111		)
Proceeds from exercise of stock options	10,974			4,733
Net cash provided by financing activities	10,974			4,622
Effect of exchange rate changes on cash and cash equivalents	577			(267		)
Net increase in cash and cash equivalents	45,383			10,053
Cash and cash equivalents at beginning of period	75,384			76,618
Cash and cash equivalents at end of period	$	120,767		$	86,671
Non-cash transactions:
Common stock issued and stock options and restricted stock units assumed in connection with acquisitions	$	119,159		$	—
Purchase of software licenses for note payable	2,543			—

See accompanying notes to unaudited condensed consolidated financial statements.

5

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 its existing people performance solutions with business alignment solutions to enable customers to achieve business results. The Company’s integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Career and Development Planning; Recruiting Management; Employee Central; Analytics and Reporting; CubeTree Social Collaboration; Employee Profile; 360-Degree Review; Employee Survey; Calibration & Team Rater; Learning Management; Social Learning; iContent; Extended Enterprise; 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 and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011, for any other interim period, or for any other future year.

The condensed consolidated balance sheet as of December 31, 2010 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 unaudited 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, 2010 filed with the Securities and Exchange Commission (SEC) on March 8, 2011. 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, 2010.

In the third quarter of fiscal 2010, the Company early adopted Accounting Standards Update No. 2009-13 (“ASU 2009-13”) related to accounting for multiple-deliverable revenue arrangements, and retrospectively applied the new accounting standard to arrangements entered into or materially modified after January 1, 2010 (the beginning of the Company's fiscal year). The adoption of ASU 2009-13 increased subscription and support revenue and professional services and other revenue by $0.6 million and $2.1 million, respectively, in the second quarter of fiscal 2010, which resulted in a corresponding reduction in net loss of $2.6 million. For the six months ended June 30, 2010, the adoption of ASU 2009-13 increased subscription and support revenue and professional services and other revenue by $0.9 million and $2.8 million, respectively, in the second quarter of fiscal 2010, which resulted in a corresponding reduction in net loss of $3.5 million. Financial information for the second quarter of fiscal 2010 has been revised to reflect the adoption of ASU 2009-13. 

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

6

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, fair value of acquired intangible assets, fair value of acquisition related contingent considerations and the determination of the fair market value of stock options, including the use of forfeiture estimates. Actual results could differ materially from those estimates.

Revenue Recognition

Revenue consists of fees for the Company's software and support as well as fees for the provision of professional services.

The majority of the Company's software is intended to be delivered through the cloud from the Company's hosting facilities and customers generally do not have the contractual right to take possession of this software. In the infrequent circumstance in which a customer of the Company has the contractual right to take possession of this software, the Company has determined that the customers would incur a significant penalty to take possession of the software. Therefore, these arrangements are treated as service agreements.

Since the acquisition of Plateau, certain acquired software is licensed to customers under either perpetual or term arrangements, and does not require significant modification or customization services. Customers may either take possession of this software or may contract with the Company for hosting services. Related maintenance and support revenues are generated through the sale of maintenance contracts which are renewable on an annual basis. Under these contracts, the Company provides non-specified upgrades of its products only on a when-and-if-available basis.

The Company recognizes revenue for service agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and for software license agreements in accordance with ASC 985-605, Software Revenue Recognition.

The Company commences revenue recognition when all of the following conditions are met:

• Persuasive evidence of an arrangement;

• Subscription or services have been delivered to the customer;

• Collection of related fees is reasonably assured; and

• Related fees are fixed or determinable.

Additionally, if an agreement contains non-standard acceptance or requires non-standard performance criteria to be met, the Company defers revenues until these conditions are satisfied. 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 revenue recognition 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 recognizes the total contracted subscription revenue ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years. Subscription terms commence on the later of the start date specified in the subscription arrangement, the date the customer’s module is provisioned or when all of the revenue recognition criteria have been met. The customer's module is provisioned when a customer is provided access to use the Company’s on-demand application suite.

The Company’s professional services include forms and workflow configuration, data integration, business process consulting and training related to the application suite and are short-term in nature. Professional services are generally sold in conjunction with the Company’s subscriptions.

In October 2009, the Financial Accounting Standards Board (FASB) issued ASU 2009-13, which amended the accounting guidance for multiple-deliverable revenue arrangements to:

• provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

7

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

• require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of each deliverable if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and

• eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.

The Company early-adopted this accounting guidance and retrospectively applied its provisions to arrangements entered into or materially modified after January 1, 2010 (the beginning of the Company’s 2010 fiscal year). The previously reported quarterly results have been retrospectively adjusted to reflect the adoption as of the beginning of fiscal year 2010. Refer to note 2, "Revenue Recognition" in the 2010 Annual Report on Form 10-K for additional information on the impact of adoption.

Prior to the adoption of ASU 2009-13, the Company determined that it did not have objective and reliable evidence of fair value for each deliverable of its arrangements. As a result, the Company accounted for subscription and professional services revenue as one unit of accounting and recognized the total arrangement fee ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years.

Upon adoption of ASU 2009-13, the Company accounts for subscription and professional services revenue as separate units of account and allocates revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE is available. Since VSOE and TPE are not available for the Company’s subscription or professional services, the Company uses ESP.

The Company's arrangements with customers generally contain multiple elements. Certain of these transactions are accounted for under ASC 605-25, Revenue Recognition-Multiple Element Arrangements, and others are accounted for under ASC 985-605, Software Revenue Recognition depending on the terms of the related agreements.

The Company's arrangements subject to ASC 605-25 contain multiple elements that may include subscriptions or hosting services, maintenance and support, and professional services. The Company accounts for subscription services, maintenance and support, and professional services deliverables as separate units of accounting and allocates revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling price (VSOE), if available, third-party evidence of selling price (TPE), if VSOE is not available, or estimated selling price (ESP), if neither VSOE nor TPE is available.

The ESP for professional services deliverables is determined primarily by considering cost plus a targeted range of gross margins. ESP for subscription services and maintenance and support services is generally determined based on the renewal rate offered to the customer to renew the service. Those renewal rates are used when they are considered substantive based on the Company's normal pricing practices, which consider the modules purchased, the number of users, the term of the arrangement, and targeted discounts to internal pricing guidelines. In a minority of cases where other evidence of ESP is not available, we use the weighted average selling price of a deliverable to determine ESP. When weighted average selling prices are used (generally in the absence of other evidence), selling prices are weighted based on aggregate volume excluding transactions priced below the 10 percentile and above the 90 percentile of the pricing distribution to remove price outliers.

The majority of customer contracts specify the value of each undelivered element and, as a result of the contingent revenue guidance in Subtopic 605-25, paragraphs 30-4 and 30-5, the amount deferred for each undelivered element must generally be at or above the contractual amounts.

Revenue allocated to subscription services and maintenance support services is recognized over the term. Revenue allocated to professional services is recognized under the percentage of completion method using the ratio of hours incurred to estimated total hours or, for short term projects, upon acceptance of services related to each module.

The Company's arrangements subject to ASC 985-605 contain multiple elements that may include term or perpetual software licenses, maintenance and support, and professional services. The Company determined that it has established vendor specific objective evidence (VSOE) of fair value for its maintenance and support and professional services; therefore, for perpetual licenses sold in arrangements along with maintenance and support and/or professional services, license revenues are recognized at the date of delivery and acceptance, if applicable, using the residual method. Maintenance and support revenues are recognized ratable from the date of acceptance, if applicable, over the service period.

8

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 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 for which the subscription delivery (provision) start date 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 non-current deferred revenue.

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 that they should be recorded as an asset and charged to expense over the same period that the associated subscription or professional services 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 June 30, 2011 are classified as long-term deferred commissions.

During the three and six months ended June 30, 2011, the Company capitalized $2.5 million and $5.0 million of deferred commissions and amortized $4.1 million and $8.3 million to sales and marketing expense. As of June 30, 2011, deferred commissions on the Company’s unaudited condensed consolidated balance sheet totaled $16.7 million.

2. Recent Accounting Pronouncements

Effective January 2011, the Company adopted ASU No. 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations", which requires enhanced disclosure requirements and description of material, nonrecurring pro forma adjustments directly attributable to a business combination. These additional requirements became effective January 1, 2011 for business combinations for which the acquisition date is after the effective date. The adoption of this accounting update did not have a material impact on the Company's unaudited condensed consolidated financial statements.

On May 12, 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS", which was issued concurrently with IFRS 13, "Fair Value Measurement", to provide largely identical guidance about fair value measurement and disclosure requirements. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. A public entity is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011, and early adoption is not permitted. The Company does not expect the adoption of ASU No. 2011-04 will have a material impact on the Company's condensed consolidated financial statements.

On June 16, 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”, to increase the prominence of other comprehensive income (loss) in financial statements. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. An entity should apply the ASU retrospectively. For a public entity, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company plans to adopt the provisions of ASU No. 2011-05 beginning with its quarterly filing for the three months ending March 31, 2012. The adoption of this accounting update will have no impact on the Company's financial position, results of operations, or cash flows.

3. Business Combination

9

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company completed the following business combinations during fiscal 2010:

• On July 1, 2010, the Company acquired Inform Business Impact (“Inform”), a provider of business analytics and workforce planning software, for $25.6 million in cash and 906,892 shares of common stock valued at approximately $12.9 million, of which 371,372 shares are held in escrow, plus contingent consideration based on performance related earn-out payments with a fair value of $5.3 million. This acquisition was not considered material to the Company.

• On July 13, 2010, the Company acquired Epista Software A/S (“YouCalc”), a provider of real-time analytics and reporting software for $3.2 million in cash, plus contingent consideration based on performance related earn-out payments in shares of common stock with a fair value of $1.5 million. This acquisition was not considered material to the Company.

• On July 20, 2010, the Company acquired CubeTree, Inc., (“CubeTree”) a provider of social media and collaboration software, for 903,733 shares of common stock valued at approximately $18.9 million, of which 190,511 shares are held in escrow, plus a future contingent cash payment with a fair value of $27.8 million.

