Seagate 2006 Annual Report Download - page 23

Table of Contents
Perpendicular Recording Technology — If products based on this technology suffer unanticipated or atypical
reliability or operability problems, our operating results will be adversely impacted. In addition, products based
on perpendicular technology require increased quantities of precious metals and scarce alloys like platinum
and ruthenium which increases risk of higher costs and production delays that could adversely impact our
operating results.
In fiscal year 2007, we converted more than half of our products to products using perpendicular technology and
we expect that by the end of fiscal year 2008 that all of our products will be based on perpendicular technology.
Perpendicular recording technology poses various technological challenges including a complex integration of the
recording head, the disc, recording channel and drive firmware as a system.
If these perpendicular technology based products suffer unanticipated or atypical failures that were not
anticipated in the design of those products, our service and warranty costs may materially increase which would
adversely impact our operating results.
Perpendicular recording technology also requires recording media with more layers and the use of more precious
metals and scarce alloys like platinum and ruthenium to create such layers. These precious metals and scarce alloys
have recently become increasingly expensive and at times difficult to acquire. As our product offerings shift
increasingly to perpendicular technology, we will be exposed to increased risks that higher costs or reduced
availability of these precious metals and scarce alloys could adversely impact our operating results.
Seasonality — Because we experience seasonality in the sales of our products, our results of operations will
generally be adversely impacted during our fourth fiscal quarter.
Because sales of computer systems, storage subsystems and consumer electronics tend to be seasonal, we expect
to continue to experience seasonality in our business as we respond to variations in our customers’ demand for disc
drives. In particular, we anticipate that sales of our products will continue to be lower during our fourth fiscal quarter
than the rest of the year. In the desktop computer, notebook computer and consumer electronics sectors of our
business, this seasonality is partially attributable to our customers’ increased sales of personal computers and
consumer electronics during the winter holiday season. In the enterprise sector of our business, our sales are seasonal
because of the capital budgeting and purchasing cycles of our end users. Because our working capital needs peak
during periods in which we are increasing production in anticipation of orders that have not yet been received, our
operating results will fluctuate seasonally even if the forecasted demand for our products proves accurate.
Furthermore, it is difficult for us to evaluate the degree to which this seasonality may affect our business in
future periods because of the rate and unpredictability of product transitions and new product introductions,
particularly in the consumer electronics market.
Difficulty in Predicting Quarterly Demand — If we fail to predict demand accurately for our products in any
quarter, we may not be able to recapture the cost of our investments.
The disc drive industry operates on quarterly purchasing cycles, with much of the order flow in any given
quarter coming at the end of that quarter. Our manufacturing process requires us to make significant product-specific
investments in inventory in each quarter for that quarter’s production. Because we typically receive the bulk of our
orders late in a quarter after we have made our investments, there is a risk that our orders will not be sufficient to
allow us to recapture the costs of our investment before the products resulting from that investment have become
obsolete. We cannot assure you that we will be able to accurately predict demand in the future.
Other factors that may negatively impact our ability to recapture the cost of investments in any given quarter
include:
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the impact of variable demand and the aggressive pricing environment for disc drives;
• the impact of competitive product announcements and possible excess industry supply both with respect to
particular disc drive products (particularly now that there are no material limitations on disc drive