Western Digital 2007 Annual Report Download - page 17

OEMs evaluate and select their hard drive suppliers based on a number of factors, including quality and reliability,
storage capacities, performance characteristics, price, service and support, ease of doing business, and the supplier’s long-
term financial stability. They typically seek to qualify two or more providers for each generation of hard drives, and once
an OEM has chosen its qualified hard drive vendors for a given product, it generally will purchase hard drives from those
vendors for the life of that product. To achieve success with OEM qualifications, a hard drive supplier must consistently
offer hard drives featuring leading technology, quality, and reliability at acceptable capacity per disk. Suppliers must
quickly achieve volume production of each new generation of high quality and reliable hard drives, requiring access to
flexible, high-capacity, high-quality manufacturing capabilities.
Many of our OEM customers utilize just-in-time inventory management processes or supply chain business models
that combine “build-to-order,” in which they do not build until there is a firm order, and “contract manufacturing,” in
which the OEM contracts assembly work to a contract manufacturer, such as an ODM, who purchases components and
assembles the computer based on the OEM’s instructions. For certain OEMs, we maintain a base stock of finished goods
inventory in facilities located near or adjacent to the OEM’s operations.
For an additional discussion of risks related to our need to adapt to our customers’ business models and maintain
customer satisfaction, refer to Item 1A of this Annual Report on Form 10-K.
Distributors
We use a broad group of distributors to sell our products to non-direct customers such as small computer and CE
manufacturers, dealers, systems integrators, online retailers and other resellers. Distributors accounted for approximately
36%, 39% and 36% of our revenue for 2007, 2006 and 2005, respectively. Distributors generally enter into non-
exclusive agreements for specific territories with us for the purchase and redistribution of our products in specific
territories. We grant our distributors limited price protection rights.
Retailers
We sell our branded products directly to a select group of major retailers such as computer superstores, warehouse
clubs, online retailers, and computer electronics stores, and authorize sales through distributors to smaller retailers.
Retailers accounted for approximately 16%, 7% and 6% of our revenue for 2007, 2006 and 2005, respectively. Our
current retail customer base is primarily in the United States, Canada and Europe. The retail channel complements our
other sales channels while helping to build brand awareness for WD and our products. Retailers supply end-users with
products to upgrade their computers and externally store their data for backup or mobility purposes. We grant our
retailers price protection and limited rights to return product on an inventory rotation basis. We also sell our branded
products at our web site.
Sales and Marketing
We maintain sales offices in selected parts of the world including the major geographies of the Americas, Asia
Pacific, Japan, Europe, and the Middle East. Our international sales, which include sales to foreign subsidiaries of
U.S. companies but do not include sales to U.S. subsidiaries of foreign companies, represented 68%, 68% and 65% of our
revenue for 2007, 2006 and 2005, respectively. Sales to international customers may be subject to certain risks not
normally encountered in domestic operations, including exposure to tariffs and various trade regulations. For further
discussion regarding the risks related to sales to international customers, see Item 1A of this Annual Report on
Form 10-K.
For additional information concerning revenue recognition, sales by geographic region and significant customer
information, see Part II, Item 8, Notes 1 and 6 of the Notes to Consolidated Financial Statements.
We perform our marketing and advertising functions internally and through outside firms. We target advertising,
worldwide packaging and marketing materials to various reseller and end-user categories. We utilize both consumer
media and trade publications. We have programs under which we reimburse qualified distributors and retailers for
certain marketing expenditures. We also maintain customer relationships by communicating with our resellers and
providing end-users with information and support through our web site.
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