SanDisk 2012 Annual Report Download - page 122

more sophisticated firmware and, with respect to enterprise SSDs, customization of our products for specific
OEM customers. Changes in our OEM customers’ specifications for these products could require us to update the
firmware for our SSD products, which results in increased costs for processing these updates. Furthermore, our
failure to update our products to comply with the new specifications may result in reduced demand from our
customers for a particular SSD solution, notwithstanding the long design, qualification and test cycles we have
undertaken as part of our sales process for that solution, which may harm our results of operations.
Difficulty in forecasting demand for our products may result in excess inventory or lost sales, either of
which could harm our financial results. The majority of our products are sold directly or indirectly into consumer
markets, which are difficult to accurately forecast. Also, a substantial majority of our quarterly sales are from
orders received and fulfilled in that quarter. Additionally, we depend upon timely reporting from our customers
as to their inventory levels and sales of our products in order to forecast demand for our products. The failure to
accurately forecast demand for our products may result in lost sales or excess inventory and associated reserves
or write-downs, any of which could harm our business, financial condition and operating results.
The long lead times for some of our purchasing arrangements further restrict our ability to respond to
variations from our forecasts. Some of our silicon purchasing arrangements provide that the first three months of
our rolling six-month projected supply requirements are fixed and we may make only limited percentage changes
in the second three months of the period covered by our supply requirement projections. Our products also
contain non-silicon components that have long lead-times requiring us to place orders several months in advance
of anticipated demand. In addition, purchasing decisions for manufacturing tools in Flash Ventures often need to
be made several months in advance in order to ensure that the tools can be integrated into the manufacturing
process when increased capacity is needed. These purchasing arrangements increase the risk of excess inventory
or loss of sales in the event our forecasts vary substantially from actual demand.
We rely substantially on our ventures and strategic partnerships with Toshiba, which subjects us to risks and
uncertainties that could harm our business, financial condition and operating results. The vast majority of our
NAND flash memory is supplied by Flash Ventures. In addition, we partner with Toshiba on the development of
NAND flash technology and we have entered into strategic partnerships with Toshiba relating to research and
development for the next technology transitions of NAND flash and alternative technologies beyond NAND flash
technologies. These ventures and strategic partnerships are subject to various risks that could harm the value of our
investments, our results of operations or our future growth opportunities, including, among others:
• under the terms of our venture agreements with Toshiba, which govern the operations of Flash
Ventures, we have limited power to unilaterally direct most of the activities that most significantly
impact Flash Ventures’ financial performance, including technology transitions, capital investment and
other manufacturing and operational activities at Flash Ventures; the process of reaching agreement
with Toshiba may be time consuming and may result in decisions that could harm our future results of
operations, financial condition or competitiveness;
• the terms of our arrangements with Toshiba include provisions such as exclusivity, transfer restrictions,
and limited termination rights, which limit our flexibility; and
• we may not always agree with Toshiba on the NAND research and development roadmap, or the
technology path beyond NAND flash memory, and we or Toshiba may have different priorities with
respect to investment in Flash Ventures.
Our license and royalty revenues may fluctuate or decline significantly in the future due to license
agreement renewals or if licensees fail to perform on a portion or all of their contractual obligations. If our
existing licensees do not renew their licenses upon expiration, renew them on less favorable terms, or we are not
successful in signing new licensees in the future, our license revenue, profitability, and cash provided by
operating activities would be harmed. As our older patents expire, and the coverage of our newer patents may be
different, it may be more difficult to negotiate or renew favorable license agreement terms or a license agreement
at all. For example, in the first quarter of fiscal year 2010, our license and royalty revenues decreased
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