Digital River 2006 Annual Report Download - page 25

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• Slower than anticipated growth of the online market as a vehicle for the purchase of software products;
• The cost of compliance with U.S. and foreign regulations relating to our business; and
• Our ability to retain and attract personnel commensurate with our business needs.
In addition, revenue generated by our software and digital commerce services is likely to fluctuate on a
seasonal basis that is typical for the software publishing market in general. We believe that our first and fourth
quarters are generally seasonally stronger than our second and third quarters due to the timing of new product
introductions, which generally do not occur in the summer months, the holiday selling period, and the post-
holiday retail season.
Our operating expenses are based on our expectations of future revenue. These expenses are relatively
fixed in the short-term. If our revenue for a quarter falls below our expectations and we are unable to quickly
reduce spending in response, our operating results for that quarter would be harmed. In addition, the operating
results of companies in the electronic commerce industry have, in the past, experienced significant
quarter-to-quarter fluctuations that may adversely affect our stock price.
Security breaches could hinder our ability to securely transmit confidential information.
A significant barrier to e-commerce and communications is the secure transmission of confidential
information over public networks. Any compromise or elimination of our security could be costly to remedy,
damage our reputation and expose us to liability, and dissuade existing and new clients from using our
services. We rely on encryption and authentication technology licensed from third parties to provide the
security and authentication necessary for secure transmission of confidential information, such as end-user
credit card numbers. A party who circumvents our security measures could misappropriate proprietary
information or interrupt our operations.
We may be required to expend significant capital and other resources to protect against security breaches
or address problems caused by breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users could deter people from using the Internet to conduct transactions that
involve transmitting confidential information, thereby inhibiting the growth of our business. To the extent that
our activities or those of third-party contractors involve the storage and transmission of proprietary
information, such as credit card numbers, security breaches could damage our reputation and expose us to a
risk of loss, fines or litigation and possible liability. Our security measures may not prevent security breaches,
and failure to prevent security breaches could lead to a loss of existing clients and also deter potential clients
away from our services.
Claims of infringement of other parties’ intellectual property rights could require us to expend significant
resources, enter into unfavorable licenses or require us to change our business plans.
From time-to-time we are named as a defendant in lawsuits claiming that we have, in some way, violated
the intellectual property rights of others. We have been notified of several potential patent disputes, and expect
that we will increasingly be subject to patent infringement claims as our services expand in scope and
complexity. Any assertions or prosecutions of claims like these could require us to expend significant financial
and managerial resources. The defense of any claims, with or without merit, could be time-consuming, result
in costly litigation and diversion of technical and management personnel, cause product enhancement delays
or require that we develop non-infringing technology or enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may be unavailable on terms acceptable to us or at all. In the event of a
successful claim of infringement against us and our failure or inability to develop non-infringing technology or
license the infringed or similar technology on a timely basis, we may be unable to pursue our current business
plan. We expect that we will increasingly be subject to patent infringement claims as our services expand in
scope and complexity, and our results of operation and financial condition could be materially adversely
affected.
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