SanDisk 2012 Annual Report Download - page 121

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conts here. Annual Report
Our revenues depend in large part on our ability to achieve design wins with OEM customers and the
success of products sold by our OEM customers. Our primary OEM products include cards for mobile devices,
embedded memory products, and SSDs for the notebook and server markets. Our OEM revenue is primarily
dependent upon our products meeting OEM specifications and the achievement of design wins in an OEM’s
products such as mobile phones, tablets, computers and enterprise servers. Even if our products meet OEM
specifications, our sales to these customers are dependent upon the OEMs choosing our products over those of
our competitors, on the OEMs’ ability to create, market and sell their products successfully, and our ability to
supply our products in sufficient quantity and in a timely manner. For example, in the first half of fiscal year
2012, our OEM sales declined because our next generations of mobile embedded products were in various stages
of development and qualification, and because mobile OEM customers reduced their rate of card bundling and
bundled lower capacity cards. If our OEM customers are not successful in selling their current or future products
in sufficient volume or in a timely manner, or should they decide not to use our products, or should they further
reduce their card bundling or bundle lower capacity cards, or should we not be able to produce our products in
sufficient quantity or quality, our revenues, operating results and financial condition could be harmed.
Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose
one or more of our major customers or licensees, or experience any material reduction in orders from any of our
customers, our revenues and operating results could suffer. In fiscal year 2012, one customer, Apple, accounted
for 13% of our total revenues, and our top two customers represented 22% of our total revenues. In fiscal year
2011, one customer, Samsung, accounted for 10% of our total revenues, and our top two customers represented
19% of our total revenues. The composition of our major customer base has changed over time, including shifts
between OEM and retail-based customers, and there have been changes in the market share concentration among
our customers. We expect fluctuations in our customer and licensee base and the mix of our revenue by customer
and licensee to continue as our markets and strategies evolve, which could make our revenues less predictable
from period-to-period. Our sales are generally made from standard purchase orders rather than long-term
contracts. Accordingly, our customers, including our major customers, may generally terminate or reduce their
purchases from us at any time with limited notice or penalty. If we were to lose one or more of our major
customers or licensees, 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 could suffer.
Our enterprise SSD business is characterized by sales to a limited number of customers with long design,
qualification and sales processes. The enterprise SSD market is comprised of a relatively limited number of
customers, with long design, qualification and test cycles prior to sales. OEM customers in the enterprise SSD
market typically also require us to customize our products, which could further lengthen the sales process. We
spend substantial time, money and other resources in our sales process without any assurance that our efforts will
produce any customer orders. These lengthy and uncertain processes also make it difficult for us to forecast demand
and timing of customer orders. Moreover, we start manufacturing our products and placing orders for materials and
components based on non-binding forecasts that our OEM customers provide to us, further increasing our exposure
when actual sales vary from the OEM customer’s forecasts. The difficulty in forecasting demand and the
customized nature of our products for certain OEMs make it difficult to anticipate our inventory requirements,
which may cause us to over-purchase materials and components or over-produce finished goods, resulting in
inventory write-offs, or under-produce finished goods, harming our ability to meet customer requirements and
generate sales. Furthermore, due to longer customer product cycles, we may not be able to transition customers to
our leading edge products, which would prevent us from benefitting from the technology transitions that enable cost
reductions, which may harm our product gross margins. We are also in the process of transitioning our enterprise
solutions products from non-captive memory to captive memory, and delays in the qualification of captive memory
for these products may cause unexpected declines in our revenue or margins from these products.
Our SSD products are more complex and rely on more sophisticated firmware than our other products,
which may result in increased costs and lower gross margins due to more frequent product updates, returns of
obsolete products and warranty claims. Our SSD solutions in the client computing and enterprise data center
markets are more complex than our traditional products due to, among other things, an increased dependence on
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