| EMC CORP ITEM 1A RISK FACTORS This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Federal securities laws, about our business and prospects |
| The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures or business combinations that may be announced after the date hereof |
| Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including but not limited to those set forth below, one-time events and other important factors disclosed previously and from time to time in our other filings with the SEC We disclaim any obligation to update any forward-looking statements contained herein after the date of this Annual Report |
| Our business could be materially adversely affected as a result of general economic and market conditions |
| We are subject to the effects of general global economic and market conditions |
| If these conditions deteriorate, our business, results of operations or financial condition could be materially adversely affected |
| Our business could be materially adversely affected as a result of a lessening demand in the information technology market |
| Our revenue and profitability depend on the overall demand for our products and services |
| Delays or reductions in IT spending, domestically or internationally, could materially adversely affect demand for our products and services which could result in decreased revenues or earnings |
| Component costs, competitive pricing, and sales volume and mix could materially adversely affect our revenues, gross margins and earnings |
| Our gross margins are impacted by a variety of factors, including competitive pricing, component and product design costs as well as the volume and relative mixture of product and services revenues |
| Increased component costs, increased pricing pressures, the relative and varying rates of increases or decreases in component costs and product price, changes in product and services revenue mixture or decreased volume could have a material adverse effect on our revenues, gross margins or earnings |
| The costs of third party components comprise a significant portion of our product costs |
| While we generally have been able to manage our component and product design costs, we may have difficulty managing such costs if supplies of certain components become limited or component prices increase |
| Any such limitation could result in an increase in our component costs |
| An increase in component or design costs relative to our product prices could have a material adverse effect on our gross margins and earnings |
| Moreover, certain competitors may have advantages due to vertical integration of their supply chain, which may include disk drives, microprocessors, memory components and servers |
| The markets in which we do business are highly competitive and we encounter aggressive price competition for all of our products and services from numerous companies globally |
| There also has been and may continue to be a willingness on the part of certain competitors to reduce prices or provide storage-related products or services, together with other IT products or services, at minimal or no additional cost in order to preserve or gain market share |
| Such price competition may result in pressure on our product prices, and reductions in product prices may have a material adverse effect on our revenues, gross margins and earnings |
| We currently believe that pricing pressures are likely to continue |
| If our suppliers are not able to meet our requirements, we could have decreased revenues and earnings |
| We purchase or license many sophisticated components and products from one or a limited number of qualified suppliers, including some of our competitors |
| These components and products include disk drives, high density memory components, power supplies and software developed and maintained by third parties |
| We have experienced delivery delays from time to time because of high industry demand or the inability of some vendors to consistently meet our quality or delivery requirements |
| If any of our suppliers were to cancel or materially change contracts or commitments with us or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased quarterly revenues and earnings, which would have a material adverse effect on our business, results of operations and financial condition |
| Additionally, we periodically transition our product line to incorporate new technologies |
| The importance of transitioning our customers smoothly to new technologies, along with our historically uneven pattern of quarterly sales, intensifies the risk that the failure of a supplier to meet our quality or delivery requirements will have a material adverse impact on our revenues and earnings |
| 8 ______________________________________________________________________ [36]Table of Contents Our business could be materially adversely affected as a result of the risks associated with acquisitions and investments |
| As part of our business strategy, we seek to acquire businesses that offer complementary products, services or technologies |
| These acquisitions are accompanied by the risks commonly encountered in an acquisition of a business, which may include, among other things: • the effect of the acquisition on our financial and strategic position and reputation • the failure of an acquired business to further our strategies • the failure of the acquisition to result in expected benefits, which may include benefits relating to enhanced revenues, technology, human resources, costs savings, operating efficiencies and other synergies • the difficulty and cost of integrating the acquired business, including costs and delays in implementing common systems and procedures and costs and delays caused by communication difficulties or geographic distances between the two companies’ sites • the assumption of liabilities of the acquired business, including litigation-related liabilities • the potential impairment of acquired assets • the lack of experience in new markets, products or technologies or the initial dependence on unfamiliar supply or distribution partners • the diversion of our management’s attention from other business concerns • the impairment of relationships with customers or suppliers of the acquired business or our customers or suppliers • the potential loss of key employees of the acquired company • the potential incompatibility of business cultures These factors could have a material adverse effect on our business, results of operations or financial condition |
