8x8 2007 Annual Report Download - page 24

unable to prevent our customers from fraudulently receiving goods and services. Our liability risk will increase if a larger
fraction of our Packet8 transactions involve fraudulent or disputed credit card transactions. Any costs we incur as a result of
fraudulent or disputed transactions could harm our business. In addition, the functionality of our current billing system relies on
certain third-party vendors delivering services. If these vendors are unable or unwilling to provide services, we will not be able
to charge for our Packet8 services in a timely or scalable fashion, which could significantly decrease our revenue and have a
material adverse effect on our business, financial condition and operating results.
We have experienced losses due to subscriber fraud and theft of service.
Subscribers have obtained access to the Packet8 service without paying for monthly service and international toll calls by
unlawfully using our authorization codes and submitting fraudulent credit card information. To date, such losses from
unauthorized credit card transactions and theft of service have not been significant. We have implemented anti-fraud
procedures in order to control losses relating to these practices, but these procedures may not be adequate to effectively limit
all of our exposure in the future from fraud. If our procedures are not effective, consumer fraud and theft of service could
significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results.
A higher rate of customer terminations would negatively affect our business by reducing our revenue or requiring us to
spend more money to grow our customer base.
Our rate of customer terminations, or average monthly customer churn, was 4.2% for the year ended March 31, 2007. Our
churn rate could increase in the future if customers are not satisfied with our service. Other factors, including increased
competition from other providers, also influence our churn rate.
Because of churn, we have to acquire new customers on an ongoing basis just to maintain our existing level of customers and
revenues. As a result, marketing expense is an ongoing requirement of our business. If our churn rate increases, we will have to
acquire even more new customers in order to maintain our existing revenues. We incur significant costs to acquire new
customers, and those costs are an important factor in determining our net losses and achieving future profitability. Therefore, if
we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers beyond those
budgeted, our revenue could decrease and our net losses could increase.
Our success also depends on third parties in our distribution channels.
We currently sell our products direct to consumers and through resellers, and are focusing efforts on diversifying and
increasing our distribution channels. Our future revenue growth will depend in large part on sales of our products through
reseller and other distribution relationships. We may not be successful in developing additional distribution relationships.
Agreements with distribution partners generally provide for one-time and recurring commissions based on our list prices, and
do not require minimum purchases or restrict development or distribution of competitive products. Therefore, entities that
distribute our products may compete with us. In addition, distributors and resellers may not dedicate sufficient resources or
give sufficient priority to selling our products. Our failure to develop new distribution channels, the loss of a distribution
relationship or a decline in the efforts of a material reseller or distributor could have a material adverse effect on our business,
financial condition or results of operations.
Our future operating results may vary substantially from period to period and may be difficult to predict.
Our historical operating results have fluctuated significantly and will likely continue to fluctuate in the future, and a decline in
our operating results could cause our stock price to fall. On an annual and a quarterly basis, there are a number of factors that
may affect our operating results, many of which are outside our control. These include, but are not limited to:
• changes in market demand;
• the timing of customer orders;
• customer cancellations;
• competitive market conditions;
• lengthy sales cycles and/or regulatory approval cycles;
• new product introductions by us or our competitors;
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