3Ware 2005 Annual Report Download - page 42

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excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the
future that we are not able to recover, and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost
reductions but still hold higher cost products in inventory, our operating results would be harmed.
An important part of our strategy is to continue our focus on the markets for communications and storage
equipment. If we are unable to further expand our share of these markets, our revenues may not grow and
could further decline.
Our markets frequently undergo transitions in which products rapidly incorporate new features and
performance standards on an industry-wide basis. If our products are unable to support the new features or
performance levels required by OEMs in these markets, or if our products fail to be certified by OEMs, we would
lose business from an existing or potential customer and would not have the opportunity to compete for new
design wins or certification until the next product transition occurs. If we fail to develop products with required
features or performance standards, or if we experience a delay as short as a few months in certifying or bringing
a new product to market, or if our customers fail to achieve market acceptance of their products, our revenues
could be significantly reduced for a substantial period.
We expect a significant portion of our revenues to continue to be derived from sales of products based on
current, widely accepted transmission standards. If the communications market evolves to new standards, we
may not be able to successfully design and manufacture new products that address the needs of our customers or
gain substantial market acceptance.
Customers for our products generally have substantial technological capabilities and financial resources.
They traditionally use these resources to internally develop their own products. The future prospects for our
products in these markets are dependent upon our customers’ acceptance of our products as an alternative to their
internally developed products. Future prospects also are dependent upon acceptance of third-party sourcing for
products as an alternative to in-house development. Network equipment vendors may in the future continue to
use internally developed components. They also may decide to develop or acquire components, technologies or
products that are similar to, or that may be substituted for, our products.
If our network equipment vendor customers fail to accept our products as an alternative, if they develop or
acquire the technology to develop such components internally rather than purchase our products, or if we are
otherwise unable to develop strong relationships with network equipment vendors, our business, financial
condition and results of operations would be materially and adversely affected.
The discontinuance of some of our FibreChannel HBA products will result in a decline in revenue that we
realize from sales of these products and we may incur significant costs due to customer obligations relating
to these products.
We recently announced the discontinuance of our FibreChannel HBA products designed to operate on Sun’s
Solaris servers. These HBA products accounted for a significant portion of our revenue from sales of storage
products during fiscal 2004 and fiscal 2005. Though we will continue to ship these products in the near term, we
expect the revenue from sale of these products to decline rapidly. We also have obligations to customers that
relate to these products, including obligations for warranty support, maintenance and repairs. Our ability to fulfill
these obligations has been limited by the reduction in force we implemented in the third quarter of fiscal 2005.
Both fulfilling these obligations and failure to fulfill these obligations could result in significant liability, costs,
and expenses.
Our industry and markets are subject to consolidation, which may result in stronger competitors, fewer
customers and reduced demand.
There has been industry consolidation among communications IC companies, network equipment
companies and telecommunications companies in the past. We expect this consolidation to continue as
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