| To the extent that we issue shares of our common stock or other rights to purchase our common stock in connection with any future acquisition, existing shareholders may experience dilution and our earnings per share may decrease |
| In addition to the risks commonly encountered in the acquisition of a business as described above, we may also experience risks relating to the challenges and costs of closing a transaction |
| Further, the risks described above may be exacerbated as a result of managing multiple acquisitions at the same time |
| We also seek to invest in businesses that offer complementary products, services or technologies |
| These investments are accompanied by risks similar to those encountered in an acquisition of a business |
| We may be unable to keep pace with rapid industry, technological and market changes |
| The markets in which we compete are characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing needs of customers |
| There can be no assurance that our existing products will be properly positioned in the market or that we will be able to introduce new or enhanced products into the market on a timely basis, or at all |
| We spend a considerable amount of money on research and development and introduce new products from time to time |
| There can be no assurance that enhancements to existing products and solutions or new products and solutions will receive customer acceptance |
| As competition in the IT industry increases, it may become increasingly difficult for us to maintain a technological advantage and to leverage that advantage toward increased revenues and profits |
| Risks associated with the development and introduction of new products include delays in development and changes in data storage, networking virtualization, infrastructure management and operating system technologies which could require us to modify existing products |
| Risks inherent in the transition to new products include: • the difficulty in forecasting customer preferences or demand accurately • the inability to expand production capacity to meet demand for new products • the impact of customers’ demand for new products on the products being replaced, thereby causing a decline in sales of existing products and an excessive, obsolete supply of inventory • delays in initial shipments of new products Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, competitors’ responses to the introductions and the desire by customers to evaluate new products for extended periods of time |
| Our failure to introduce new or enhanced products on a timely basis, keep pace with rapid industry, technological or market changes or effectively manage the transitions to new products or new technologies could have a material adverse effect on our business, results of operations or financial condition |
| 9 ______________________________________________________________________ [37]Table of Contents The markets we serve are highly competitive and we may be unable to compete effectively |
| We compete with many companies in the markets we serve, certain of which offer a broad spectrum of IT products and services and others which offer specific information storage, management or virtualization products or services |
| Some of these companies (whether independently or by establishing alliances) may have substantially greater financial, marketing and technological resources, larger distribution capabilities, earlier access to customers and greater opportunity to address customers’ various IT requirements than us |
| In addition, as the IT industry consolidates, companies may improve their competitive position and ability to compete against us |
| We compete on the basis of our products’ features, performance and price as well as our services |
| Our failure to compete on any of these bases could affect demand for our products or services, which could have a material adverse effect on our business, results of operations or financial condition |
| Companies may develop new technologies or products in advance of us or establish business models or technologies disruptive to us |
| Our business may be materially adversely affected by the announcement or introduction of new products, including hardware and software products and services by our competitors, and the implementation of effective marketing or sales strategies by our competitors |
| The material adverse effect to our business could include a decrease in demand for our products and services and an increase in the length of our sales cycle due to customers taking longer to compare products and services and to complete their purchases |
| We may have difficulty managing operations |
| Our future operating results will depend on our overall ability to manage operations, which includes, among other things: • retaining and hiring, as required, the appropriate number of qualified employees • managing, protecting and enhancing, as appropriate, our infrastructure, including but not limited to, our information systems and internal controls • accurately forecasting revenues • training our sales force to sell more software and services • successfully integrating new acquisitions • managing inventory levels, including minimizing excess and obsolete inventory, while maintaining sufficient inventory to meet customer demands • controlling expenses • managing our manufacturing capacity, real estate facilities and other assets • executing on our plans An unexpected decline in revenues without a corresponding and timely reduction in expenses or a failure to manage other aspects of our operations could have a material adverse effect on our business, results of operations or financial condition |
| Our business could be materially adversely affected as a result of war or acts of terrorism |
| Terrorist acts or acts of war may cause damage or disruption to our employees, facilities, customers, partners, suppliers, distributors and resellers, which could have a material adverse effect on our business, results of operations or financial condition |
| Such conflicts may also cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of components and distribution of products |
| Our business may suffer if we are unable to retain or attract key personnel |
| Our business depends to a significant extent on the continued service of senior management and other key employees, the development of additional management personnel and the hiring of new qualified employees |
| There can be no assurance that we will be successful in retaining existing personnel or recruiting new personnel |
