HP 2005 Annual Report Download - page 21

accurately reflect customer demand for our products and services. After we develop a product, we must
be able to manufacture appropriate volumes quickly and at low costs. To accomplish this, we must
accurately forecast volumes, mix of products and configurations that meet customer requirements, and
we may not succeed at all or within a given product’s life cycle. Any delay in the development,
production or marketing of a new product could result in our not being among the first to market,
which could further harm our competitive position. In addition, in the course of conducting our
business, we must adequately address quality issues associated with our products and services, including
defects in our engineering, design and manufacturing processes, as well as defects in third party
components included in our products. In order to address quality issues, we work extensively with our
customers and suppliers and engage in product testing to determine the cause of the problem and to
determine appropriate solutions. However, we may have limited ability to control quality issues,
particularly with respect to faulty components manufactured by third parties. If we are unable to
determine the cause, find an appropriate solution or offer a temporary fix (or ‘‘patch’’), we may delay
shipment to customers, which would delay revenue recognition and could adversely affect our revenue
and reported results. Finding solutions to quality issues can be expensive and may result in additional
warranty, replacement and other costs, adversely affecting our profits. In addition, quality issues can
impair our relationships with new or existing customers and adversely affect our reputation, which
could have a material adverse effect on our operating results.
If we do not effectively manage our product and services transitions, our revenue may suffer.
Many of the industries in which we compete are characterized by rapid technological advances in
hardware performance, software functionality and features, frequent introduction of new products, short
product life cycles, and continual improvement in product price characteristics relative to product
performance. If we do not make an effective transition from existing products and services to future
offerings, our revenue may decline. Among the risks associated with the introduction of new products
and services are delays in development or manufacturing, variations in costs, delays in customer
purchases or reductions in price of existing products in anticipation of new introductions, difficulty in
predicting customer demand for the new offerings and effectively managing inventory levels so that
they are in line with anticipated demand, risks associated with customer qualification and evaluation of
new products and the risk that new products may have quality or other defects or may not be
supported adequately by application software. Our revenue and gross margin also may suffer due to the
timing of product or service introductions by our suppliers and competitors. This is especially
challenging when a product has a short life cycle or a competitor introduces a new product just before
our own product introduction. Furthermore, sales of our new products and services may replace sales,
or result in discounting, of some of our current offerings, offsetting the benefit of even a successful
introduction. There also may be overlaps in the current products and services of HP and portfolios
acquired through mergers and acquisitions that we must manage. In addition, it may be difficult to
ensure performance of new customer contracts in accordance with our revenue, margin and cost
estimates and to achieve operational efficiencies embedded in our estimates. Given the competitive
nature of our industry, if any of these risks materializes, future demand for our products and services
and our results of operations may suffer.
Our revenue, cost of sales, and expenses may suffer if we cannot continue to license or enforce the
intellectual property rights on which our business depends or if third parties assert that we violate their
intellectual property rights.
We rely upon patent, copyright, trademark and trade secret laws in the United States and similar
laws in other countries, and agreements with our employees, customers, suppliers and other parties, to
establish and maintain our intellectual property rights in technology and products used in our
operations. However, any of our direct or indirect intellectual property rights could be challenged,
invalidated or circumvented, or such intellectual property rights may not be sufficient to permit us to
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