HP 2007 Annual Report Download - page 36

therefore dependent upon the continuing operations of those CMs and ODMs to fulfill demand for our PC products.
HP represents a substantial portion of the business of some of these CMs and ODMs, and any changes to the nature
or volume of business transacted by HP with a particular CM or ODM could adversely affect the operations and
financial condition of the CM or ODM and lead to shortages or delays in receiving products from that CM or ODM.
If shortages or delays persist, the price of these supplies may increase, we may be exposed to quality issues or the
supplies may not be available at all. We may not be able to secure enough supplies at reasonable prices or of
acceptable quality to build products or provide services in a timely manner in the quantities or according to the
specifications needed. Accordingly, our revenue and gross margin could suffer as we could lose time-sensitive sales,
incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately
address supply issues, we might have to reengineer some products or service offerings, resulting in further costs and
delays.
• Oversupply. In order to secure supplies for the provision of products or services, at times we may make advance
payments to suppliers or enter into non-cancelable commitments with vendors. In addition, we may purchase
supplies strategically in advance of demand to take advantage of favorable pricing or to address concerns about the
availability of future supplies. If we fail to anticipate customer demand properly, a temporary oversupply could
result in excess or obsolete components, which could adversely affect our gross margin.
• Contractual terms. As a result of binding price or purchase commitments with vendors, we may be obligated to
purchase supplies or services at prices that are higher than those available in the current market and be limited in our
ability to respond to changing market conditions. In the event that we become committed to purchase supplies or
services for prices in excess of the current market price, we may be at a disadvantage to competitors who have
access to components or services at lower prices, and our gross margin could suffer. In addition, many of our
competitors obtain products or components from the same CMs, ODMs and suppliers that we utilize. Our
competitors may obtain better pricing and other terms and more favorable allocations of products and components
during periods of limited supply, and our ability to engage in relationships with certain CMs, ODMs and suppliers
could be limited. The practice employed by our PC business of purchasing product components and transferring
those components to its CMs and ODMs may create large supplier receivables with the CMs and ODMs that,
depending on the financial condition of the CMs and ODMs, may have a risk of uncollectibility. In addition, certain
of our CMs, ODMs and suppliers may decide in the future to discontinue conducting business with us. Any of these
actions by our competitors, CMs, ODMs or suppliers could adversely affect our future operating results and
financial condition.
• Contingent workers. We also rely on third-party suppliers for the provision of contingent workers, and our failure to
manage our use of such workers effectively could adversely affect our results of operations. We have been exposed
to various legal claims relating to the status of contingent workers in the past and could face similar claims in the
future. We may be subject to shortages, oversupply or fixed contractual terms relating to contingent workers, as
described above. Our ability to manage the size of, and costs associated with, the contingent workforce may be
subject to additional constraints imposed by local laws.
• Single source suppliers. Our use of single source suppliers for certain components could exacerbate our supplier
issues. We obtain a significant number of components from single sources due to technology, availability, price,
quality or other considerations. For example, we rely on Intel to provide us with a sufficient supply of processors for
many of our PCs, workstations, handheld computing devices and servers, and some of those processors are
customized for our products. New products that we introduce may utilize custom components obtained from only
one source initially until we have evaluated whether there is a need for
22