SanDisk 2005 Annual Report Download - page 89

• continued development of new markets and products for NAND flash memory and acceptance of our
products in these markets;
• our license and royalty revenues may decline significantly in the future as our existing license agreements
and key patents expire;
• timing of sell through by our distributors and retail customers;
• increased purchases of flash memory products from our non-captive sources, which typically have higher
costs than our captive sources;
• difficulty in forecasting and managing inventory levels; particularly, building a large inventory of unsold
product due to noncancelable contractual obligations to purchase materials such as flash memory, con-
trollers, printed circuit boards and discrete components;
• write-downs of our investments in fabrication capacity, equity investments and other assets;
• expensing of share-based compensation;
• adverse changes in product and customer mix;
• terrorist attacks, governmental responses to those attacks and natural disasters;
• changes in general economic conditions; and
• the factors listed elsewhere under “Risk Factors.”
Sales to a small number of customers represent a significant portion of our revenues and, if we were to lose one
of our major licensees or customers or experience any material reduction in orders from any of our customers, our
revenues and operating results would suffer. Sales to our top 10 customers and licensees accounted for more than
50%, 55% and 48% of our total revenues during the fiscal years of 2005, 2004 and 2003, respectively. If we were to
lose one of our major licensees or customers or experience any material reduction in orders from any of our
customers or in sales of licensed products by our licensees, our revenues and operating results would suffer.
Additionally, our license and royalty revenues may decline significantly in the future as our existing license
agreements expire. Our sales are generally made by standard purchase orders 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 we enter new
markets.
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 our distributors’ customers, in the
case of sales to distributors. If our distributors and retailers are not successful in this market, we could experience
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 protection against declines in our recommended selling prices, which
has the effect of reducing our deferred revenue and eventually 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,
strategic price decreases by us or our competitors such as that implemented by us in the first quarter of 2006, supply
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