SanDisk 2004 Annual Report Download - page 32

Table of Contents
rather than long−term contracts. Accordingly, our customers may generally terminate or reduce their purchases from us at any time
without notice or penalty. In addition, the composition of our major customer base changes from year to year as the market demand
for our customers’ products changes. Additionally, our license and royalty revenues may decline in the future as our existing license
agreements expire, caps are reached or rates change.
Our business depends significantly upon sales of products in the highly competitive consumer market, a significant portion of
which are made to retailers and through distributors, and if our distributors and retailers are not successful in this market, we could
experience substantial product returns, which would negatively impact our business, financial condition and results of operations. A
significant portion of our sales are made through retailers, either directly or through distributors. Sales through these channels
typically include rights to return unsold inventory and protection against price declines. As a result, we do not recognize revenue until
after the product has been sold through to the end user, in the case of sales to retailers, or to distributor customers, in the case of sales
to distributors. If our distributors and retailers are not successful in this market, there could be substantial product returns or price
protection claims, which would harm our business, financial condition and results of operations. Availability of sell−through data
varies throughout the retail channel, which makes it difficult for us to determine actual retail product revenues until after the end of
each of our fiscal quarters. Our arrangements with our customers also provide them price protections against declines in our
recommended selling prices, which has the effect of reducing our deferred revenue. Except in limited circumstances, we do not have
exclusive relationships with our retailers or distributors and therefore must rely on them to effectively sell our products over those of
our competitors.
Our average selling prices, net of promotions, may decline due to excess supply, competitive pricing pressures and strategic price
reductions initiated by us or our competitors. The market for NAND flash products is competitive and characterized by rapid price
declines. Price declines may be influenced by, among other factors, supply in excess of demand from existing or new competitors,
technology transitions, new technologies or strategic actions by competitors to gain market share. If our cost reductions fail to keep
pace with the rate of price declines, our gross margin and operating results will be negatively impacted.
Our revenue depends, in part, on the success of products sold by our OEM customers. A portion of our sales are to a number of
OEMs who bundle our flash memory products with their products, such as cameras or handsets. Our sales to these customers are
dependent upon a particular OEM’s ability to create, introduce, market and sell their products successfully in their respective markets.
Should our OEM customers be unsuccessful in selling their products, which include our product, or should they decide to discontinue
bundling our products, our results of operation and financial condition could be harmed.
The continued growth of our business depends on the development of new markets and products for NAND flash memory. Over the
last several years, we have derived the vast majority of our revenue from the digital camera market. As this market begins to
experience slower growth rates, our growth will be increasingly dependent on the development of new markets and new products for
NAND flash memory. Specifically, one of the new markets that we are focused on is the handset market in which feature phones are
increasingly being designed to utilize NAND flash memory cards. There can be no assurance that new markets and products will
develop and grow fast enough, or that new markets will adopt NAND flash technologies or our products, to enable us to continue our
growth.
We continually seek to develop new products and standards, which may not be widely adopted by consumers or, if adopted, may
reduce demand by consumers for our older products. We continually seek to develop new products and standards and enhance
existing products and standards with higher memory capacities and other enhanced features. We cannot assure you that our new
products will gain market acceptance or that we will be successful in penetrating the new markets that we target, such as the digital
audio player market or the consumable flash market with our Shoot and Store products. As we introduce new standards and new
products, it will take time for these new standards and products to be adopted, for consumers to accept and transition to these new
products and for significant sales to be generated from
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