SanDisk 2010 Annual Report Download - page 143

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should they decide not to use our products, our results of operations and financial condition could be harmed.
OEM manufacturers of consumer devices, including mobile phones and tablets continue to increase their usage
of embedded flash storage. Our OEM revenue is dependent in part upon our embedded flash storage solutions
meeting OEM product specifications and achieving design wins, including in new product categories such as
tablets. Embedded flash storage solutions typically require lengthy customer product qualifications, which could
slow the adoption of our latest technology transitions and thereby have a negative impact on our gross margins
by limiting our ability to reduce costs. Also, since our embedded solutions are specifically qualified, we could be
restricted from using non-captive supply, resulting in the potential need for further capital investment in our
captive capacity. Recently, there have been numerous announcements of new devices such as tablets, the
majority of which utilize NAND flash memory. There is a risk that not all tablets will gain market acceptance. If
tablets or other product categories do not grow as anticipated, or we supply OEMs that are not successful in
commercializing their products, we could build excess capacity for demand that does not materialize.
In 2009, we began selling non-branded products, wafers and components to certain OEM customers. The
sales to these OEMs could be more variable than the sales to our historical customer base, and these OEMs may
be more inclined to switch to an alternative supplier based on short-term price fluctuations or the timing of
product availability. Sales to these OEMs could also cause a decline in sales of our branded products. In addition,
we sell certain customized products and if the intended customer does not purchase these products as scheduled,
we may incur excess inventory or rework costs.
Our business depends significantly upon sales through retailers and distributors, and if our retailers and
distributors are not successful, we could experience reduced sales, substantial product returns or increased price
protection, any of which would negatively impact our business, financial condition and results of operations. A
significant portion of our sales is 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 well as
participation in various cooperative marketing programs. 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. Price protection against declines in our selling prices has the effect of reducing
our deferred revenues, and eventually our revenues. If our retailers and distributors are not successful, due to
weak consumer retail demand caused by an economic downturn, competitive issues, decline in consumer
confidence, or other factors, we could continue to experience reduced sales as well as substantial product returns
or price protection claims, which would harm our business, financial condition and results of operations. 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. Certain of our retail and
distributor partners are experiencing financial difficulty and prolonged negative economic conditions could cause
liquidity issues for our retail and distributor customers and channels. For example, two of our North American
retail customers, Circuit City Stores, Inc. and Ritz Camera Centers, Inc., filed for bankruptcy protection in 2008
and 2009, respectively. Negative changes in customer credit-worthiness; the ability of our customers to access
credit; or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our
revenue and our ability to collect outstanding receivable balances. In addition, we have certain retail customers to
which we provide inventory on a consigned basis, and a bankruptcy or shutdown of these customers could
preclude us from taking possession of our consigned inventory, which could result in inventory charges.
Our inability to obtain sufficient flash memory supply could cause us to lose sales and market share and harm
our operating results. We are currently experiencing significant growth in demand for our flash memory products,
and demand from our customers may exceed the supply of captive and non-captive flash memory available to us.
We are in the process of completing the expansion of Flash Alliance, and have announced the Flash Forward
venture with Toshiba. However, it is uncertain whether additional supply provided by these expansions will enable
us to meet expected demand. While we have various sources of non-captive supply, our purchases of non-captive
supply may be limited due to the required advanced purchase order lead-times, the product mix available and the
higher cost of this non-captive supply. Our inability to obtain supply to meet demand may cause us to lose sales,
market share and corresponding profits, which would harm our operating results.
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