Adaptec 2002 Annual Report Download - page 33

In addition, we believe that uncertainty in our customers' end markets and our customers' increased focus on
cash management has caused our customers to delay product orders and reduce delivery lead−time expectations.
We expect this will increase the proportion of our revenues in future periods that will be from orders
placed and fulfilled within the same period. This will decrease our ability to accurately forecast and may
lead to greater fluctuations in operating results.
We rely on a few customers for a major portion of our sales, any one of
which could materially impact our revenues should
they change their ordering pattern.
We depend on a limited number of customers for a major portion of our revenues. Through direct, distributor
and subcontractor purchases, Cisco Systems and Hewlett Packard each accounted for more than 10% of our
fiscal 2002 revenues. Both of these customers have announced order shortfalls for some of their products.
We do not have long−term volume purchase commitments from any of our major customers. Accordingly, our
future operating results will continue to depend on the success of our largest customers and on our ability
to sell existing and new products to these customers in significant quantities. The loss of a key customer,
or a reduction in our sales to any key customer or our inability to attract new significant customers could
materially and adversely affect our business, financial condition or results of operations.
If the current downturn continues, we may have to add to our inventory
reserve, which would lead to a further decline in our operating
profits.
As a result of the industry−wide reduction in capital spending and resulting significant decrease in demand
for our products, we determined that we had inventory levels that exceeded our anticipated demand over the
next twelve months. Accordingly, in 2002 we recorded an inventory write−down of $4 million related to excess
inventory on hand. The inventory reserve was based on our revenue expectations through 2003. If future
demand of our products does not meet our expectations, we may need to take an additional write−down of
inventory.
We anticipate lower margins on high volume products, which could adversely
affect our profitability.
We expect the average selling prices of our products to decline as they mature. Historically, competition in
the semiconductor industry has driven down the average selling prices of products. If we price our products
too high, our customers may use a competitor's product or an in−house solution. To maintain profit margins,
we must reduce our costs sufficiently to offset declines in average selling prices, or successfully sell
proportionately more new products with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current operating costs.
OEMs are becoming more price conscious than in the past as a result of the industry downturn, and as
semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in
OEM equipment. We have also experienced more aggressive price competition from competitors that wish to
enter into the market segments in which we participate. These circumstances may make some of our products
less competitive and we may be forced to decrease our prices significantly to win a design. We may lose
design opportunities or may experience overall declines in gross margins as a result of increased price
competition.
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