| The loss of one or more key or other employees, our inability to attract additional qualified employees or the delay in hiring key personnel could have a material adverse effect on our business, results of operations or financial condition |
| In addition, we have historically used stock options and other equity awards as key elements of our compensation packages for many of our employees |
| Under recent accounting rules, we will be required to treat stock-based compensation as an expense commencing in our first quarter of 2006 |
| In addition, changes to regulatory or stock exchange rules and regulations and in institutional shareholder voting guidelines on equity plans may result in additional requirements or limitations on our equity plans |
| As a result, we may change our compensation practices with respect to the number of shares and type of equity awards used |
| The 10 ______________________________________________________________________ [38]Table of Contents value of our equity awards may also be adversely affected by the volatility of our stock price |
| These factors may impair our ability to attract, retain and motivate employees |
| Changes in generally accepted accounting principles may adversely affect us |
| From time to time, the Financial Standards Accounting Board (“FASB”) promulgates new accounting principles that are applicable to us |
| This standard will require us to expense the fair value of stock options issued to employees in our basic financial statements |
| This will adversely affect our results of operations |
| We currently estimate that the standard will adversely impact earnings for 2006 by approximately dlra0dtta09 per diluted share |
| The FASB has proposed other standards, including modifying the accounting for income taxes, accounting for business combinations and fair value measurements |
| These proposed standards or other proposals could have a material adverse impact on our results of operations or financial condition |
| Our quarterly revenues and earnings could be materially adversely affected by uneven sales patterns and changing purchasing behaviors |
| Our quarterly sales have historically reflected an uneven pattern in which a disproportionate percentage of a quarter’s total sales occur in the last month and weeks and days of each quarter |
| This pattern makes prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increases the risk of unanticipated variations in quarterly results and financial condition |
| We believe this uneven sales pattern is a result of many factors including: • the relative dollar amount of our product and services offerings in relation to many of our customers’ budgets, resulting in long lead times for customers’ budgetary approval, which tends to be given late in a quarter • the tendency of customers to wait until late in a quarter to commit to purchase in the hope of obtaining more favorable pricing from one or more competitors seeking their business • the fourth quarter influence of customers’ spending their remaining capital budget authorization prior to new budget constraints in the first six months of the following year • seasonal influences Our uneven sales pattern also makes it extremely difficult to predict near-term demand and adjust manufacturing capacity accordingly |
| If predicted demand is substantially greater than orders, there will be excess inventory |
| Alternatively, if orders substantially exceed predicted demand, the ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, which could materially adversely affect quarterly revenues and earnings |
| In addition, our revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and our backlog at any particular time is not necessarily indicative of future sales levels |
| This is because: • we assemble our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers • we generally ship products shortly after receipt of the order • customers may reschedule or cancel orders with little or no penalty Loss of infrastructure, due to factors such as an information systems failure, loss of public utilities or extreme weather conditions, could impact our ability to ship products in a timely manner |
| Delays in product shipping or an unexpected decline in revenues without a corresponding and timely slowdown in expenses, could intensify the impact of these factors on our business, results of operations and financial condition |
| In addition, unanticipated changes in our customers’ purchasing behaviors such as customers taking longer to negotiate and complete their purchases or making smaller, incremental purchases based on their current needs, also make the prediction of revenues, earnings and working capital for each financial period difficult and uncertain and increase the risk of unanticipated variations in our quarterly results and financial condition |
| Risks associated with our distribution channels may materially adversely affect our financial results |
| In addition to our direct sales force, we have agreements in place with many distributors, systems integrators, resellers and original equipment manufacturers to market and sell our products and services |
| We may, from time to time, derive a significant percentage of our revenues from such distribution channels |
| For 2005, Dell, Inc, one of our channel partners, accounted for 12prca of our revenues |
| Our financial results could be materially adversely affected if our contracts with channel partners were terminated, if our relationship with channel partners were to deteriorate or if the financial condition of our channel partners were to weaken |
| In 11 ______________________________________________________________________ [39]Table of Contents addition, as our market opportunities change, we may have an increased reliance on channel partners, which may negatively impact our gross margins |
| If we are not successful, we may lose sales opportunities, customers and market share |
| Furthermore, the partial reliance on channel partners may materially reduce the visibility to our management of potential customers and demand for products and services, thereby making it more difficult to accurately forecast such demand |
| In addition, there can be no assurance that our channel partners will not develop, market or sell products or services in competition with us in the future |
| In addition, as we focus on new market opportunities and additional customers through our various distribution channels, including small-to-medium sized businesses, we may be required to provide different levels of service and support than we typically provided in the past |
