SanDisk 2000 Annual Report Download - page 13

11 . Sa n D is k C o r p o ra t io n . 2 0 0 0 A n n ua l Re p o r t
Management’s Discussion and Analysis
of Financial Conditions and Results of Operations
Ce rtain state m e nts in this d isc ussion and analysis are
fo rw ard lo o king statem e nts b ased o n c urre nt exp e c ta-
tio ns , and entail vario us risks and uncertaintie s that
c o uld c ause ac tual results to d iffer m aterially from
tho s e exp resse d in suc h fo rw ard lo o king statem e nts.
Suc h risks and unc e rtainties are se t fo rth in “ Facto rs
That M ay Affe c t Future Re sults” and e lse w he re in this
rep ort. Th e follow ing disc ussio n should b e read in c o n-
junc tio n w ith o ur c o nso lidated financ ial statem ents and
the no te s the reto .
O v e r v ie w
SanDisk w as fo und ed in 19 88 to d eve lo p and m arket
flash d ata sto rag e system s. W e sell o ur p ro d uc ts to
the consum er elec tronic s and ind ustrial/ c om m unic a-
tio ns m arkets. In fisc al 200 0, ap p ro xim ately 77% of our
p ro d uc t sales w e re attrib utab le to the c o nsum er elec -
tro nic s m arket, p articularly sale s of Co m p actFlash and
M ultiM ed iaCard p ro d uc ts fo r use in d ig ital c am era
ap p lic atio ns. Our Co m p ac tFlash p ro d ucts have low er
averag e selling p ric es and g ross m arg ins than o ur
hig her cap ac ity FlashDisk and FlashDrive p ro d ucts. In
ad d ition, a sub stantial p o rtio n o f o ur Co m p actFlash
and M ultiM ediaCard p ro d uc ts are so ld into the retail
c hanne l, w hic h usually has sho rte r c usto m e r ord er
lead - tim es than o ur o the r channels. A m ajo rity o f o ur
sale s to the retail c hannel are turns b usiness, w ith
o rd ers re c eive d and fulfille d in the sam e q uarter, the re-
b y d e c reasing o ur ab ility to ac c urately forec ast future
p ro d uc tion nee d s. We b elieve sales to the c o nsum e r
m arket w ill co ntinue to represent a m ajority o f o ur
sale s, and inc rease as a p e rc e ntage o f sales in future
years, as the p o p ularity o f c o nsum er ap p lic ations,
inc luding d igital cam eras, increases.
Our o p erating results are affe c te d b y a num ber of
facto rs inc lud ing the vo lum e of p rod uc t sales, com p eti-
tive p ric ing p re ssures, availab ility o f found ry c ap acity,
variations in m anufac turing c yc le tim es, fluc tuations in
m anufacturing yields and m anufacturing utilization, the
tim ing o f signific ant o rd ers, o ur ab ility to m atc h sup p ly
w ith d e m and, changes in p ro d uc t and c usto m er m ix,
m arket ac c e p tanc e o f new o r e nhanc e d versions of
o ur produc ts, c hanges in the c hanne ls thro ugh w hic h
o ur produc ts are distrib uted, tim ing o f ne w produc t
anno unc e m e nts and intro d uctio ns b y u s and o ur com -
p etito rs, the tim ing of license an d ro yalty re venues,
fluctuatio ns in p ro d uc t c o sts, incre ased researc h and
d eve lo p m e nt e xp e nse s, and exc hang e rate fluctua-
tio ns . W e have exp erie nc ed seaso nality in the p ast. As
the proportio n o f o ur p rod uc ts sold for use in c o n-
sum er ele c tro nic s ap p lic ations inc re ases, our re venue s
m ay b ec om e sub jec t to se aso nal dec lines in the first
q uarter o f eac h year. See “ Fac tors That M ay Affect
Future Re sults – Our Op e rating Re sults M ay Fluc tuate
Sig nific antly W hic h M ay Ad vers ely Affe c t Our Sto c k
Pric e ” and “ – There is Se asonality in Our Business.”
