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

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

Overview

SuccessFactors provides on-demand business execution software solutions that enable organizations to bridge the gap between business strategy and results. Our goal is to enable organizations to substantially increase employee productivity worldwide by enhancing our existing people performance solutions with business alignment solutions to enable customers to achieve business results. Our integrated application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Learning and Development; Recruiting Management; Analytics and Reporting; Employee Profile; 360-Degree Review; Execution Survey; Stack Ranker; Business Performance Accelerators; Employee Central; Metrics Navigator; Strategy Deployment and proprietary and third-party content. We deliver our application suite to organizations of all sizes across all industries and geographies. During the past twelve months our customer base has grown from 1,750 to more than 2,800 customers, across 60 industries in over 185 countries with more than 5.4 million end users.

We generate sales primarily through our global direct sales organization and, to a much lesser extent, indirectly through channel partners, with sales through channel partners constituting approximately 6% of revenue for the nine months ended September 30, 2009. However, in the future we anticipate that revenue from channel partners will increase. For the nine months ended September 30, 2009, we did not have any single customer that accounted for more than 5% of our revenue. The Company targets its sales and marketing efforts at large enterprises as well as small and mid-sized organizations.

Historically, most of our revenue has been from sales of our application suite to organizations located in the United States. For the nine months ended September 30, 2009, the percentage of our revenue generated from customers in the United States was 83%. We intend to continue to grow our international business. Accordingly, we expect the percentage of our revenue generated outside of the United States to continue to increase.

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

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

While we have experienced strong growth in revenues in recent periods, the overall global economy has experienced a severe downturn, with the United States and many other foreign countries experiencing slow overall economic growth in 2008 and the first nine months

of 2009. Accordingly, we expect slower revenue growth for rest of 2009 and into 2010. Unstable or declining economic conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities and has caused and could continue to cause our customers and potential customers to slow or reduce spending on our application suite. Furthermore, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which could impact their willingness to make purchases or their ability to make timely payments to us. If that were to occur, we may experience decreased sales and/or be required to increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. We cannot predict the timing, strength or duration of the current economic slowdown or any subsequent economic recovery, worldwide, in the United States, or in our industry. As a result, it is inherently difficult to predict how the current economic conditions will affect our business. These and other economic factors could have a material adverse effect on our ability to predict future operating results, on demand for our application suite, including new bookings and renewal and upsell rates, and on our financial condition and operating results. The weakening of the overall global economy in 2008 and continuing through 2009 has affected our customers and demand for our software and services. In fiscal year 2010 we expect this trend to continue. Despite the declining economy, we expect revenue growth to continue, but at a slower rate.

Critical Accounting Policies and Estimates

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

As discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, 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

• Sales and Use Taxes

• Allowance for Doubtful Accounts

There have been no changes to our critical accounting policies since December 31, 2008.

Results of Operations

The following table presents certain financial data for the three and nine month
periods ended September 30, 2009 and 2008 as a percentage of revenue
(unaudited):



                                                 Three Months                       Nine Months
                                              Ended September 30,               Ended September 30,
                                            2009              2008            2009              2008
Revenue                                        100 %             100 %           100 %             100 %
Cost of revenue                                 23                34              23                36

Gross margin                                    77                66              77                64

Operating expenses:
Sales and marketing                             51                86              53                89
Research and development                        16                22              16                23
General and administrative                      15                23              17                25
Gain on legal settlement, net                   -                  4              -                  3

Total operating expenses                        82               135              86               140

Loss from operations                            (5 )             (69 )            (9 )             (76 )
Interest income and other, net                  -                  1               1                 2

Loss before provision for income taxes          (5 )             (68 )            (8 )             (74 )
Provision for income taxes                      -                 (1 )            (1 )              (1 )

Net loss                                        (5 )%            (69 )%           (9 )%            (75 )%

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

Revenue

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

Three Months Ended September 30, Nine Months Ended September 30, 2009 2008 Change 2009 2008 Change

Revenue for the three months ended September 30, 2009 increased by $9.0 million, or 30%, as compared to the same period in 2008. The increase was primarily due to a $10.2 million increase in revenue from existing customers, which includes renewals and subscriptions for additional modules and end users, offset by a $1.2 million decrease in revenue from new customers. The decrease in revenue from new customers was due to a lower growth rate in new customers as compared to the prior period, which is a result of the overall global economic downturn in 2008 and the first nine months of 2009. As of September 30, 2009, we had over 2,800 customers, as compared to 2,362 at September 30, 2008.