Each of these acquisitions was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their fair values as of the respective acquisition dates. The total purchase price for each acquisition was comprised of the following (amounts in thousands, except shares):

	Shares Issued	Purchase  Consideration		Net tangible  liabilities assumed			Purchased intangible assets		Goodwill
Inform	906,892	$	43,838	$	(1,412	)	$	23,900	$	21,350
YouCalc	—	4,676		(20		)	3,710		986
CubeTree	903,733	46,653		67			8,120		38,466
Total	1,810,625	$	95,167	$	(1,365	)	$	35,730	$	60,802

On March 17, 2011, the Company acquired Jambok, Inc., (“Jambok”), a provider of social learning software, for $2.8 million in cash, and 63,728 shares of common stock with estimated fair value of approximately $2.0 million. Furthermore, the Company agreed to pay additional cash and stock considerations with 50% payable in shares of stock and 50% payable in cash up to $4.7 million to the former shareholders of Jambok based upon their continued employment with the Company for three years, as of the close of the transaction. The Company did not record any acquisition-related liabilities in connection with this arrangement, as it is considered compensatory in nature, and therefore, it will be recognized as compensation expense over the requisite three-year service period. This acquisition was not considered material to the Company.

The acquisition was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The total purchase price was comprised of the following (unaudited, amounts in thousands, except shares):

	Shares Issued	Purchase  Consideration		Net tangible  liabilities assumed			Purchased intangible assets		Goodwill
Jambok	63,728	$	4,810	$	(1,117	)	$	3,404	$	2,523

Transaction costs associated with Jambok were expensed as incurred, and such transaction costs were $0.2 million for the six months ended June 30, 2011 and are included in general and administrative expenses on the unaudited condensed consolidated statement of operations.

The goodwill recorded in connection with this transaction is primarily related to the ability of Jambok to develop new products and technologies in the future and expected synergies to be achieved in connection with the acquisition. The goodwill recognized is not expected to be deductible for income tax purposes.

Jambok's results of operations have been included in the Company's consolidated financial statements subsequent to the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not

10

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

material to prior period financial statements.

On June 29, 2011, the Company acquired all issued and outstanding shares of Plateau Systems, Ltd. (“Plateau”), a leading learning management system ("LMS") and Content-as-a-Service ("CaaS") provider, for $130.1 million in cash, 3,407,130 shares of the Company's common stock with estimated fair value of $96.8 million, plus the assumption of stock options and restricted stock units (“RSUs”) that will represent stock options or RSUs for an aggregate of 1,348,964 shares of the Company's Common Stock with estimated fair value of $20.4 million. The fair value of stock options assumed were estimated using Black-Scholes pricing model.

Of the total consideration paid in connection with the merger, $46.8 million is held in the form of cash in escrow to secure indemnification obligations.

The acquisition was accounted for using the purchase method of accounting. The following table summarizes the consideration paid for Plateau and the fair value of the assets acquired and liabilities assumed at the acquisition date (unaudited, in thousands):

Purchase Consideration:
Cash at Closing	$	130,116
Stock at Closing	96,763
Options and RSUs Assumed	20,396
Total Purchase Consideration	$	247,275
Net Tangible Liabilities Acquired:
Current Assets	$	24,372
Property & Equipment	2,692
Other Assets	3,986
Other Liabilities	(10,452		)
Deferred Revenue Liability	(10,275		)
Deferred Tax Liability	(25,924		)
	(15,601		)
Identified Intangibles	69,800
Goodwill	193,076
Total	$	247,275

The fair value of purchase consideration and the purchase price allocation are preliminary as of the reporting date as the Company is in the process of obtaining additional information required to finalize the fair value of acquired intangible assets, assumed stock options and RSUs, and deferred tax assets and liabilities. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill, and could affect the amounts reported in the Company's consolidated statement of operations in future periods. Changes to deferred tax assets or liabilities may also result in changes to the Company's income tax benefit or expense. All changes as a result of finalizing the value of purchase consideration or purchase price allocation will be made retrospectively to the acquisition date. The fair value of the 3,407,130 common shares issued as part of the consideration paid for Plateau was determined on the basis of the closing market price of the Company's common shares on the acquisition date. The fair value of the financial assets acquired includes receivables with a fair value of $7.8 million. The gross amount due under these contracts is $8.2 million, of which $0.4 million is expected to be uncollectible.

The total weighted-average amortization period for intangible assets is 6.8 years. The intangible assets are being amortized on a straight-line basis, which in general reflects the pattern in which the economic benefits of the intangible assets are being utilized. The goodwill results from expected synergies from the transaction, including complementary products that will enhance the Company's overall product portfolio, which is expected to result in incremental revenue and profitability.

11

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

None of the goodwill is deductible for tax purposes.

Plateau's results of operations have been included in the Company's unaudited condensed consolidated financial statements subsequent to the date of acquisition and were immaterial.

Costs associated with the Plateau acquisition included transaction costs of $4.8 million and restructuring costs of $1.5 million for the six months ended June 30, 2011. The following table presents these costs included in the Company's unaudited condensed consolidated statements of operations:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2011		2010		2011		2010
Subscription and support	$	30	$	—	$	30	$	—
Professional services and other	144		—		144		—
Sales and marketing	488		—		488		—
Research and development	491		—		491		—
General and administrative	4,275		—		5,187		—
Total	$	5,428	$	—	$	6,340	$	—

Refer to Note 14, "Income Taxes” regarding the tax effect of the acquisition on the Company's unaudited condensed consolidated financial statements.  

Unaudited Pro Forma Financial Information

The pro forma financial information in the table below summarizes the combined results of operations for the Company and Plateau, as though the companies were combined as of the beginning of the comparable prior annual reporting period. The pro forma financial information for all periods presented includes the accounting effects resulting from the Plateau acquisition including amortization charges from acquired intangible assets, changes in depreciation due to differing asset values and depreciation lives, and stock-based compensation charges for unvested restricted stock-based awards as though the Company and Plateau were combined as of January 1, 2010. Due to differing fiscal calendars, the results of Plateau included in this presentation are on a one month lag and include the three and six months ended May 31, 2010 and 2011

The pro forma financial information, as presented below, is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of Plateau had taken place as of the beginning of each period presented.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per share data)	2011			2010			2011			2010
Total revenues	$	98,347		$	65,557		$	183,812		$	126,280
Net income (loss)	$	(26,247	)	$	(4,203	)	$	(26,265	)	$	8,277
Basic earnings (loss) per share	$	(0.32	)	$	(0.06	)	$	(0.32	)	$	0.11
Diluted earnings (loss) per share	$	(0.32	)	$	(0.06	)	$	(0.32	)	$	0.10

A material non-recurring adjustment included in the pro forma financial information is the income tax benefit of $18.0 million, which was included in the first quarter of 2010 from the release of valuation allowance on our deferred tax asset.

The pro forma financial information for the three months ended June 30, 2011 includes a revaluation loss of $10.3 million from changes in the value of contingent considerations.

4. Cash, Cash Equivalents and Marketable Securities

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

12

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	As of June 30, 2011
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	77,386	$	—	$	—		$	77,386
Cash Equivalents:
Money market funds	11,057		—		—			11,057
U.S. Treasury bills and bonds	24,600		—		—			24,600
U.S. government and agency securities	4,000		—		—			4,000
Commercial paper	3,724		—		—			3,724
Total cash equivalents	43,381		—		—			43,381
Total cash and cash equivalents	120,767		—		—			120,767
Marketable securities:
U.S. Treasury bills and bonds	3,855		2		—			3,857
U.S. government and agency securities	78,379		73		—			78,452
Commercial paper	2,000		1		—			2,001
Corporate debt securities	47,199		61		(26		)	47,234
Marketable equity securities	50		33		—			83
Total marketable securities	131,483		170		(26		)	131,627
Total cash, cash equivalents and marketable securities	$	252,250	$	170	$	(26	)	$	252,394

The Company did not recognize any other-than-temporary impairments during the three and six months ended June 30, 2011.

The Company did not have any marketable securities that were in an unrealized loss position for 12 months or greater as of June 30, 2011. Investments in unrealized loss positions for less than 12 months and their related fair value as of June 30, 2011 were as follows (unaudited, in thousands):

	As of June 30, 2011
	Less than 12 Months					Total
Security Description	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Corporate debt securities	14,025		(26		)	14,025		(26		)
Total	$	14,025	$	(26	)	$	14,025	$	(26	)

The Company did not realize any significant gains or losses on marketable securities during the three and six months ended June 30, 2011.

As of June 30, 2011, the following table summarizes the estimated fair value of the Company's investments in marketable debt securities designated as available-for-sale classified by the contractual maturity date of the security (unaudited, in thousands):

13

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	As of
	June 30, 2011
Due within 1 year	$	108,084
Due within 1 year through 5 years	23,460
Due within 5 years through 10 years	—
Due after 10 years	—
Total marketable debt securities	$	131,544

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

	As of December 31, 2010
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash	$	23,538	$	—	$	—		$	23,538
Cash equivalents:
Money market funds	33,000		—		—			33,000
Commercial paper	18,846		—		—			18,846
Total cash equivalents	51,846		—		—			51,846
Total cash and cash equivalents	75,384		—		—			75,384
Marketable securities:
U.S. Treasury bills and bonds	9,836		—		(2		)	9,834
U.S. government and agency securities	196,167		119		(81		)	196,205
Foreign government securities	5,050		6		—			5,056
Commercial paper	21,315		—		—			21,315
Corporate debt securities	48,651		9		(75		)	48,585
Marketable equity securities	50		28		—			78
Total marketable securities	281,069		162		(158		)	281,073
Total cash, cash equivalents and marketable securities	$	356,453	$	162	$	(158	)	$	356,457

The Company did not have any marketable securities that were in an unrealized loss position for 12 months or greater as of December 31, 2010. Investments in unrealized loss positions for less than 12 months and their related fair value as of December 31, 2010 were as follows (in thousands):

	As of December 31, 2010
	Less than 12 Months					Total
Security Description	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury bills and bonds	$	3,935	$	(2	)	$	3,935	$	(2	)
U.S. government and agency securities	72,042		(81		)	72,042		(81		)
Corporate debt securities	25,964		(75		)	25,964		(75		)
Total	$	101,941	$	(158	)	$	101,941	$	(158	)

As of December 31, 2010, the following table summarizes the estimated fair value of the Company's investments in marketable debt securities designated as available-for-sale classified by the contractual maturity date of the security (in thousands):

14

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	As of
	December 31, 2010
Due within 1 year	$	214,164
Due within 1 year through 5 years	66,831
Due within 5 years through 10 years	—
Due after 10 years	—
Total marketable debt securities	$	280,995

5. Fair Value Measurements

The Company accounts for certain financial assets and liabilities 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, as follows:

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 following table presents cash equivalents, marketable securities, and acquisition-related contingent considerations carried at fair value, as of June 30, 2011 (unaudited, in thousands):

