Western Digital 1998 Annual Report Download - page 27

22
there can be no assurance that the Company will be successful in translating IBM technologies or components into
successful products.
Additionally, since IBM will be the sole supplier of the head component for these desktop drives, the Company's
business and financial results would be adversely affected if the heads manufactured by IBM fail to satisfy the
Company's quality requirements or if IBM is unable to meet the Company's volume or delivery requirements. Western
Digital believes that IBM's current and planned manufacturing capacity should be adequate to meet the Company's
forecasted requirements. However, the future growth of sales of hard drives with IBM technology is dependent upon,
among other things, IBM continuing to devote substantial financial resources to property, plant, equipment and working
capital to support the manufacture of the components, as to which there can be no assurance.
The Company entered into the IBM Agreement with the expectation that IBM will continue to lead the hard drive
industry in areal density and performance and that the Company will be able to translate that leadership into time-to-
market and time-to-volume leadership in the desktop PC hard drive market. If IBM does not maintain its areal density
leadership, the Company may not be able to realize the competitive cost advantages in the high volume portion of the
market that result from such leadership.
Although the IBM Agreement contains certain restrictions on IBM's ability to license the technology covered by it
to third parties, the IBM Agreement is not exclusive, and other hard drive manufacturers may also have access to
heads produced by IBM and possibly to IBM designs and technology. The IBM Agreement has a minimum three-year
term with the parties having the right to agree to continue the relationship for future products subject to mutually
acceptable terms and conditions. If a party breaches the agreement or becomes subject to bankruptcy or similar
proceedings, the other party may terminate the IBM Agreement. The IBM Agreement may also be terminated by a party
upon a change of control of the other party, subject to certain conditions.
Fluctuating Product Demand
Demand for the Company's hard drive products depends on the demand for the computer systems manufactured by
its customers and on storage upgrades to computer systems, which in turn are affected by computer system product
cycles, end user demand for increased storage capacity and prevailing economic conditions. Although market research
indicates that total computer system unit shipments are expected to continue to grow for the next several years, demand
may fluctuate significantly from period to period. Such fluctuations have in the past and may in the future result in
deferral or cancellation of orders for the Company's products, which could have an adverse effect on the Company's
financial condition or operating results.
The hard drive industry has also experienced seasonal fluctuations in demand. The Company has historically
experienced relatively flat demand in the first quarter of the fiscal year as compared to the fourth quarter, while
demand in the second quarter has historically been much higher than in the first quarter. Additionally, product
shipments tend to be greatest in the third month of each quarter. Any failure by the Company to accurately match its
product build plans to customer demand for any particular period could adversely affect the Company's operating
results for that period, as happened during 1998.
Customer Concentration and Changing Customer Models
High volume customers for hard drives are concentrated among a small number of OEMs, distributors and
retailers. Although the Company believes its relationships with key customers such as these are generally good, the
concentration of sales to a relatively small number of major customers represents a business risk that loss of one or
more accounts could adversely affect the Company's financial condition or operating results. Customer concentration
is especially significant for the Company's enterprise business. The Company's customers are generally not obligated
to purchase any minimum volume and are generally able to terminate their relationship with the Company at will. The
Company has experienced reductions in its business, with resulting loss of revenue, with certain OEM customers
largely as a result of delays and difficulties encountered in the Company's transition to MR head technology. If any
such changes in purchase volume or customer relationships continue to result in decreased demand for the Company's
drives, whether by loss of or delays in orders, the Company's financial condition or operating results could be
adversely affected.