SanDisk 2008 Annual Report Download - page 20

Our revenues depend in part on the success of products sold by our OEM customers. A significant portion
of our sales are to OEMs, which either bundle or embed our flash memory products with their products, such as
mobile phones, GPS devices and computers. Our sales to these customers are dependent upon the OEMs
choosing our products over those of our competitors and on the OEMs’ ability to create, introduce, market and
sell their products successfully in their markets. Should our OEM customers be unsuccessful in selling their
current or future products that include our products, or should they decide to discontinue using our products, our
results of operations and financial condition could be harmed.
The future growth of our business depends on the development and performance of new markets and
products for NAND-based flash memory. Our future growth is dependent on development of new markets, new
applications and new products for NAND-based flash memory. Historically, the digital camera market provided
the majority of our revenues, but it is now a more mature market, and the mobile handset market has emerged as
the largest segment of our revenues. Other markets for flash memory include digital audio and video players,
USB drives and SSDs. We cannot assure you that the use of flash memory in mobile handsets or other existing
markets and products will 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 grow. Our future growth is also dependent on
continued geographic expansion and we may face difficulties entering or maintaining sales in international
markets. Some international markets are subject to a higher degree of commodity pricing or tariffs and import
taxes than in the U.S., 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 continues to exceed 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 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. For example, in fiscal year 2008, we took impairment charges related
to FlashVision, Flash Partners and Flash Alliance of approximately $93 million, primarily due to NAND industry
pricing conditions due to supply exceeding demand. In addition, in fiscal year 2008, we recorded inventory
reserves primarily for lower-of-cost-or-market for both inventory on-hand and in the channel of $394 million.
We also recorded a charge of $121 million in fiscal year 2008 for adverse purchase commitments associated with
under utilization of Flash Partners and Flash Alliance capacity for the 90-day period in which we have
non-cancelable orders.
Our business and the markets we address are subject to significant fluctuations in supply and demand and
our commitments to Flash Ventures may result in periods of significant excess inventory. The start of production
at Fab 4 at the end of fiscal year 2007 and the continuing ramp of production has increased our captive supply
and resulted in excess inventory in fiscal year 2008. Our obligation to purchase 50% of the supply from Flash
Ventures could continue to harm our business and results of operations if our committed supply exceeds demand
for our products. The adverse effects could include, among other things, significant decreases in our product
prices, and significant excess, obsolete or lower of cost or market inventory write-downs, such as those we
experienced in fiscal year 2008, which would harm our gross margins and could result in the impairment of our
investments in Flash Ventures.
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 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
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