			Fair Value Measurements Using
	As of June 30, 2011		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)
Assets:
Cash Equivalents:
Money market funds	$	11,057	$	11,057	$	—	$	—
U.S. Treasury bills and bonds	24,600		24,600		—		—
U.S. government and agency securities	4,000		—		4,000		—
Commercial paper	3,724		—		3,724		—
Total cash equivalents	$	43,381	$	35,657	$	7,724	$	—
Marketable securities:
U.S. Treasury bills and bonds	$	3,857	$	3,857	$	—	$	—
U.S. government and agency securities	78,452		—		78,452		—
Commercial paper	2,001		—		2,001		—
Corporate debt securities	47,234		—		47,234		—
Marketable equity securities	83		83		—		—
Total marketable securities	$	131,627	$	3,940	$	127,687	$	—
Liabilities:
Contingent considerations	$	21,046	$	—	$	—	$	21,046

The following table presents cash equivalents, marketable securities, and acquisition-related contingent considerations carried at fair value, as of December 31, 2010 (in thousands):

15

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

			Fair Value Measurements Using
	As of December 31, 2010		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable  Inputs (Level 3)
Assets:
Cash Equivalents:
Money market funds	$	33,000	$	33,000	$	—	$	—
Commercial paper	18,846		18,846		—		—
Total cash equivalents	$	51,846	$	51,846	$	—	$	—
Marketable securities:
U.S. Treasury bills and bonds	$	9,834	$	9,834	$	—	$	—
U.S. government and agency securities	196,205		—		196,205		—
Foreign government securities	5,056		—		5,056		—
Commercial paper	21,315		—		21,315		—
Corporate debt securities	48,585		—		48,585		—
Marketable equity securities	78		78		—		—
Total marketable securities	$	281,073	$	9,912	$	271,161	$	—
Liabilities:
Contingent considerations	$	26,250	$	—	$	—	$	26,250

Cash Equivalents and Marketable Securities

Cash equivalents consist primarily of highly liquid investments in money market mutual funds, U.S. Treasury bills and bonds, and commercial paper with original maturities of three months or less. The carrying value of cash equivalents as of June 30, 2011 and December 31, 2010 was $43.4 million and $51.8 million, respectively. The carrying value approximates fair value as of June 30, 2011 and December 31, 2010.

Marketable securities, which are classified as available for sale as of June 30, 2011, are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity.

Acquisition-related Contingent Considerations

The Company estimates the fair value of acquisition-related contingent considerations using various valuation approaches including: the Monte Carlo Simulation approach, Finnerty option model and discounted cash flow model. The contingent considerations liabilities are classified as Level 3 liabilities, because the Company uses unobservable inputs to value them, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The unrealized gains and losses related to the contingent considerations were included in operating expenses on the unaudited condensed consolidated statement of operations.

The following table presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011 (unaudited, in thousands):

	Fair Value  Measurements Using
	Significant Unobservable Inputs (Level 3)
Balance at December 31, 2010	$	26,250
Total (gains) and losses, (realized and unrealized):
Included in operating expenses	(1,356		)
Included in other comprehensive loss	152
Transfers out of Level 3	(4,000		)
Balance at June 30, 2011	$	21,046

16

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The transfer out of Level 3 was due to the earn-out achievement associated with the acquisition of Inform Business Impact (“Inform”). As of June 30, 2011, cash consideration of $4.0 million was recorded for an earn-out payment to former shareholders of Inform.

During the six months ended June 30, 2010, the Company held no Level 3 assets or liabilities.

6. Goodwill

Goodwill consisted of the following (unaudited, in thousands):

Balance at December 31, 2010	$	64,077
Additions	195,599
Other adjustments	1,233
Balance at June 30, 2011	$	260,909

For the six months ended at June 30, 2011, additions represent $2.5 million and $193.1 million of goodwill associated with the Jambok and Plateau acquisitions, respectively.

Other adjustments represent foreign currency translation, as the functional currencies of the Company’s foreign subsidiaries, where goodwill is recorded, are their respective local currencies. Accordingly, the foreign currencies are translated into U.S. dollars using exchange rates in effect at period end. Adjustments are included in other comprehensive income (loss).

7. Intangible Assets

The following table present details of the Company's acquired intangible assets through business combinations as of June 30, 2011 (unaudited, in thousands, except years):

	Weighted- Average Useful Life (in Years)	Gross		Accumulated Amortization			Foreign currency translation		Net
Technology	6	$	67,585	$	(6,284	)	$	6,372	$	67,673
Customer relationships	7	40,850		(199		)	262		40,913
Trademark and tradename	5	1,000		(199		)	262		1,063
Total purchased intangible assets with finite lives		$	109,435	$	(6,682	)	$	6,896	$	109,649

The following table present details of the Company's acquired intangible assets through business combinations as of December 31, 2010 (in thousands, except years):

	Weighted- Average Useful Life (in Years)	Gross		Accumulated Amortization			Foreign currency translation		Net
Technology	7	$	33,730	$	(2,920	)	$	4,808	$	35,618
Customer relationships	5	1,000		(99		)	206		1,107
Trademark and tradename	5	1,000		(99		)	206		1,107
Total purchased intangible assets with finite lives		$	35,730	$	(3,118	)	$	5,220	$	37,832

As the functional currencies of the Company’s foreign subsidiaries, where intangible assets are recorded, are their respective local currencies, there are related foreign currency translation adjustments. Accordingly, the foreign currencies are translated into U.S. dollars using exchange rates in effect at period end. Adjustments are included in other comprehensive income (loss).

As of June 30, 2011, the Company expects amortization expense in future periods to be as follows (unaudited, in

17

thousands):

Remainder of 2011	$	10,230
2012	20,385
2013	19,858
2014	17,915
2015	12,482
Thereafter	28,779
Total	$	109,649

The following table presents the amortization of purchased intangible assets (unaudited, in thousands):

	Three Months Ended				Six Months Ended
	June 30, 2011		June 30, 2010		June 30, 2011		June 30, 2010
Technology	$	1,819	$	—	$	3,364	$	—
Customer relationships	50		—		100		—
Trademark and Tradename	50		—		100		—
	$	1,919	$	—	$	3,564	$	—

Of these amounts, $1.8 million and $0.1 million were included in cost of revenue (subscription and support) and sales and marketing expenses, respectively, for the three months ended June 30, 2011 and $3.3 million and $0.2 million were included in cost of revenue (subscription and support) and sales and marketing expenses, respectively, for the six months ended June 30, 2011. There was no amortization of purchased intangibles recorded for the three and six months ended June 30, 2010.

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of June 30, 2011 and December 31, 2010 consisted of (unaudited, in thousands):

	As of		As of
	June 30, 2011		December 31, 2010
Accrued royalties	$	2,779	$	1,785
Indirect taxes	4,190		902
Accrued other liabilities	18,357		8,746
	$	25,326	$	11,433

Accrued employee compensation as of June 30, 2011 and December 31, 2010 consisted of (unaudited, in thousands):

	As of		As of
	June 30, 2011		December 31, 2010
Accrued bonus payable	$	13,523	$	6,895
Accrued commission payable	6,301		12,279
Accrued vacation	2,304		1,809
All other accrued employee compensation payable	4,783		2,484
	$	26,911	$	23,467

9. Commitments and Contingencies

Legal Proceedings

The Company from time to time is involved in various legal proceedings arising in 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. As of June 30, 2011, no amount is accrued as a loss is not probable or estimable.

On December 2, 2010, the Company filed suit against its competitor Halogen Software, Inc. ("Halogen") for intentional

18

interference with prospective economic relations, conversion, fraud and unfair competition seeking injunctive relief and damages, including punitive damages. During the second quarter of fiscal 2011, the Company entered into a settlement agreement with Halogen to resolve the litigation with the settlement amount received, net of litigation costs, by the Company during the second quarter of fiscal 2011.

Acquisition-related contingent considerations

The Company estimates the fair value of contingent considerations issued in business combinations using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. The fair values of liability classified contingent considerations are remeasured at each reporting period, with any changes in the fair value recorded as income or expense, and such remeasurements resulted in a net loss of approximately $10.3 million and a net gain of $1.4 million for the three and six months ended June 30, 2011, respectively. The potential undiscounted amount of all future cash payments that the Company could be required to make under the contingent considerations is between $0.0 million and $47.9 million as of June 30, 2011. Equity-classified contingent considerations issued in business combinations are recognized at fair value as of the acquisition date and not adjusted in subsequent periods.

On July 1, 2010, the Company completed the acquisition of Inform. The earn-out provided for the payment of up to approximately $15.0 million in cash consideration upon the achievement of certain bookings revenue targets. As of June 30, 2011, the Company had accrued $4.0 million based on targets actually achieved.

On July 20, 2010, the Company completed the acquisition of CubeTree, Inc., (“CubeTree”) and agreed to make a future contingent cash payment based on the value of the Company's common stock. Specifically, the contingent cash payment provides for the former stockholders of CubeTree to receive a cash payment on the three-year anniversary of the closing or at such earlier time as a change of control of the Company occurs. This time is referred to as the “Top-Up Payment Date.” If, on the Top-Up Payment Date, the value of the consideration issued at the closing, or the “Market Value,” is less than approximately $47.9 million or $53.01 per share, or the “Guaranteed Value,” subject to adjustments, we would be obligated to make a payment to such holders in an aggregate amount equal to the difference between the Guaranteed Value and the Market Value, or 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 limited exceptions. This right to receive the Top-Up Payment will terminate in the event the value of the shares of the consideration paid at closing equals or exceeds approximately $47.9 million or $53.01 per share at any time prior to the Top-Up Payment Date.

On March 17, 2011, the Company acquired Jambok for $2.8 million in cash, and 63,728 shares of common stock with estimated fair value of approximately $2.0 million, plus future contingent consideration up to $4.7 million (payable in shares of stock and cash) for continued employment by the former Jambok shareholders over a three-year period subsequent the acquisition date. The Company did not record any acquisition-related liabilities in connection with this arrangement, as it is considered compensatory in nature, and therefore, it will be recognized as compensation expense over the requisite three-year service period.

All of these contingent considerations are recorded at fair value on the Company's consolidated balance sheet as of the acquisition dates, and are remeasured to fair value each reporting period with any changes in the value recorded as income or expense. As of June 30, 2011, $21.0 million is accrued for the fair value of the expected CubeTree top-up payment.