| We may have difficulty managing directly or indirectly through our channels these different service and support requirements and may be required to incur substantial costs to provide such services which may adversely affect our business, results of operations or financial condition |
| Changes in foreign conditions could impair our international operations |
| A substantial portion of our revenues is derived from sales outside the United States |
| In addition, a substantial portion of our products is manufactured outside of the United States |
| Accordingly, our future results could be materially adversely affected by a variety of factors, including changes in foreign currency exchange rates, changes in a specific country’s or region’s political or economic conditions, trade restrictions, import or export licensing requirements, the overlap of different tax structures or changes in international tax laws, changes in regulatory requirements, compliance with a variety of foreign laws and regulations and longer payment cycles in certain countries |
| Undetected problems in our products could directly impair our financial results |
| If flaws in design, production, assembly or testing of our products (by us or our suppliers) were to occur, we could experience a rate of failure in our products that would result in substantial repair, replacement or service costs and potential damage to our reputation |
| Continued improvement in manufacturing capabilities, control of material and manufacturing quality and costs and product testing are critical factors in our future growth |
| There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition |
| Our business could be materially adversely affected as a result of the risks associated with alliances |
| We have alliances with leading information technology companies and we plan to continue our strategy of developing key alliances in order to expand our reach into markets |
| There can be no assurance that we will be successful in our ongoing strategic alliances or that we will be able to find further suitable business relationships as we develop new products and strategies |
| Any failure to continue or expand such relationships could have a material adverse effect on our business, results of operations or financial condition |
| There can be no assurance that companies with which we have strategic alliances, certain of which have substantially greater financial, marketing or technological resources than us, will not develop or market products in competition with us in the future, discontinue their alliances with us or form alliances with our competitors |
| Our business may suffer if we cannot protect our intellectual property |
| We generally rely upon patent, copyright, trademark and trade secret laws and contract rights in the United States and in other countries to establish and maintain our proprietary rights in our technology and products |
| However, there can be no assurance that any of our proprietary rights will not be challenged, invalidated or circumvented |
| In addition, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States |
| Therefore, there can be no assurance that we will be able to adequately protect our proprietary technology against unauthorized third-party copying or use, which could adversely affect our competitive position |
| Further, there can be no assurance that we will be able to obtain licenses to any technology that we may require to conduct our business or that, if obtainable, such technology can be licensed at a reasonable cost |
| From time to time, we receive notices from third parties claiming infringement by our products of third-party patent or other intellectual property rights |
| Responding to any such claim, regardless of its merit, could be time-consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses |
| In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products or a successful claim of infringement against us requiring us to pay royalties to a third party, and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected |
| 12 ______________________________________________________________________ [40]Table of Contents We may become involved in litigation that may materially adversely affect us |
| From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings |
| Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses |
| Furthermore, because litigation is inherently unpredictable, there can be no assurance that the results of any of these actions will not have a material adverse effect on our business, results of operations or financial condition |
| We may have exposure to additional income tax liabilities |
| As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions |
| Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses |
| Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file |
| From time to time, we are subject to income tax audits |
| While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes |
| Should we be assessed with additional taxes, there could be a material adverse effect on our results of operations or financial condition |
| Changes in regulations could materially adversely affect us |
| Our business, results of operations or financial conditions could be materially adversely affected if laws, regulations or standards relating to us or our products are newly implemented or changed |
| In addition, our compliance with existing regulations may have a material adverse impact on us |
| Under applicable federal securities laws, including the Sarbanes-Oxley Act of 2002, we are required to evaluate and determine the effectiveness of our internal control structure and procedures for financial reporting |
| Compliance with this legislation may divert management’s attention and resources and cause us to incur significant expense |
| Should we or our independent auditors determine that we have material weaknesses in our internal controls, our results of operations or financial condition may be materially adversely affected or our stock price may decline |
| Our stock price, like that of other technology companies, is subject to significant volatility because of factors such as: • the announcement of acquisitions, new products, services or technological innovations by us or our competitors • quarterly variations in our operating results • changes in revenue or earnings estimates by the investment community • speculation in the press or investment community In addition, our stock price is affected by general economic and market conditions and has been negatively affected by unfavorable global economic and market conditions |
| If such conditions deteriorate, our stock price could decline |