HP 2007 Annual Report Download - page 35

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, abilities to
borrow funds in the credit markets 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 suppliers 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.
• Shortages. Occasionally we may experience a shortage of, or a delay in receiving, certain supplies as a result of
strong demand, capacity constraints, supplier financial weaknesses, inability of suppliers to borrow funds in the
credit markets, disputes with suppliers (some of which are also customers), other problems experienced by suppliers
or problems faced during the transition to new suppliers. In particular, our PC business relies heavily upon Contract
Manufacturers (“CMs”) and Original Design Manufacturers (“ODMs”) to manufacture its products and is
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