10. Note Payable

During the second quarter of fiscal 2011, the Company capitalized approximately $2.5 million of cost incurred for the purchase of perpetual software license, in accordance with ASC 350-40, Internal-Use Software. The Company entered into a 3-year payment plan agreement (“PPA”) with the supplier, with a quarterly payment starting the third quarter of fiscal 2011. As of June 30, 2011, the Company recorded $0.9 million and $1.6 million for short-term and long-term notes payable, respectively.

11. Stock-Based Compensation

For stock-based awards exchanged for employee services, the Company measures stock-based compensation cost on the grant date, based on the fair value of the award, and recognizes expense over the requisite service period, which is generally the vesting period. To estimate the fair value of an award, the Company uses the Black-Scholes pricing model. This model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. For all grants during 2011 and 2010, the Company calculated the expected term based on its historical experience from previous stock option grants. The Company estimates the volatility of its common stock by analyzing its historical volatility and considering volatility data of its peer group and the Company's implied volatility. The Company estimates the forfeiture rate based on historical experience of its stock-based awards that are granted, exercised, and

19

SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

cancelled.

The following table presents stock-based compensation included in the Company’s unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 (unaudited, in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Cost of revenue	$	1,691	$	677	$	2,353	$	1,280
Sales and marketing	3,888		1,794		6,860		3,749
Research and development	1,766		722		3,192		1,597
General and administrative	2,098		1,328		4,686		2,921
	$	9,443	$	4,521	$	17,091	$	9,547

Stock-based compensation expense for the six months ended June 30, 2010 includes shares of common stock with a fair value of $1.6 million, issued to the Company’s senior management in lieu of cash bonuses to senior management, with the majority accounted for in general and administrative for $0.8 million and sales and marketing for $0.6 million, in March 2010. There were no such cash bonuses for the six months ended June 30, 2011.

The fair value of options granted to employees during the three and six months ended June 30, 2011 and 2010 were determined using the following weighted-average assumptions for employee grants, excluding replacement stock options granted in connection with the Plateau acquisition (unaudited):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Expected life from grant date (in years)	4.15			4.00			4.58			4.18
Risk-free interest rate	1.50		%	1.71		%	1.58		%	1.88		%
Expected volatility	59		%	61		%	59		%	63		%
Dividend yield	—			—			—			—
Weighted-average estimated fair value of options granted during the period	$	15.61		$	10.20		$	15.84		$	10.19

The following table summarizes the activity for stock options for the six months ended June 30, 2011 (unaudited):

	Shares Subject to Options Outstanding		Weighted-Average Exercise Price per Share
	(Shares in thousands)
Balance at December 31, 2010	7,815		$	9.64
Granted	1,447		14.72
Exercised	(1,646	)	6.42
Cancelled	(297	)	12.00
Balance at June 30, 2011	7,319		$	11.27

As of June 30, 2011, unrecognized compensation expense under the Company’s stock option plans for employee stock options was $19.5 million, which is expected to be recognized over a weighted-average remaining vesting period of 2.3 years.

The following table summarizes the activity for restricted stock units ("RSUs") for the six months ended June 30, 2011 (unaudited):

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SUCCESSFACTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	Restricted Stock Units
	Number of Shares		Weighted-Average Grant Date Fair Value
	(Shares in thousands)
Unvested at December 31, 2010	2,765		$	12.94
Granted	2,168		31.79
Vested	(379	)	36.04
Forfeited	(224	)	22.30
Unvested at June 30, 2011	4,330		$	19.87

As of June 30, 2011, unrecognized compensation expense under the Company’s equity incentive plans for employee RSUs was $96.8 million, which is expected to be recognized over a weighted-average remaining vesting period of 3.2 years.

12. 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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Net loss	$	(6,961	)	$	(1,875	)	$	(4,242	)	$	(5,584	)
Change in foreign currency translation, net	968			(163		)	1,835			(267		)
Change in unrealized gain on marketable securities, net	105			219			142			289
Comprehensive loss	$	(5,888	)	$	(1,819	)	$	(2,265	)	$	(5,562	)

13. 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 outstanding options, unvested RSUs, and contingently issuable shares placed in escrow. Shares are included only if they are dilutive. 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 earnings per share in the future as of June 30, 2011 and 2010 were 12.2 million, including 0.6 million shares held in escrow in connection with Inform and CubeTree acquisitions, and 12.9 million, respectively.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Net loss	$	(6,961	)	$	(1,875	)	$	(4,242	)	$	(5,584	)
Shares used in computing net loss per common share, basic and diluted	78,902			72,645			78,225			72,328
Net loss per common share, basic and diluted	$	(0.09	)	$	(0.03	)	$	(0.05	)	$	(0.08	)

14. Income Taxes

For the three and six months ended June 30, 2011, income tax benefit was $17.5 million, or 72% of pre-tax loss, and $18.1 million, or 81% of pre-tax loss, compared to income tax expense of $0.1 million, or 4% of pre-tax loss, and $0.2 million,

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or 4% of pre-tax loss, for the three and six months ended June 30, 2010. The effective tax rate for the three and six months ended June 30, 2011 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. Included in the $18.1 million income tax benefit for the six months ended June 30, 2011 is an $18.0 million tax benefit from the release of valuation allowance on the Company's deferred tax asset ("DTA"). In connection with the Company's Plateau acquisition, a deferred tax liability ("DTL") was established on the acquired identifiable intangible assets. This DTL exceeded the acquired DTA by $18.0 million and creates additional source of income to realize a tax benefit for the Company's DTA. As such, authoritative guidance requires the impact on the acquiring company's deferred tax assets and liabilities caused by an acquisition be recorded in the acquiring company's financial statements outside of acquisition accounting. Accordingly, the valuation allowance on a portion of the Company's DTA was released and resulted in a financial statement benefit of $18.0 million. This tax benefit may change in future periods as the purchase price allocation is still preliminary. Any change will be made retrospectively to the acquisition date.

15. Related Party Transaction

In connection with the acquisition of Inform in July 2010, the Company assumed a noncancelable operating lease for an office building in Brisbane, Australia, owned by the former owners of Inform and who are now stockholders of the Company. The lease expires in 2015, with future payment obligations of approximately $4.5 million. The associated rent expense was approximately $0.2 million and $0.4 million for the three and six months ended June 30, 2011, respectively. There were no related party transactions for the three and six months ended June 30, 2010.

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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 future revenue mix and growth; operating expenses and losses; 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. Words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions or their negatives are intended to identify forward-looking statements.  We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition and results of operations. 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 unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

SuccessFactors provides on-demand Business Execution (BizX) 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; Career and Development Planning; Recruiting Management; Employee Central; Analytics and Reporting; CubeTree Social Collaboration; Employee Profile; 360-Degree Review; Employee Survey; Calibration & Team Rater; Learning Management; Social Learning; iContent; Extended Enterprise; and proprietary and third-party content. We deliver our application suite to organizations of all sizes across all industries and geographies. Our suite, which is delivered through the cloud, improves business alignment, team execution and people performance to drive results for companies of all sizes. Across more than 168 countries and in 34 languages, more than 15 million subscription seats and 3,500 customers leverage our application suite every day, up from approximately 300,000 seats and 100 companies in 2003.

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 4% of revenue for the first six months in 2011. However, in the future, we anticipate that revenue from channel partners will increase. For the first six months in 2011, we did not have any single customer that accounted for more than 5% of our revenue. We target our 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 first six months of fiscal 2011, approximately 72% of our revenue was generated from customers in the United States. We intend to continue to grow our international business. Accordingly, we expect the growth rate in our international business to exceed the growth rate in the U.S.

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 BizX 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 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.

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For the remainder of 2011, we expect to see steady demand for our software and services along with growth rates of billings remaining strong but at a somewhat slower pace compared to what we experienced in 2010. Additionally, we expect to see a higher growth rate of revenues compared to what we experienced in 2010.

The Jambok acquisition completed in the first quarter of 2011 and the Plateau acquisition completed in the second quarter of 2011 did not significantly contribute to our revenues for the three or six month period ended June 30, 2011.

Recent Accounting Pronouncements

Refer to Note 2, "Recent Accounting Pronouncements” regarding the effect of certain recent accounting pronouncements on our unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report 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” of our Annual Report on Form 10-K for the year ended December 31, 2010, 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

• Identified Intangible Assets

• Goodwill

• Contingent Considerations

Our revenue recognition accounting policy has been updated to reflect additional terms as a result of the acquisition in June 2011 of Plateau (see Note 3 to the unaudited condensed consolidated financial statements). No other critical accounting policy has been modified since the filing of our last Annual Report on Form 10-K.

Revenue Recognition

Our revenue consists of fees for our software and support as well as fees for the provision of professional services.

The majority of our software is intended to be delivered through the cloud from our hosting facilities and our customers generally do not have the contractual right to take possession of this software. In the infrequent circumstance in which our customer has the contractual right to take possession of this software, we have determined that the customers would incur a significant penalty to take possession of the software. Therefore, these arrangements are treated as service agreements.

Other software is licensed to customers under either perpetual or term arrangements, and does not require significant modification or customization services. Customers may either take possession of this software or may contract with us for hosting services. Related maintenance and support revenues are generated through the sale of maintenance contracts which are renewable on an annual basis. Under these contracts, we provide non-specified upgrades of our products only on a when-and-if-available basis. Hosting revenues are generated through the sale of contracts that contain multi-year commitments on the part of customers. These arrangements are treated as software sales agreements for perpetual licenses and as service agreements for term licenses.

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We recognize revenue for service agreements in accordance with ASC 605, Revenue Recognition, and for software sales agreements in accordance with ASC 985-605, Software Revenue Recognition.

We commence revenue recognition when all of the following conditions are met:

• Persuasive evidence of an arrangement;

• Subscription or services have been delivered to the customer;

• Collection of related fees is reasonably assured; and

• Related fees are fixed or determinable.

Additionally, if an agreement contains non-standard acceptance or requires non-standard performance criteria to be met, we defer revenues until these conditions are satisfied. Signed agreements are used as evidence of an arrangement. We assess cash collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If we determine that collectability is not reasonably assured, we defer the revenue recognition until collectability becomes reasonably assured, generally upon receipt of cash. We assess 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. Our arrangements are typically noncancelable, though customers typically have the right to terminate their agreement for cause if we fail to perform.

We recognize the total contracted subscription revenue ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years. Subscription terms commence on the later of the start date specified in the subscription arrangement, the date the customer's module is provisioned or when all of the revenue recognition criteria have been met. The customer's module is provisioned when a customer is provided access to use our on-demand application suite.