Revenue from customers in the United States accounted for $32.3 million, or 84% of revenue in the three months ended September 30, 2009, compared to $25.5 million, or 86% of revenue, in the three months ended September 30, 2008.

Revenue for the nine months ended September 30, 2009 increased by $32.0 million, or 41%, as compared to the same period in 2008. The increase was primarily due to a $29.8 million increase in revenue from existing customers and a $2.2 million increase in revenue from new customers. Revenue growth is a result of increased number of customers and continued efforts to add new revenue streams to existing customers.

Revenue from customers in the United States accounted for $92.4 million, or 83% of revenue in the nine months ended September 30, 2009, compared to $68.3 million, or 87% of revenue, in the nine months ended September 30, 2008 as we have had increased sales of our products in recent periods in EMEA, APAC, Canada and the Latin American regions.

Cost of Revenue and Gross Margin

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



                                        Three Months Ended September 30,               Nine Months Ended September 30,
                                       2009              2008         Change           2009             2008        Change
                                                                    (Dollars in thousands)
Revenue                             $    38,685        $  29,712          30 %     $    110,845       $ 78,887          41 %
Cost of revenue                           8,831           10,187         (13 )%          25,267         28,767         (12 )%

Gross profit                        $    29,854        $  19,525          53 %     $     85,578       $ 50,120          71 %

Gross margin                                 77 %             66 %                           77 %           64 %

Cost of revenue decreased by $1.4 million, or 13%, from the three months ended September 30, 2008 to the three months ended September 30, 2009, primarily due to a decrease of $1.4 million in employee-related costs due to lower headcount, a decrease of $0.2 million in professional outside services and $0.2 million decrease in travel and entertainment offset by an increase of $0.4 million in license royalties and partner referral costs.

Gross margin increased from 66% for the three months ended September 30, 2008 to 77% for the three months ended September 30, 2009 primarily due to increased renewals, which have a lower cost of revenue as a percentage of revenue, more efficient utilization of professional services and customer support personnel and a larger customer base over which to spread fixed costs. We expect gross margin percentage to decrease modestly in the fourth quarter of 2009 as we hire additional professional services staff. The timing of additional expenses to expand delivery capability of our application suite and other services could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue, in any particular quarter or annual period which could affect the gross margin percentage.

Cost of revenue decreased $3.5 million, or 12%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009, primarily due to a decrease of $3.7 million in employee-related costs due to lower headcount, a decrease of $0.9 million in professional outside services, a decrease of $0.4 million in travel and entertainment, offset by an increase of $0.9 million in maintenance and data center related costs and an increase of $0.6 million in license royalties and partner referral costs.

Gross margin increased from 64% for the nine months ended September 30, 2008 to 77% for the nine months ended September 30, 2009. The increase in gross margin was primarily due to increased renewals, which have a lower cost of revenue as a percentage of revenue, more efficient utilization of professional services and customer support personnel and a larger customer base over which to spread fixed costs.

Operating Expenses

Sales and Marketing

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



                                                                                             Nine Months Ended
                                          Three Months Ended September 30,                     September 30,
                                         2009              2008         Change         2009          2008        Change
                                                                   (Dollars in thousands)
Sales and marketing                   $    19,573        $  25,251         (22 )%    $ 59,125      $ 70,121         (16 )%
Percent of revenue                             51 %             86 %                       53 %          89 %

Sales and marketing expenses decreased by $5.7 million, or 22%, from the three months ended September 30, 2008 to the three months ended September 30, 2009, primarily due to a decrease of $2.8 million in marketing and promotional spending, a decrease of $2.6 million in employee-related costs, primarily resulting from less headcount in sales and marketing and a decrease of $0.3 million in facilities and related costs.

Sales and marketing expenses decreased by $11.0 million, or 16%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009, primarily due to a decrease of $6.7 million in employee-related costs, primarily resulting from less headcount in sales and marketing, a decrease of $3.4 million in marketing and promotional spending, a decrease of $0.4 million in outside services spending, a decrease of $0.3 million in facilities and related costs and a decrease of $0.2 million in travel and entertainment. We do not expect sales and marketing expenses to significantly change in the fourth quarter of 2009 as compared to the first three quarters of 2009, but actual sales and marketing spend could vary depending on changing market conditions, variable sales expenses related to bookings achievement, and perceived investment opportunities balanced against the company's profitability goals.

