SanDisk 2013 Annual Report Download - page 120

Our license and royalty revenue may fluctuate or decline significantly in the future due to license agreement
renewals, declines in sales of the products or use of technology underlying the license and royalty revenue by our
licensees, 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, exercise their
option to terminate the license or fail to exercise their option to extend the licenses, 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
revenue decreased sequentially primarily due to a new license agreement with Samsung that was effective
in the third quarter of fiscal year 2009 with a term of seven years, and contains a lower effective royalty rate
compared to the previous license agreement. To the extent that we are unable to renew license agreements
under similar terms, or at all, our financial results would be harmed by the reduced license and royalty
revenue and we may incur significant patent litigation costs to enforce our patents against these licensees.
Our agreements may require us in certain instances to recognize license revenue related to a particular
licensee all in one period instead of over time which could create additional volatility in our licensing
revenue. A portion of our license and royalty revenue is based on sales of product categories as well as
underlying technology, and fluctuations in the sales of those products or technology adoption rates would
also result in fluctuations in the license and royalty revenue due to us under our agreements. If our
licensees or we fail to perform on contractual obligations, we may incur costs to enforce or defend the
terms of our licenses and there can be no assurance that our enforcement, defense or collection efforts will
be effective. If we license new IP from third-parties or existing licensees, we may be required to pay license
fees, royalty payments or offset existing license revenue. In addition, we may be subject to disputes, claims
or other disagreements on the timing, amount or collection of royalties or license payments under our
existing license agreements.
In transitioning to new technologies and products, we may not achieve OEM design wins, our OEM
customers may delay transition to new technologies, our competitors may transition more quickly than we do, or
we may experience product delays, cost overruns or performance issues that could harm our business. The
transition to new generations of products, such as products containing 19-nanometer, 1Y-nanometer or
subsequent process technologies such as 1Z-nanometer 2D NAND and 3D NAND and/or X3 NAND
memory architecture, is highly complex and requires new controllers, new test procedures and
modifications to numerous aspects of our manufacturing processes, resulting in the need for extensive
qualification of the new products by our OEM customers and us. In addition, our competitors may
transition to these new technologies more quickly or more effectively than we are able to, which could
harm our ability to compete effectively. If we fail to achieve OEM design wins with new technologies such
as 19-nanometer, 1Y-nanometer or subsequent process technologies or the use of X3 in certain products, if
our OEM customers choose to transition to these new technologies more slowly than our roadmap plans, if
the demand for the products that we developed is lower than expected, if the supporting technologies to
implement these new technologies are not available, or if our competitors transition to these new
technologies, including X3, more quickly or more effectively than we are able to, we may be unable to
achieve the cost structure required to support our profit objectives or may be unable to grow or maintain
our OEM market position. Furthermore, there can be no assurance that technology transitions will occur
on schedule or at the yields or costs that we anticipate, that the tools and equipment required for the
technology transitions will be available on a cost-effective basis or at all, or that products based on the new
technologies will meet customer specifications. The vast majority of products require controllers or
firmware, and any delays in developing or sourcing controllers or firmware, or incompatibility or quality
issues relating to the controllers or firmware in our products, could harm our revenue and gross margin, as
well as business relationships with our customers. Any material delay in a development or qualification
schedule could delay deliveries and harm our operating results.
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