Our professional services include forms and workflow configuration, data integration, business process consulting and training related to the application suite and are short-term in nature. Professional services are generally sold in conjunction with our subscriptions.

In October 2009, the Financial Accounting Standards Board (FASB) issued ASU 2009-13, which amended the accounting guidance for multiple-deliverable revenue arrangements to:

• provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

• require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of each deliverable if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and

• eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method. 

We early-adopted this accounting guidance and retrospectively applied its provisions to arrangements entered into or materially modified after January 1, 2010 (the beginning of our 2010 fiscal year). The previously reported quarterly results have been retrospectively adjusted to reflect the adoption as of the beginning of fiscal year 2010. Refer to Note 2, “Revenue Recognition” in the 2010 Annual Report on Form 10-K for additional information on the impact of adoption.

Prior to the adoption of ASU 2009-13, we determined that we did not have objective and reliable evidence of fair value for each deliverable of its arrangements. As a result, we accounted for subscription and professional services revenue as one unit of accounting and recognized the total arrangement fee ratably over the contracted term of the subscription agreement, generally one to three years although terms can extend to as long as five years.

Upon adoption of ASU 2009-13, we account for subscription and professional services revenue as separate units of account and allocate revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE, if available, TPE, if VSOE is not available, or ESP, if neither VSOE nor TPE is available. Since VSOE and TPE are not available for our subscription or professional services, we use ESP.

Our arrangements with customers generally contain multiple elements. Certain of these transactions are accounted for under ASC 605-25, Revenue Recognition-Multiple Element Arrangements, and others are accounted for under ASC 985-605, Software Revenue Recognition, depending on the terms of the related agreements.

Our arrangements subject to ASC 605-25 contain multiple elements that may include subscriptions or hosting services, maintenance and support, and professional services. We account for subscription services, maintenance and support, and professional services deliverables as separate units of accounting and allocate revenue to each deliverable in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on vendor-specific objective evidence of selling

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price (VSOE), if available, third-party evidence of selling price (TPE), if VSOE is not available, or estimated selling price (ESP), if neither VSOE nor TPE is available.

The ESP for professional services deliverables is determined primarily by considering cost plus a targeted range of gross margins. ESP for subscription services and maintenance and support services is generally determined based on the renewal rate offered to the customer to renew the service. Those renewal rates are used when they are considered substantive based on our normal pricing practices, which consider the modules purchased, the number of users, the term of the arrangement, and targeted discounts to internal pricing guidelines. In a minority of cases where other evidence of ESP is not available, we use the weighted average selling price of a deliverable to determine ESP. When weighted average selling prices are used (generally in the absence of other evidence), selling prices are weighted based on aggregate volume excluding transactions priced below the 10 percentile and above the 90 percentile of the pricing distribution to remove price outliers.

The majority of customer contracts specify the value of each undelivered element and, as a result of the contingent revenue guidance in Subtopic 605-25, paragraphs 30-4 and 30-5, the amount deferred for each undelivered element must generally be at or above the contractual amounts.

Revenue allocated to subscription services and maintenance and support services is recognized over the term. Revenue allocated to professional services is recognized under the percentage of completion method using the ratio of hours incurred to estimated total hours or, for short term projects, upon acceptance of services related to each module.

Our arrangements subject to ASC 985-605 contain multiple elements that may include term or perpetual software licenses, maintenance and support, and professional services. We determined that we have established vendor specific objective evidence (VSOE) of fair value for our maintenance and support and professional services; therefore, for perpetual licenses sold in arrangements along with maintenance and support and/or professional services, license revenues are recognized at the date of delivery and acceptance, if applicable, using the residual method. Maintenance and support revenues are recognized ratably from the date of acceptance, if applicable, over the service period.

Deferred revenue consists of billings or payments received in advance of revenue recognition from our 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, we generally invoice our customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year, noncancelable subscription agreements. Our professional services are generally sold in conjunction with the subscriptions. The portion of deferred revenue that we anticipate 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 for which the subscription delivery (provision) start date 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 non-current deferred revenue.

Results of Operations

The following table presents certain consolidated financial data for the three and six months ended June 30, 2011 and 2010 as a percentage of total revenue (unaudited):

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	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Revenue
Subscription and support	76	%	78	%	76	%	80	%
Professional services and other	24		22		24		20
Total revenue	100		100		100		100
Cost of revenue
Subscription and support	16		12		15		12
Professional services and other	17		12		16		12
Total cost of revenue	33		24		32		24
Total gross margin	67		76		68		76
Operating expenses:
Sales and marketing	50		45		48		47
Research and development	21		18		21		18
General and administrative	22		17		20		17
Revaluation of contingent considerations	14		—		(1	)	—
Gain on settlement of litigation, net	(5	)	—		(2	)	—
Total operating expenses	102		79		88		82
Loss from operations	(36	)	(3	)	(18	)	(5	)
Unrealized foreign exchange gain on intercompany loan	1		—		1
Interest income and other, net	1		(1	)	1		(1	)
Loss before benefit for (provision of) income taxes	(34	)	(4	)	(16	)	(6	)
Benefit for (provision of) income taxes	24		—		13		—
Net loss	(10	)%	(4	)%	(3	)%	(6	)%

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 components of total revenue for the periods presented (unaudited):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011		2010		Change		2011		2010		Change
	(Dollars in thousands)						(Dollars in thousands)
Revenue:
Subscription and support	$	55,119	$	38,471	43	%	$	106,311	$	74,951	42	%
Professional services and other	17,731		11,032		61	%	34,137		19,287		77	%
Total revenue	$	72,850	$	49,503	47	%	$	140,448	$	94,238	49	%

Total revenue increased by $23.3 million, or 47%, for the three months ended June 30, 2011, compared to the corresponding period of fiscal 2010, primarily due to an increase in the level of renewals and sales of additional subscription modules to our existing customers, offset by a slight decrease in subscription sales to new customers. We define existing customers as companies that we have sold to before that are either renewing their subscriptions, purchasing additional modules and/or adding new users, and we define new customers as companies that have never purchased from us before.

Total revenue increased by $46.2 million, or 49%, for the six months ended June 30, 2011, compared to the corresponding period of fiscal 2010, primarily due to an increase in the level of renewals and sales of additional subscription modules to our existing customers, offset by a slight decrease in subscription sales to new customers.

Revenue from customers in the United States accounted for approximately 69% and 72% of total revenue for the three and six months ended June 30, 2011, respectively.

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Subscription and support revenue

Subscription and support revenue for the three months ended June 30, 2011 increased by $16.6 million, or 43% compared to the corresponding period of fiscal 2010. This increase was composed of a $17.4 million increase in revenue from existing customers, which includes backlog, renewals and subscriptions for additional modules and end users. The increase is offset by a $0.8 million decrease in new business, which we define as revenue from the first year of the initial deal of new customers. For the three months ended June 30, 2011, the Plateau acquisition contributed approximately $0.4 million of revenue.

Subscription and support revenue for the six months ended June 30, 2011 increased by $31.4 million, or 42%, compared to the corresponding period of fiscal 2010. Substantially all of the increase in subscription and support revenue for the six months ended June 30, 2011 was composed of a $32.5 million increase in revenue from existing customers, offset by a $1.1 million decrease in new business. For the six months ended June 30, 2011, the Plateau acquisition contributed approximately $0.4 million of revenue.

In the third quarter of fiscal 2010, the Company early adopted ASU 2009-13 related to accounting for multiple-deliverable revenue arrangements, and retrospectively applied the new accounting standard to arrangements entered into or materially modified after January 1, 2010 (the beginning of the Company's fiscal year). The adoption of ASU 2009-13 increased subscription and support revenue in the three and six month periods ended June 30, 2010 by $0.6 million and $0.9 million, respectively. Financial information for the first and second quarter of fiscal 2010 has been revised to reflect the adoption of ASU 2009-13.

Professional services and other revenue

Professional services and other revenue for the three months ended June 30, 2011 increased by $6.7 million, or 61%, compared to the corresponding period of fiscal 2010. The increase in professional services and other revenue was composed of $3.6 million in professional services revenue that was previously deferred pending non-standard acceptance criteria in one customer contract that was removed during the quarter and $3.4 million in professional services revenue recognized under the percentage of completion using the ratio of hours incurred to estimated total hours. These increases were offset by $0.1 million decrease in revenue from existing customers and a $0.3 million decrease in new business. Plateau, which we acquired in the second quarter of fiscal 2011, contributed approximately $0.1 million during the three months ended June 30, 2011.

Professional services and other revenue for the six months ended June 30, 2011 increased by $14.9 million or 77%, compared to the corresponding period of fiscal 2010. The increase in professional services and other revenue was composed of a $4.8 million increase in revenue from existing customers, and a $1.9 million increase in new business. In addition, we recognized $4.5 million in professional services revenue under the percentage of completion using the ratio of hours incurred to estimated total hours and $3.6 million in professional services revenue that was previously deferred pending non-standard acceptance criteria in one customer contract that was removed during the period. Plateau, which we acquired in the second quarter of fiscal 2011, attributed approximately $0.1 million during the six months ended June 30, 2011.

In the third quarter of fiscal 2010, the Company early adopted ASU 2009-13 related to accounting for multiple-deliverable revenue arrangements, and retrospectively applied the new accounting standard to arrangements entered into or materially modified after January 1, 2010 (the beginning of the Company's fiscal year). The adoption of ASU 2009-13 increased professional services and other revenue in the three and six month periods ended June 30, 2010 by $2.0 million and $2.7 million, respectively. Financial information for the first and second quarter of fiscal 2010 has been revised to reflect the adoption of ASU 2009-13.

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):

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	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2011			2010			Change		2011			2010			Change
	(Dollars in thousands)
Revenue:
Subscription and support	$	55,119		$	38,471		43	%	$	106,311		$	74,951		42	%
Professional services and other	17,731			11,032			61	%	34,137			19,287			77	%
Total revenue	72,850			49,503			47	%	140,448			94,238			49	%
Cost of revenue:
Subscription and support	11,976			5,762			108	%	21,411			10,907			96	%
Professional services and other	12,411			5,975			108	%	23,046			11,419			102	%
Total cost of revenue	24,387			11,737			108	%	44,457			22,326			99	%
Total gross profit	$	48,463		$	37,766		28	%	$	95,991		$	71,912		34	%
Total gross margin	67		%	76		%			68		%	76		%

Subscription and support cost of revenue

Subscription and support cost of revenue for the three months ended June 30, 2011 increased by $6.2 million, or 108%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $2.5 million increase in personnel costs largely attributable to the increase in headcount compared to the second quarter of 2010, a $1.8 million increase in amortization expenses related to purchased intangible assets in connection with acquisitions, and a combined $1.9 million increase in data center related costs, royalties, outside services, overhead allocation, and travel-related expenses.

