Western Digital 2015 Annual Report Download - page 25

significant focus on price and availability of product. In addition, the PC market is experiencing a shift to notebook and
other mobile devices and, as a result, more computing devices are being delivered to the market as complete systems,
which could weaken the distribution market. If we fail to respond to changes in demand in the distribution market, our
operating results could suffer. Additionally, if the distribution market weakens as a result of a slowing PC growth rate,
technology transitions or a significant change in consumer buying preference, or if we experience significant price
declines due to demand changes in the distribution channel, then our operating results would be adversely affected.
Loss of market share with or by a key customer, or consolidation among our customer base, could harm our operating results.
During the quarter ended July 3, 2015, 44% of our revenue came from sales to our top 10 customers. These
customers have a variety of suppliers to choose from and therefore can make substantial demands on us, including
demands on product pricing and on contractual terms, often resulting in the allocation of risk to us as the supplier.
Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we
lose a key customer, if any of our key customers reduce their orders of our products or require us to reduce our prices
before we are able to reduce costs, if a customer is acquired by one of our competitors or if a key customer suffers
financial hardship, our operating results would likely be harmed.
Additionally, if there is consolidation among our customer base, our customers may be able to command
increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addi-
tion, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross mar-
gins are diminished, we could decide not to sell our products to a particular customer, which could result in a decrease
in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replace-
ment of our products by the combined entity with those of our competitors and cancellations of orders, each of which
could harm our operating results.
Also, the storage ecosystem is constantly evolving, and our traditional customer base is changing. Fewer compa-
nies now hold greater market share for certain applications and services, such as social media, shopping and streaming
media. As a result, the competitive landscape is changing, giving these companies increased leverage in negotiating
prices and other terms of sale, which could adversely affect our profitability. In addition, the changes in our evolving
customer base create new selling and distribution patterns to which we must adapt. To remain competitive, we must
respond to these changes by ensuring we have proper scale in this evolving market, as well as offer products that meet
the technological requirements of this customer base at competitive pricing points. To the extent we are not successful
in adequately responding to these changes, our operating results could be harmed.
Expansion into new markets may increase the complexity of our business, cause us to increase our research and development expenses
to develop new products and technologies or cause our capital expenditures to increase, and if we are unable to successfully adapt
our business processes and product offerings as required by these new markets, our ability to grow will be adversely affected.
To remain a significant supplier in the storage industry and to expand into new markets, we will need to offer a
broad range of storage products to our customers. We currently offer a variety of 3.5-inch and 2.5-inch hard drives,
solid state drives and systems and other products for the PC, enterprise, data center and other storage markets. As we
expand our product lines to sell into new markets, such as our recent entry into active archive systems, the overall
complexity of our business may increase at an accelerated rate and we may become subject to different market dynam-
ics. These dynamics may include, among other things, different demand volume, seasonality, product requirements,
sales channels, and warranty and return policies. In addition, expansion into other markets may result in increases in
research and development expenses and substantial investments in manufacturing capability or technology enhance-
ments. If we fail to successfully expand into new markets with products that we do not currently offer, we may lose
business to our competitors or new entrants who offer these products.
Our vertical integration of head and magnetic media manufacturing makes us dependent on our ability to timely and cost-
effectively develop heads and magnetic media with leading technology and overall quality, increasing capital expenditure costs
and asset utilization risks for our business.
We develop and manufacture a substantial portion of the heads and magnetic media used in the hard drive prod-
ucts we produce. Consequently, we are more dependent upon our own development and execution efforts and less able
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