SanDisk 2012 Annual Report Download - page 124

Alternative technologies or storage solutions such as cloud storage, enabled by high bandwidth wireless or
internet-based storage, could reduce the need for physical flash storage within electronic devices, which could
materially harm our operating results.
We require an adequate level of product gross margins to continue to invest in our business. Our ability to
generate sufficient product gross margins and profitability to invest in our business is influenced by supply/
demand balance in the flash memory industry, our ability to reduce our cost per gigabyte at an equal or higher
rate than the price decline per gigabyte, our ability to develop new products and technologies, the rate of growth
of our target markets, the competitive position of our products, the mix of our products, the continued acceptance
of our products by our customers and our management of production capacity. For example, we experienced
negative product gross margins for fiscal year 2008 and the first quarter of fiscal year 2009 due to sustained
aggressive industry price declines as well as inventory charges primarily due to lower of cost or market write
downs. If we fail to maintain adequate product gross margins and profitability, our business and financial
condition would be harmed and we may have to reduce, curtail or terminate certain business activities, including
funding technology development and capacity expansion.
Any disruption or shortage in our supply chain could reduce our revenues, earnings and gross margins. All
of our flash memory products require silicon supply for the memory and controller components. The vast
majority of our flash memory is currently supplied by Flash Ventures and to a much lesser extent by third-party
silicon suppliers. Any disruption or shortage in supply of flash memory from our captive or non-captive sources,
including disruptions due to disasters, work stoppages, supply chain interruptions and other factors, would harm
our operating results.
The concentration of Flash Ventures in Yokkaichi, Japan, magnifies the risks of supply disruption. The
Yokkaichi location and Japan in general are subject to earthquakes, typhoons and other natural disasters.
Moreover, Toshiba’s employees who produce Flash Ventures’ products are covered by collective bargaining
agreements and any strike or other job action by those employees could interrupt our wafer supply from Flash
Ventures. A disruption in our captive wafer supply, whether due to disruptions from natural disasters,
emergencies such as power outages, fires or chemical spills, or employee strikes or other job actions could cause
us not to have sufficient supply to meet demand, resulting in lost sales and market share, as well as significant
costs, including wafer loss. For example, the March 11, 2011 earthquake and tsunami in Japan caused a brief
equipment shutdown at Flash Ventures, which resulted in some wafer loss as well as delayed or canceled
deliveries of certain tools and materials from suppliers impacted by the earthquake. In addition, Flash Ventures
has, from time to time, experienced power outages and power fluctuations, which have resulted in a loss of
wafers and increased costs associated with bringing the facility back online.
Currently, our controller wafers are manufactured by third-party foundries. Any disruption in the
manufacturing operations of our controller wafer vendors would result in delivery delays, harm our ability to
make timely shipments of our products and harm our operating results until we could qualify an alternate source
of supply for our controller wafers, which could take several quarters to complete.
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 claims, any of which would harm our business, financial condition and operating results. A significant
portion of our sales is made through retailers (for our retail channel) and distributors (for both our retail and
OEM channels). 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. In addition, sales through retailers
and distributors typically include commercial terms such as the right to return unsold inventory and protection
against price declines. 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.
If our retailers and distributors are not successful in selling our products, not only would our revenues would
decrease, but we could also experience lower gross margins due to substantial product returns or price protection
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