Subscription and support cost of revenue for the six months ended June 30, 2011 increased by $10.5 million, or 96%, compared to the corresponding period of fiscal 2010. The increase was primarily due to higher employee related costs of $3.7 million driven by an increase in average headcount, amortization of intangibles of $3.4 million related to acquired intangibles, depreciation and allocated overhead expenses of $1.1 million combined, data center and related costs of $0.8 million, outside services of $0.5 million, outsourced maintenance of $0.5 million, royalties of $0.3 million, and travel costs of $0.2 million.

Professional services and other cost of revenue

Professional services and other cost of revenue for the three months ended June 30, 2011 increased by $6.4 million, or 108%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $3.9 million increase in personnel costs, largely attributable to headcount additions, a $1.6 million increase in outsourced services and a combined $0.9 million increase in outside services, customer training, overhead allocation and travel-related expenses.

Professional services and other cost of revenue for the six months ended June 30, 2011 increased by $11.6 million, or 102%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $6.9 million increase in personnel costs, largely attributable to headcount additions, a $2.8 million increase in outsourced services and a combined $1.9 million increase in outside services, customer training, overhead allocation and travel-related expenses.

We expect that in the future, subscription and support cost of revenue and professional services and other cost of revenue may increase depending on the growth rate of our new bookings and our need to support the implementation, hosting and support of those new bookings, as well as the new bookings of our acquisitions. We also expect that subscription and support cost of revenue and professional services and other cost of revenues as a percentage of revenue could fluctuate from period to period depending on growth of our professional services business and any associated costs relating to the delivery of professional services, the timing of sales of products that have royalty and referrals associated with them and the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our application suite and other services. The timing of these additional expenses could affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenue, in any particular quarterly or annual period.

Gross margin for the three months ended June 30, 2011 was 67% compared to 76% for the corresponding period of fiscal 2010, and for the six months ended June 30, 2011 was 68% compared to 76% for the corresponding period of fiscal 2010. The decreases in gross margin were primarily due to increases in personnel costs due to headcount additions, amortization expense of purchased intangible assets attributable to acquisitions completed as well as the costs incurred on significant contracts for which the associated revenue recognition has not begun or is being recognized ratably, offset by increases in revenue associated

29

with existing customers.

Operating Expenses

Sales and Marketing

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

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2011			2010			Change		2011			2010			Change
	(Dollars in thousands)								(Dollars in thousands)
Sales and marketing	$	36,387		$	22,177		64	%	$	67,358		$	44,419		52	%
Percent of total revenue	50		%	45		%			48		%	47		%

Sales and marketing expenses for the three months ended June 30, 2011 increased by $14.2 million, or 64%, compared to the corresponding period of fiscal 2010. The increase was primarily driven by our continuing efforts to expand our sales and marketing activities. The increase in sales and marketing expenses was primarily comprised of a $9.8 million increase in personnel costs, of which $3.0 million was an increase in salary expense; $2.3 million of commission expense; $2.0 million of stock-based compensation costs; and $2.5 million of bonus and payroll tax expenses, $2.1 million of tradeshow, research, and public relations marketing expenses, a $0.5 million increase in outside services, a $0.7 million increase in allocated overhead expenses, and a $1.0 million increase in travel-related expenses.

Sales and marketing expenses for the six months ended June 30, 2011 increased by $22.9 million, or 52%, compared to the corresponding period of fiscal 2010. The increase was primarily driven by our continuing efforts to expand our sales and marketing activities. The increase in sales and marketing expenses was primarily comprised of a $17.0 million increase in personnel costs, of which $5.6 million was an increase in salary expense; $4.7 million of commission expense; $3.1 million of stock-based compensation costs; and $3.6 million of bonus and payroll tax expenses, $2.9 million of tradeshow, research, and public relations marketing expenses, a $0.6 million increase in outside services, a $1.4 million increase in overhead expenses, and a $1.0 million increase in travel-related expenses.

We expect sales and marketing spending to increase at a greater percentage of operating expenses for the rest of 2011 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								Six Months Ended
	June 30,								June 30,
	2011			2010			Change		2011			2010			Change
	(Dollars in thousands)								(Dollars in thousands)
Research and development	$	15,525		$	8,926		74	%	$	29,291		$	16,651		76	%
Percent of total revenue	21		%	18		%			21		%	18		%

Research and development expenses for the three months ended June 30, 2011 increased by $6.6 million, or 74%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $5.1 million increase in personnel costs mainly attributable to our continuing efforts to expand our offshore development and acquisitions. The remaining $1.5 million of the overall increase in other research and development expenses for the three months ended June 30, 2011 was attributable to an increase in outside services and allocated overhead expenses.

Research and development expenses for the six months ended June 30, 2011 increased by $12.6 million, or 76%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $9.6 million increase in personnel costs mainly attributable to our continuing efforts to expand our offshore development and acquisitions, $2.0 million in overhead expenses, and $1.0 million in outside services.

We expect research and development costs to increase modestly for the rest of 2011, as we continue to expand our offshore research and development efforts and integrate acquisitions.

General and Administrative

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

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2011			2010			Change		2011			2010			Change
	(Dollars in thousands)								(Dollars in thousands)
General and administrative	$	15,771		$	8,203		92	%	$	28,718		$	15,697		83	%
Percent of total revenue	22		%	17		%			20		%	17		%

General and administrative expenses for the three months ended June 30, 2011 increased by $7.6 million, or 92%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $4.4 million increase in outside services expenses, of which $3.0 million related to due diligence and integration costs; a $3.4 million increase in personnel costs resulting from headcount growth in our general and administrative function to support our growth; a $0.4 million increase in IT costs; and a combined $0.2 million increase in travel-related and entertainment expenses. These were partially offset by a decrease of $0.8 million in overhead expenses.

General and administrative expenses for the six months ended June 30, 2011 increased by $13.0 million, or 83%, compared to the corresponding period of fiscal 2010. The increase was primarily due to a $7.0 million increase in personnel costs resulting from headcount growth in our general and administrative function to support our growth; a $6.7 million increase in outside services expenses, of which $2.0 million related to due diligence and integration costs, a $0.5 million increase in IT costs, and a combined $0.3 million increase in travel related and entertainment expenses. These were partially offset by a decrease of $0.8 million in overhead expenses.

We expect general and administrative expense to increase at a modest pace for the rest of 2011 as we continue to invest in our business and acquisition related activities.

Revaluation of Contingent Considerations

The following table presents our revaluation of contingent considerations for the periods presented (unaudited):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010		Change	2011			2010			Change
	(Dollars in thousands)						(Dollars in thousands)
Revaluation loss (gain) of contingent considerations	$	10,303		$	—	n/a	$	(1,356	)	$	—		n/a
Percent of total revenue	14		%	—			(1		)%	—		%

Revaluation loss of contingent considerations for the three months ended June 30, 2011 was $10.3 million compared to zero for the corresponding period of fiscal 2010. The revaluation resulted in a change of approximately $8.6 million and $1.7 million related to contingent considerations associated with the CubeTree and Inform acquisitions, respectively. We value the contingent considerations at each reporting period for the following contingency periods: 1) CubeTree is based on our stock price over a three-year period beginning on July 20, 2010, and 2) Inform is based on achievement of bookings for a period of two years following the closing of the acquisition on July 1, 2010.

Revaluation gain of contingent considerations for the six months ended June 30, 2011 was $1.4 million compared to zero for the corresponding period of fiscal 2010. The increase was due to gains of approximately $1.4 million related to contingent considerations associated with the Inform acquisition.

Gain on Settlement of Litigation, Net

The following table presents our net gain on settlement of litigation for the periods presented (unaudited):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010		Change	2011			2010			Change
	(Dollars in thousands)						(Dollars in thousands)
Gain on settlement of litigation, net	$	(3,619	)	$	—	n/a	$	(2,906	)	$	—		n/a
Percent of total revenue	(5		)%	—			(2		)%	—		%

Gain on settlement of litigation, net of litigation costs for the three and six months ended June 30, 2011 was $3.6 million

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and $2.9 million, respectively, compared to zero for the corresponding periods of fiscal 2010. The increase was due to the recognition of a gain associated with the settlement of litigation with Halogen Software, Inc., during the second quarter of fiscal 2011, net of related litigation expenses. Refer to Note 9, "Commitments and Contingencies" to the unaudited condensed consolidated financial statements.

Unrealized Foreign Exchange Gain on Intercompany Loan

The following table presents our unrealized foreign exchange gain on intercompany loan for the periods presented (unaudited):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010		Change	2011			2010			Change
	(Dollars in thousands)						(Dollars in thousands)
Unrealized foreign exchange gain on intercompany loan	$	965		$	—	n/a	$	1,501		$	—		n/a
Percent of total revenue	1		%	—			1		%	—		%

As the functional currency of our foreign subsidiary, where the intercompany loan is recorded, is its respective local currency, we remeasure a U.S. dollar intercompany loan into the local currency at the end of each reporting period. Unrealized foreign exchange gain on intercompany loan for the three and six month periods ended June 30, 2011 was $1.0 million and $1.5 million, respectively, compared to zero for the corresponding periods of fiscal 2010 as the intercompany loan occurred in July 2010.

Interest Income (Expense) and Other, Net

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

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2011			2010			Change		2011			2010			Change
	(Dollars in thousands)								(Dollars in thousands)
Interest income (expense) and other, net	$	508		$	(268	)	290	%	$	1,292		$	(535	)	342	%
Percent of total revenue	1		%	(1		)%			1		%	(1		)%

Interest income and other, net for the three months ended June 30, 2011 increased by $0.8 million, or 290%, compared to the corresponding period of fiscal 2010. The increase was primarily due to higher net foreign exchange gains.

Interest income and other, net for the six months ended June 30, 2011 increased by $1.8 million, or 342%, compared to the corresponding period of fiscal 2010. The increase was primarily due to higher net foreign exchange transaction gains.

