HP 2006 Annual Report Download - page 25

If we fail to manage the distribution of our products and services properly, our revenue, gross margin and
profitability could suffer.
We use a variety of different distribution methods to sell our products and services, including
third-party resellers and distributors and both direct and indirect sales to both enterprise accounts and
consumers. Successfully managing the interaction of our direct and indirect channel efforts to reach
various potential customer segments for our products and services is a complex process. Moreover,
since each distribution method has distinct risks and gross margins, our failure to implement the most
advantageous balance in the delivery model for our products and services could adversely affect our
revenue and gross margins and therefore our profitability. Other distribution risks are described below.
•Our financial results could be materially adversely affected due to channel conflicts or if the financial
conditions of our channel partners were to weaken.
Our future operating results may be adversely affected by any conflicts that might arise
between our various sales channels, the loss or deterioration of any alliance or distribution
arrangement or the loss of retail shelf space. Moreover, some of our wholesale and retail
distributors may have insufficient financial resources and may not be able to withstand
changes in business conditions, including economic weakness and industry consolidation. Many
of our significant distributors operate on narrow product margins and have been negatively
affected by business pressures. Considerable trade receivables that are not covered by
collateral or credit insurance are outstanding with our distribution and retail channel partners.
Revenue from indirect sales could suffer, and we could experience disruptions in distribution
if our distributors’ financial conditions or operations weaken.
•Our inventory management is complex as we continue to sell a significant mix of products through
distributors.
We must manage inventory effectively, particularly with respect to sales to distributors, which
involves forecasting demand and pricing issues. Distributors may increase orders during
periods of product shortages, cancel orders if their inventory is too high or delay orders in
anticipation of new products. Distributors also may adjust their orders in response to the
supply of our products and the products of our competitors and seasonal fluctuations in
end-user demand. Our reliance upon indirect distribution methods may reduce visibility to
demand and pricing issues, and therefore make forecasting more difficult. If we have excess or
obsolete inventory, we may have to reduce our prices and write down inventory. Moreover,
our use of indirect distribution channels may limit our willingness or ability to adjust prices
quickly and otherwise to respond to pricing changes by competitors. We also may have limited
ability to estimate future product rebate redemptions in order to price our products
effectively.
We depend on third-party suppliers, and our revenue and gross margin could suffer if we fail to manage
supplier issues properly.
Our operations depend on our ability to anticipate our needs for components, products and
services and our suppliers’ ability to deliver sufficient quantities of quality components, products and
services at reasonable prices in time for us to meet critical schedules. Given the wide variety of systems,
products and services that we offer, the large number of our suppliers and contract manufacturers that
are dispersed across the globe, and the long lead times that are required to manufacture, assemble and
deliver certain components and products, problems could arise in planning production and managing
inventory levels that could seriously harm us. Other supplier problems that we could face include
component shortages, excess supply, risks related to the terms of our contracts with suppliers, risks
associated with contingent workers, and risks related to our relationships with single source suppliers,
as described below.
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