SanDisk 2007 Annual Report Download - page 59

The continued growth of our business depends on development and performance of new markets and products
for NAND flash. Our growth will be increasingly dependent on development of new markets, new applications
and new products for NAND flash memory. Historically, the digital camera market provided the majority of our
revenues, but it is now a more mature market representing a declining percentage of our total revenues, and the
mobile handset market has emerged as the largest segment of our revenues and driver of growth. Other markets for
flash memory include digital audio and video players, USB drives and solid state drives. There can be no assurance
that the use of flash memory in mobile handsets or other existing markets and products will continue to develop and
grow fast enough, or that new markets will adopt NAND flash technologies in general or our products in particular,
to enable us to continue our growth. In addition, there can be no assurance that the increase in average product
capacity and unit demand in response to price reductions will generate revenue growth for us as it has in the past.
Our growth is also dependent on continued geographic expansion and we may face difficulties entering or
maintaining sales in international markets. Recently, our international sales have grown faster than in North
America and we have gained international market share. Some international markets are subject to a higher degree
of commodity pricing than in North America, subjecting us to increased risk of pricing and margin pressure.
Our strategy of investing in captive manufacturing sources could harm us if our competitors are able to
produce products at lower costs or if industry supply exceeds demand. We secure captive sources of NAND
through our significant investments in manufacturing capacity. We believe that by investing in captive sources of
NAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of high
demand. Our significant investments in manufacturing capacity may require us to obtain and guarantee capital
equipment leases and use available cash, which could be used for other corporate purposes. To the extent we secure
manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other NAND
suppliers, we may not achieve an adequate return on our significant investments and our revenues, gross margins
and related market share may be negatively impacted. We may also incur increased inventory or impairment charges
related to our captive manufacturing investments and may not be able to exit those investments without significant
cost to us. In addition, if we finance these manufacturing investments with debt, our return may not be sufficient to
finance the related debt payments or we may need to raise additional funding, which could be difficult to obtain or
may only be available at rates and other terms that are unfavorable.
We continually seek to develop new applications, products, technologies and standards, which may not be
widely adopted by consumers or, if adopted, may reduce demand by consumers for our older products; and our
competitors seek to develop new standards which could reduce demand for our products. We continually devote
significant resources to the development of new applications, products and standards and the enhancement of
existing products and standards with higher memory capacities and other enhanced features. Any new applications,
products, technologies, standards or enhancements we develop may not be commercially successful. The success of
new product introductions is dependent on a number of factors, including market acceptance, our ability to manage
risks associated with new products and production ramp issues. New applications, such as the adoption of flash-
based solid state drives, or SSDs, that are designed to replace hard disk drives in devices such as computers and
servers, can take several years to develop. We cannot guarantee that manufacturers will adopt SSDs or that this
market will grow as we anticipate. For the SSD market to become sizeable, the cost of flash memory must decline
significantly so that the cost to consumers is competitive with the cost of hard disk drives, and we believe that we
will need to implement MLC technology into our SSDs, which will require us to develop new controllers. There can
be no assurance that our MLC-based SSDs will be able to meet the specifications required to gain customer
qualification and acceptance. Other new products, such as the Sansa Connect
TM
, Sansa Clip, Sansa View, Sansa
Shaker
TM
, TakeTV
TM
and pre-recorded flash memory cards may not gain market acceptance, and we may not be
successful in penetrating the new markets that we target. New applications such as our Fanfare
TM
content gateway,
which represents our first significant content initiative, may require significant up-front investment with no
assurance of long-term commercial success or profitability. The content we provide may be supplied by third parties
and to the extent that the third parties do not deliver as expected or disputes arise related to, among other things,
third-party royalties from the distribution of content, our product offerings may be negatively impacted. Unau-
thorized distribution of third-party content that we host could restrict us from continuing to provide content or limit
access to new content. As we introduce new standards or technologies, it can take time for these new standards or
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