Benefit for (Provision of) 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 benefit for the three and six months ended June 30, 2011 was $17.5 million and $18.1 million, compared to income tax expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2010, respectively. The effective tax rates for 2011 and 2010 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

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and a valuation allowance against our deferred tax assets. Included in the $18.1 million income tax benefit for the six months ended June 30, 2011 is an $18.0 million tax benefit from the release of valuation allowance on our deferred tax asset ("DTA"). In connection with our Plateau acquisition, a deferred tax liability ("DTL") was established on the acquired identifiable intangible assets. This DTL exceeded the acquired DTA by $18.0 million and creates additional source of income to realize a tax benefit for our DTA. As such, authoritative guidance requires the impact on the acquiring company's deferred tax assets and liabilities caused by an acquisition be recorded in the acquiring company's financial statements outside of acquisition accounting. Accordingly, the valuation allowance on a portion of our DTA was released and resulted in a financial statement benefit of $18.0 million. This tax benefit may change in future periods as the purchase price allocation is still preliminary. Any change will be made retrospectively to the acquisition date.

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 $104.0 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 $202.9 million in net proceeds, after deducting underwriting discounts and commissions of $10.4 million and other offering expenses of approximately $0.6 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 (unaudited, in thousands):

	Six Months Ended
	June 30,
	2011		2010
	(Unaudited)
Net cash provided by operating activities	$	18,564	$	19,936
Net cash provided by (used in) investing activities	15,268		(14,238		)
Net cash provided by financing activities	10,974		4,622

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 and revaluation of contingent considerations.

Cash provided by operating activities for the six months ended June 30, 2011 was $18.6 million and consisted of net loss of $4.2 million adjusted by non-cash items of $11.7 million (including a tax benefit of $18 million, stock-based compensation of $17.1 million, amortization of deferred commissions of $8.3 million, depreciation and amortization of $7.2 million, offset by a gain of $1.4 million from the change in the fair value of acquisition-related contingent considerations and $1.5 million of unrealized foreign exchange gain on intercompany loan) and cash provided by changes in assets and liabilities of $11.1 million primarily due to a decrease in accounts receivable resulting from our collection efforts, offset by an increase in deferred commissions.

Cash provided by operating activities for the six months ended June 30, 2010 was $19.9 million primarily resulted from net loss of $5.6 million adjusted for certain non-cash items of $16.5 million (including stock-based compensation of $9.5 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 $4.3 million and depreciation of $2.6 million). In addition, the increase in cash provided by operating activities resulted from an increase of $11.4 million in accounts receivable; an increase of $6.6 million in deferred revenue; and $0.4 million net increase in accounts payable, accrued expenses, income tax payable, and other liabilities. These increases were offset by $4.2 million decrease in deferred commissions, $3.4 million decrease in accrued employee compensation, and $1.7 million decrease in prepaid expenses and other assets.

Net Cash Provided By (Used In) Investing Activities

Cash provided by investing activities in the six months ended June 30, 2011 was $15.3 million primarily consisted of

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proceeds of $194.9 million from sales and maturities of available-for-sale securities offset by $130.3 million (net of cash received) used for the Jambok and Plateau acquisitions, $46.3 million used in purchases of available-for-sale securities, and $3.0 million of capital expenditures, which is net of $2.5 million from a non-cash purchase of software licenses.

Cash used in investing activities in the six months ended June 30, 2010 was $14.2 million primarily resulted from $145.6 million of purchases of available-for-sale securities and $1.8 million of capital expenditures, $2.2 million in advances to principal shareholders of Inform, offset by proceeds from sales and maturities of available-for-sale securities of $135.3 million.

Net Cash Provided by Financing Activities

Cash provided by financing activities in the six months ended June 30, 2011 was $11.0 million, which consisted of proceeds from the exercise of stock options.

Cash provided by financing activities in the six months ended June 30, 2010 was $4.6 million primarily due to proceeds from the exercise of stock options of $4.7 million offset by $0.1 million in offering costs.

Capital Resources

As of June 30, 2011, our cash, cash equivalents and marketable securities balance is $252.4 million, of which $27 million is held in our international subsidiaries.

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 integrate acquisitions, and the continuing market acceptance of our application suite. Our capital expenditures for the rest of 2011 are expected to grow modestly for the rest of 2011. 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.

Commitments

On July 1, 2010, we completed the acquisition of Inform. The earn-out provided for the payment of up to approximately $15.0 million in cash consideration upon the achievement of certain bookings revenue targets. As of June 30, 2011, we had accrued $4.0 million based on targets actually achieved.

On July 20, 2010, we completed the acquisition of CubeTree. We agreed to make a future contingent cash payment based on the value of our common stock. Specifically, the contingent cash payment provides for the former stockholders of CubeTree to receive a cash payment on the three-year anniversary of the closing or at such earlier time as a change of control of us occurs. This time is referred to as the “Top-Up Payment Date.” If, on the Top-Up Payment Date, the value of the consideration issued at the closing, or the “Market Value,” is less than approximately $47.9 million or $53.01 per share, or the “Guaranteed Value,” subject to adjustments, we would be obligated to make a payment to such holders in an aggregate amount equal to the difference between the Guaranteed Value and the Market Value, or 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 limited exceptions. This right to receive the Top-Up Payment will terminate in the event the value of the shares of the consideration paid at closing equals or exceeds approximately $47.9 million or $53.01 per share at any time prior to the Top-Up Payment Date.

On March 17, 2011, we acquired Jambok for $2.8 million in cash, and 63,728 shares of common stock with estimated fair value of approximately $2.0 million, plus future contingent consideration up to $4.7 million (payable in shares of stock and cash) for continued employment by the former Jambok shareholders over a three-year period subsequent the acquisition date. We did not record any acquisition-related liabilities in connection with this arrangement, as it is considered compensatory in nature, and therefore, it will be recognized as compensation expense over the requisite three-year service period.

All of these contingent considerations are recorded at fair value on our consolidated balance sheet as of the acquisition dates, and are remeasured to fair value each reporting period, with any changes in the value recorded as income or expense. As of June 30, 2011, we had accrued $21.0 million for the fair value of the expected CubeTree top-up payment.

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Fluctuations

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 is 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 June 30, 2011 would result in a loss of approximately $1.9 million. 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 $120.8 million and marketable securities of $131.6 million as of June 30, 2011. 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 risks. 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 June 30, 2011, the average maturity of our investment portfolio was approximately 262 days; therefore we believe the movement of interest rates should not have a material impact on our unaudited condensed consolidated balance sheet or statement of operations.

At any time, a significant increase or 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 June 30, 2011 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 June 30, 2011. The sensitivity analysis indicated that a hypothetical 100 basis points adverse movement in interest rates would result in a loss in the fair values of our investments of approximately $1.2 million as of June 30, 2011.

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 investments 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

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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.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

On December 2, 2010, we filed suit against a competitor, Halogen Software, Inc. We sought injunctive relief and damages, including punitive damages, on grounds of fraud, intentional interference with prospective economic relations, copyright infringement, unauthorized computer access, trade secret misappropriation, and unfair competition.  On July 5, 2011, we announced that we had entered into a settlement agreement with Halogen resolving the litigation.  Under the settlement, Halogen acknowledged that it engaged in false pre-texting and agreed to pay an amount to us, to allow entry of a permanent injunction against Halogen, to destroy wrongfully obtained data, and to implement employee training along with new company guidelines to ensure that Halogen does not again engage in similar behavior.

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 Report, our Annual Report on Form 10-K for the year ended December 31, 2010 and our other public filings. 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 losses in each fiscal period since our inception in 2001. We experienced a net loss on a generally accepted accounting principles in the United States of America (GAAP) basis of $12.5 million for 2010 and $4.2 million for the six months ended June 30, 2011. At June 30, 2011 we had an accumulated deficit of $235.6 million. The losses and accumulated deficit were due to the substantial investments we made to grow our business and acquire customers. We still expect to incur significant operating expenses in the future due to our investment in sales and marketing, research and development expenses, operations costs, expenses related to stock-based compensation and acquisition-related charges arising from our acquisitions of Plateau Systems, Ltd., Inform, CubeTree, YouCalc and Jambok and other future acquisitions we may undertake. 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.

Because we recognize subscription and support 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 subscription and support 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 subscription and support revenue for that quarter, but could negatively affect subscription and support 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 subscription and support 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 subscription and support revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Because we recognize subscription and support revenue from our customers over the term of their agreements but incur most costs associated with generating customer agreements up front, rapid growth in our customer base may result in increased losses.

Because the expenses associated with generating customer agreements are generally incurred up front, but the resulting subscription and support revenue is recognized over the life of the customer agreement, increased growth in the number of customers may result in our recognition of more costs than subscription and support 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.

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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 maintain or 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 historically high, some of our customers have elected not to renew their agreements with us. Moreover, in some cases, 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, our customer support, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, the effects of 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 and billings may decline, and we may not realize significantly improved operating results from our customer base.

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 competition 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.

While we still 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, Automatic Data Processing, Inc., Cornerstone

OnDemand, Inc., Halogen Software Inc., Kenexa Corporation, Oracle Corporation, PeopleClick Authoria, SAP AG, Saba Software, Inc., Lumesse Limited, SumTotal Systems Inc., Taleo Corporation and Workday, Inc. Our expanded product and feature offerings compete with those offered by other companies, including large public companies such as Google, IBM's Cognos, Microsoft's SharePoint Solutions and Salesforce.com and smaller private companies such as JiveSoftware and Socialtext. Competitive pressures may also increase with the consolidation of competitors within our market, such as the acquisition of Learn.com, Cytiva and Jobpartners by Taleo, Salary.com by Kenexa, Mr. Ted by Lumesse and Softscape, GeoLearning, Cybershift and Accero by SumTotal.

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 products or offer them at lower prices as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of business execution 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 have made acquisitions in the past and expect to acquire other companies or technologies, which could divert our management's attention, result in additional dilution to our stockholders, increase expenses, and otherwise disrupt our operations and harm our operating results.

We acquired three companies in 2010 and two in 2011, including Plateau. 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. We cannot assure you that we will realize the anticipated benefits of these acquisitions.

There are inherent risks in integrating and managing corporate acquisitions, and we have limited experience with

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acquisitions. For example, in addition to the risks noted below, we may not achieve expected benefits of the Plateau acquisition if we fail to successfully transition its customers from licensed solutions to software as a service solutions from on-premise or hosted solutions. 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: 

•unanticipated costs or liabilities associated with the acquisition;

•the need to migrate an acquired company's customers to our platform;

•customers of the acquired company not desiring to renew with us;

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

•liabilities associated with an acquired company's data security, privacy, regulatory compliance or technology;

•diversion of management's attention from other business concerns;

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

•the potential loss of key employees;

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

•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. Also, contingent considerations related to the acquisitions will be remeasured to fair value at each reporting period, with any changes in the value recorded as income or expense. 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.

