Western Digital 2014 Annual Report Download - page 25

Sales in the distribution channel are important to our business, and if we fail to respond to demand changes in distribution
markets or if distribution markets for our products weaken, our operating results could suffer.
Our distribution customers typically sell to small computer manufacturers, dealers, systems integrators and other
resellers. We face significant competition in this channel as a result of limited product qualification programs and a
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 sys-
tems, 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 sig-
nificant 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 June 27, 2014, 45% of our revenue came from sales to our top 10 customers and dur-
ing the fiscal year ended June 27, 2014, 44% of our revenue came from sales to such customers. These customers have
a variety of suppliers to choose from and therefore can make substantial demands on us, including demands on prod-
uct 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 hard-
ship, 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 other products for the PC and other storage markets. As we expand our product line to sell into
new markets, the overall complexity of our business increases at an accelerated rate and we become subject to different
market dynamics. 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
enhancements. 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.
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