Research and Development

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



                                                                                              Nine Months Ended
                                           Three Months Ended September 30,                     September 30,
                                          2009              2008         Change         2009          2008        Change
                                                                    (Dollars in thousands)
Research and development               $    6,343        $    6,516          (3 )%    $ 17,967      $ 17,975           0 %
Percent of revenue                             16 %              22 %                       16 %          23 %

Research and development expenses consist primarily of expenses for research and development staff, the cost of certain third-party service providers and allocated overhead. There have been no significant changes in the level of spending from the three and nine months ended September 30, 2008 to the three and nine months ended September 30, 2009 although we have invested in research and development offshore at lower overall total costs.

General and Administrative

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



                                                                                              Nine Months Ended
                                           Three Months Ended September 30,                     September 30,
                                          2009              2008         Change         2009          2008        Change
                                                                    (Dollars in thousands)
General and administrative             $    6,016        $    6,863         (12 )%    $ 18,542      $ 19,905          (7 )%
Percent of revenue                             15 %              23 %                       17 %          25 %

General and administrative expenses decreased by $0.8 million, or 12%, from the three months ended September 30, 2008 to the three months ended September 30, 2009, primarily due to a decrease of $0.6 million in professional services and a decrease of $0.2 million in employee-related costs due to lower headcount.

General and administrative expenses decreased $1.4 million, or 7%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009, primarily due to a decrease of $1.8 million in professional and outside service costs, a decrease of $0.6 million in employee-related costs due to lower headcount, offset by an increase of $0.5 million in tax expense related to indirect tax and $0.5 million in bad debt expense.

Expenses related to legal settlement

For the three and nine months ended September 30, 2008 we recorded $1.3 million and $2.2 million, respectively, of legal expense associated with a law-suit filed against a competitor on March 11, 2008. In the fourth quarter of 2008, the parties to the law-suit signed an agreement resolving all claims and counterclaims in the actions and the Company recorded a pre-tax net gain at that time.

Interest Income and Other, Net

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



                                        Three Months Ended September 30,               Nine Months Ended September 30,
                                      2009             2008           Change         2009             2008          Change
                                                                    (Dollars in thousands)
Interest income and other, net      $    210         $    256            (18 )%    $    823        $     1,625         (49 )%
Percent of revenue                         0 %              1 %                           1 %                2 %

There have been no material changes in interest income and other, net expenses from the three months ended September 30, 2008 to the three months ended September 30, 2009. Interest income and other, net decreased by $0.8 million, or 50%, from the nine months ended September 30, 2008 to the nine months ended September 30, 2009. The decrease is primarily due to realized and unrealized gains of $0.7 million on foreign exchange related to our accounts receivable balances in the nine months ended September 30, 2008 and lower interest rates on our cash and investment balances.

Provision for Income Taxes

We account for income taxes using the 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 carry-forwards.

Further, compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between each of our legal entities 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 the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. The Company 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, the Company records estimated reserves when it is not probable that an uncertain tax position will be sustained upon examination by a taxing authority. These estimates are subject to change.

Income tax expense for the three and nine months ended September 30, 2009 was $104,000 and $742,000, respectively, compared to $256,000 and $556,000, respectively, for the three and nine months ended September 30, 2008. The effective tax rates for 2009 and 2008 differ from the U.S. federal statutory rates of 34% primarily due to stock based compensation and other permanent tax adjustments, and foreign withholding taxes partially offset with foreign operational rate benefits.

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 and June 2008 follow-on offering of approximately $132 million, after deducting underwriting discounts and commissions and offering costs. Since the quarter ended December 31, 2008 we began to generate cash flow from operations and had net cash provided by operating activities in the nine months ended September 30, 2009. In October 2009, we completed a follow-on public offering raising approximately $203 million in net proceeds, after deducting underwriting discounts and commissions of $10.4 million and other offering expenses of approximately $0.6 million.

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

                                                            Nine Months Ended September 30,
                                                             2009                     2008
                                                                      (Unaudited)
Net cash provided by (used in) operating activities     $         7,204          $       (12,704 )
Net cash used in investing activities                           (39,661 )                (56,218 )
Net cash provided by financing activities                         3,491                   28,230

Net Cash Provided By (Used in) 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 (used in) operating activities has historically resulted from losses from operations, changes in working capital accounts, offset by the add back of non-cash expense items such as depreciation, amortization and expense associated with stock-based compensation awards.

Cash provided by operating activities in the nine months ended September 30, 2009 of $7.2 million primarily resulted from net loss of $10.0 million adjusted for certain non-cash items of $15.7 million (including depreciation, amortization, stock-based compensation and stock issued for services). In addition, the increase in cash provided by operating activities resulted from an . . .