Beg inning in late 1995 , w e adopted a strate g y o f
lic ensing o ur flash te c hnology, inc lud ing o ur p atent
p o rtfolio, to third p arty m anufacture rs of flas h prod-
uc ts. To d ate, w e have entered into p atent c ro ss-
lic ense agree m e nts w ith seve ral c o m p anies, and
inte nd to p ursue o p p o rtunitie s to enter into ad d itional
lic ense s. Under our c urrent lic e nse ag re em ents,
lic ense es p ay lic e nse fe es, ro yaltie s, o r a c o m b inatio n
the reof. In so m e c ase s, the c o m pensatio n to us m ay
b e p artially in the fo rm o f g uarantee d ac c ess to flash
m em o ry m anufac turing c ap ac ity fro m the lic ense e
c o m p any. The tim ing and am o unt o f ro yalty p aym e nts
and the rec o g nitio n o f lic ense fees c an vary substan-
tially fro m q uarter to q uarter d epending o n the te rm s
o f eac h ag reem ent and , in so m e case s, the tim ing o f
sale s o f p ro d uc ts by the o ther partie s. As a re sult,
lic ense and ro yalty re venue s have fluc tuate d sig nifi-
c antly in the p ast and are like ly to c o ntinue to fluc tuate
in the future. Given the relative ly high g ro ss m arg ins
asso c iate d w ith lic ense and royalty reve nues, gross
m arg ins and net incom e are likely to fluctuate m o re
w ith c hang e s in lic ense and ro yalty reve nu es than w ith
c hang es in p ro d uct re venue s.
W e m arket o ur p ro d uc ts u sing a d irect sales
o rg anizatio n, distrib uto rs, m anufac turers’ repre se nta-
tives, p rivate lab e l p artne rs, OEM s and retailers. W e
exp ect that sales throug h the retail channel w ill co m -
p rise an inc reasing share o f o ur p ro d uc t revenues in
the future, and that a sub stantial p o rtion of our sales
into the retail channel w ill b e m ad e to p artic ip ants that
w ill have the rig ht to return unso ld p ro d ucts. Our p o licy
is to defer recognitio n o f re venues fro m the se sales
until the p ro d uc ts are so ld to the end c usto m e rs.
H istoric ally, a m ajo rity of o ur sale s have b een to a
lim ite d num b e r o f custom ers. Sales to o ur to p 10 c us-
to m e rs ac c o unte d fo r approxim ately 48% , 57% , an d
59% , resp ectively, of our p ro d uct re venue s fo r 200 0,
19 99, and 1998 . In 200 0, no sing le custom er ac c o unt-
ed for g reate r than 10 % o f o ur to tal re venue s. In 19 9 9
and 19 98, re venue s fro m o ne c usto m er excee d e d 10%
o f to tal re venue s. W e e xp e c t that sale s o f o ur p rod -
uc ts to a lim ite d num b er of custom ers w ill c o ntinue to
ac c o unt fo r a sub stantial portio n o f o ur produc t rev-
enue s fo r the fo reseeable future . W e have also exp eri-
enc ed sig nific ant c hanges in the c o m p o sitio n of o ur
c usto m er b ase fro m year to year and expec t this pat-
te rn to c ontinue as m arket d e m and for o ur c usto m ers’
p ro d uc ts fluc tuate s. The lo ss o f, or a sig nific ant re d uc-
tio n in p urc hase s by any o f o ur m ajo r c usto m ers, c o uld
harm o ur b usiness, financial c ond itio n and results o f
o p eratio ns. See “ Facto rs That M ay Affec t Future
Results – Sales to a Sm all N um b e r o f Custom ers
Represent a Sig nific ant Po rtio n o f Our Re venue s.”
All of our pro du c ts require silic o n w afe rs, the
m ajo rity o f w hic h are currently m anufac tured fo r us b y
UM C in Taiw an. Ind ustry- w id e dem and fo r sem ic o n-
d uc tors increased sig nific antly in 1999 and the first nine