As a result of our acquisition of Plateau, a portion of our revenue will be generated by sales to government entities, which are subject to a number of challenges and risks.

As a result of our acquisition of Plateau, we will begin to have sales to U.S. federal, state and local governmental agency customers, and we may in the future increase sales to government entities. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale. Government entities may require contract terms that differ from our standard arrangements. In addition, government customers may be adversely affected by budgetary cycles, and funding reductions or delays.

Additionally, governments routinely audit and investigate government contractors, and we may be subject to such audits and investigations. For example, we have made a voluntary disclosure to the government regarding Plateau's prior government contract sales. We could be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture or refund of profits or certain fees collected, suspension of payments, fines, and suspension or prohibition from doing business with the government entity.

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' data, and security breaches could expose us to a risk of loss of this information, litigation, indemnity obligations and other liability. While we have administrative, technical, and physical security measures in place, and we try to contractually require third parties to whom we transfer data to have appropriate security measures in place, if these 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 could be damaged, our business may suffer and we could incur

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significant liability. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. We may be exposed to a greater risk of security breaches as a result of our acquisitions because the acquired businesses may use security measures and other systems that are different and less secure than ours. 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. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that apply to us. 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 or data protection 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 particularly in certain industries and foreign countries.

Our organization continues to experience rapid changes. 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 continue to experience rapid changes in headcount and operations. We grew from 188 employees at December 31, 2005 to 596 employees at December 31, 2008 to 1,463 employees at June 30, 2011 and have added additional members to our management team. We increased the size of our customer base from 341 customers at December 31, 2005 to approximately 2,600 customers at December 31, 2008 to more than 3,500 customers at June 30, 2011. The growth in our customer base has placed, and any future growth will place, a significant strain on our management, administrative, operational, legal and financial compliance 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 plan to continue to invest in 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 requires 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, we may not be able to significantly increase our revenue and grow our business. In addition, if our channel partners increasingly offer products or services that compete with ours, or fail to become knowledgeable of our products or to provide adequate customer support, this could impair our ability to sell our products and harm our customer relationships and reputation.

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

Widespread adoption of our solutions depends on the widespread adoption of business execution by organizations. It is uncertain whether they will purchase software as a service for this function. Accordingly, we cannot assure you that a software as a service model for business execution will achieve and sustain the high level of market acceptance that is critical for the

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success of our business.

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

We have derived a significant portion of our historical revenue from sales of our core Performance Management and Goal Management modules but the percentage of revenue from these modules has decreased over time as we have expanded our suite of products and customers have purchased additional modules. If these core modules do not remain competitive, or if we experience pricing pressure or reduced demand for these modules, our future subscription and other revenue could be negatively affected, which would harm our future operating results.

The market for software as a service is at a relatively 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 software as a service is at a relatively early stage relative to on-premise solutions, 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 software as a service. 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 software as a service. 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 software as a service include:

•perceived security capabilities and reliability;

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

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

•the level of configurability or customizability of the software.

If organizations do not perceive the benefits of software as a service, the market for our software 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:

•our ability to attract new customers;

•customer renewal rates;

•the size and timing of customer orders;

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

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

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

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

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

•changes in our pricing policies or those of our competitors;

•changes in currency exchange rates;

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

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

•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;

•network outages or security breaches;

•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

•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. In addition, an increased emphasis on quarterly results may not result in our achievement of long-term business strategies.

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

Prospective 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. In addition, supporting large enterprise customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. If we are unable to address the needs of these customers in a timely fashion or further develop and enhance our application suite, these customers have in the past and may not renew their subscriptions, seek to terminate their relationship, renew on less favorable terms, fail to purchase additional modules or additional users or assert legal claims against us. If any of these were to occur, our revenue may decline and we may not realize significantly improved operating results from our customer base.

As more of our sales efforts are targeted at larger enterprise customers, our sales cycle may become more time-consuming and expensive, we may encounter pricing pressure and implementation challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business and operating results.

As we target more of our sales efforts at larger enterprise customers, we will face greater costs, longer sales cycles and less predictability in completing some of our sales. Our quarterly results of operations also may vary significantly depending on when we complete sales to these larger enterprise customers. For large enterprises, a purchase decision may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding our compliance with applicable privacy and data protection laws and regulations to prospective customers with international operations. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions, while potentially requiring us to delay revenue recognition on some of these transactions until the technical or implementation requirements have been met.

We depend on our management team, particularly our Chief Executive Officer, our President and our key sales and 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 on the expertise and continued services of our executive officers, particularly our Chief Executive Officer and our President. We have in the past and may in the future continue to experience changes in our executive management team resulting from the hiring or departure of executives, which may be disruptive to our business. We are also substantially dependent on the continued service of key sales personnel and existing development personnel because of their familiarity with the inherent complexities of our application suite and technologies.

Most of our employees do not have employment arrangements that require them 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

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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, continue to perform at current levels or 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 increasingly 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 implementation partners and technology and content providers. 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, including our partners, to favor their products or services or to prevent or reduce subscriptions to our application suite either by disrupting our relationship with existing customers or by limiting our ability to win new customers. In addition, global economic conditions could adversely affect the businesses of our partners, and it is possible that they may not be able to devote the additional 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 multiple data centers worldwide. We do not control the operation 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.

As we continue to add data centers and add capacity in our existing data centers, we may transfer data to other locations. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Interruptions in our service or data loss or corruption may cause customers to terminate their agreements and adversely affect our renewal rates and our ability to attract new customers. Data transfers may also subject us to regional privacy and data protection laws that apply to the transmission of customer data across international borders.

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, or if these providers experience outages, 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 and financial results could be harmed. If we or our third-party data centers were to experience a major power outage, we or they 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 significant disruption of our business.

If our application suite becomes unavailable or otherwise fails to perform properly, our reputation and customer relationships could be harmed, our market share could 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

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in product functionality or that cause interruptions in the availability of our application suite could result in:

•lost or delayed market acceptance and sales;

•breach of warranty or other contract breach or misrepresentation claims;

•sales credits or refunds to our customers;

•loss of customers;

•diversion of development and customer service resources; and

•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 or third parties 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 could be harmed.

Our ability to attract new customers and increase revenue from existing customers depends 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, adequate quality testing, 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, contain defects or 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. 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

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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. We have added employees, offices and customers internationally, particularly in Europe, Asia and Australia. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks and competition 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 or that returns on such investments will be achieved in the future.

In addition, our international operations may fail to succeed due to other risks inherent in operating businesses internationally, including:

•our lack of familiarity with commercial and social norms and customs in international countries which may adversely affect our ability to recruit, retain and manage employees in these countries;

•difficulties and costs associated with staffing and managing foreign operations;

•the potential diversion of management's attention to oversee and direct operations that are geographically distant from our U.S. headquarters;

•compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

•legal systems in which our ability to enforce and protect our rights may be different or less effective than in the United States and in which the ultimate result of dispute resolution is more difficult to predict;

•greater difficulty collecting accounts receivable and longer payment cycles;

•higher employee costs and difficulty in terminating non-performing employees;

•differences in work place cultures;

•unexpected changes in regulatory requirements;

•the need to adapt our application suite for specific countries;

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

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

•more limited protection for intellectual property rights in some countries;

•adverse tax consequences;

•fluctuations in currency exchange rates;

•restrictions on the transfer of funds; and

•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 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

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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 rely on copyright, patent, 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 or we may be unable to secure intellectual property protection for all of our products and services.

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. As a result of our acquisitions and as we expand our product offerings, we could be subject to an increased risk of such litigation. 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 such 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 to resolve claims or litigation, whether or not legitimately or successfully asserted against us, which could include royalty payments in connection with any such litigation and to obtain licenses, modify products, or refund fees. Even if we were to prevail in the event of claims or litigation against us, any claim or 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 try to monitor our use of open source software, 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 cause us to breach contracts, harm our reputation, result in customer losses or claims, increase our costs or otherwise 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 or commerce conducted via 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

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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.

Uncertainty in global economic conditions may adversely affect our business, operating results or financial condition.

Our operations and performance depend on global economic conditions. Challenging or uncertain economic 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 challenging or uncertain economic times, our customers may face difficulties gaining timely access to sufficient credit and experience decreasing cash flow, which could impact their willingness to make purchases and their ability to make timely payments to us. Global economic conditions have in the past and 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. If global economic conditions remain uncertain or deteriorate, it may materially impact our business, operating results, and financial condition.

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, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules subsequently implemented by the SEC and national securities exchanges 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 considering 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. Our failure to adequately comply could subject us to liability, costly regulatory or other investigations, claims or litigation.

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. For instance, our revenue recognition policies are complex and require us to apply criteria and make judgments that affect the amounts we report in our financial statements. We make judgments based on historical experience and various other estimates and assumptions that we believe to be reasonable under the circumstances. However 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 June 30, 2011, we had approximately 82.8 million shares of common stock outstanding. Substantially all of our outstanding shares of common stock are 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 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. 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.

The market price of our common stock is likely to be volatile and could decline.

Stock markets in general and the market for technology-related stocks in particular have been highly volatile. As a result, the market price of our stock is likely to be similarly volatile, and investors in our stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects.

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.

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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 June 30, 2011, we used all of the proceeds from this offering for working capital and for our acquisitions of Jambok, Inform and Plateau Systems.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the Exhibit Index (following the Signatures section of this report) are incorporated by reference into this Item 6.

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SIGNATURE

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: August 9, 2011

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Exhibit Index

Number	Document
2.1	Amended and Restated Agreement and Plan of Merger by and among the Registrant, Plateau Systems, Ltd. and the other parties signatory thereto. (1)
10.1	Executive Employment Agreement dated July 20, 2011 between the Registrant and Lars Dalgaard. (2)
10.2	Performance Share Unit Agreement dated July 20, 2011 between the Registrant and Lars Dalgaard. (2)
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.
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema Document.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.*

  ____________________

(1)     Previously filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-33755) filed with the Securities and Exchange Commission on June 30, 2011.

(2)     Previously filed as Exhibit 99.1 and 99.2, respectively, to the Registrant’s Current Report on Form 8-K (File No. 001-33755) filed with the Securities and Exchange Commission on July 22, 2011.

*    Pursuant to Rule 406T of Regulation S-T, these interactive data files are furnished and not filed or a part of a    registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended; are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended; and otherwise are not subject to liability under these sections.

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