SanDisk 2013 Annual Report Download - page 117

the firmware for our SSD products, which would result 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.
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 product
design, qualification, manufacturing and 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 on
the timelines or in the quantities we expect. 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 inventory 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 gross margin. For the enterprise products we acquired with
the SMART Storage Systems, or SMART Storage, acquisition, we are in the process of transitioning these
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.
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. Substantially all 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 revenue and costs, our future rate of
spending 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, we or Toshiba may have different priorities with
respect to investment in Flash Ventures or future technologies, and divergent technology paths and
investment priorities may impact our results of operations.
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Annual Report