8x8 2005 Annual Report Download - page 32

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We depend on contract manufacturers to manufacture substantially all of our products, and any delay or
interruption in manufacturing by these contract manufacturers would result in delayed or reduced shipments
to our customers and may harm our business.
We do not have long-term purchase agreements with our contract manufacturers. There can be no assurance that our
contract manufacturers will be able or willing to reliably manufacture our products, in volumes, on a cost-effective
basis or in a timely manner. For our videophones, cordless handsets and terminal adaptors that are used with our
Packet8 service, we rely on the availability of certain semiconductor products. These devices are also sourced solely
from certain overseas contract manufacturers and partners, and are currently not available from any other
manufacturer. Any of these factors could have a material adverse effect on our business, financial condition or
results of operations.
We rely on third party network service providers to originate and terminate substantially all of our public
switched telephone network calls.
Our Packet8 service depends on the availability of third party network service providers that provide telephone
numbers and public switched telephone network (PSTN) call termination and origination services for our customers.
Many of these network service providers have been affected by the downturn in the telecommunications industry
and may be forced to terminate the services that we depend on. The time to interface our technology to another
network service provider, if available, and qualify this new service could have a material adverse effect on our
business, operating results or financial condition.
While we believe that relations with our current service providers are good and we have contracts in place, there can
be no assurance that these service providers will be able or willing to supply cost-effective services to us in the
future or that we will be successful in signing up alternative or additional providers. While we believe that we could
replace our current providers, if necessary, our ability to provide service to our subscribers would be impacted
during this timeframe, and this could have an adverse effect on our business, financial condition or results of
operations. The loss of access to, or requirement to change, the telephone numbers we provide to our customers
could have a material adverse effect on our business.
We may not be able to manage our inventory levels effectively, which may lead to inventory obsolescence that
would force us to incur inventory write-downs.
Our products have lead times of up to several months, and are built to forecasts that are necessarily imprecise.
Because of our practice of building our products to necessarily imprecise forecasts, it is likely that, from time to
time, we will have either excess or insufficient product inventory. Excess inventory levels would subject us to the
risk of inventory obsolescence, while insufficient levels of inventory may negatively affect relations with customers.
For instance, our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply
of our products could result in legal action from our customers, loss of customers or harm to our ability to attract
new customers. Any of these factors could have a material adverse effect on our business, operating results or
financial condition.
If our products do not interoperate with our customers' networks, orders for our products will be delayed or
canceled and substantial product returns could occur, which could harm our business.
Many of the potential customers for our Packet8 service have requested that our products and services be designed
to interoperate with their existing networks, each of which may have different specifications and use multiple
standards. Our customers' networks may contain multiple generations of products from different vendors that have
been added over time as their networks have grown and evolved. Our products must interoperate with these products
as well as with future products in order to meet our customers' requirements. In some cases, we may be required to
modify our product designs to achieve a sale, which may result in a longer sales cycle, increased research and
development expense, and reduced operating margins. If our products do not interoperate with existing equipment or
software in our customers' networks, installations could be delayed, orders for our products could be canceled or our
products could be returned. In addition, contractual obligations may require us to continue to provide services that
interoperate whether cost effective or in our interests. Any of these factors could harm our business, financial
condition or results of operations.
We may have difficulty identifying the source of the problem when there is a problem in a network.