SanDisk 2014 Annual Report Download - page 5

30JUL201319362378
SanDisk Corporation
951 SanDisk Drive
Milpitas, CA 95035-7933
Dear Fellow SanDisk Stockholders,
2014 was a year of significant accomplishments for SanDisk, with record revenue and strong earnings and free cash
flow. We executed our strategy of deriving a greater portion of revenue from high-value offerings, especially enterprise
solid state drives, and now have the broadest portfolio of enterprise solutions in the market. We also drove additional
stockholder value by returning 103 percent of our free cash flow to our stockholders, including increasing our dividend
payment rate by 33 percent on top of our continuing stock repurchases.
However, 2014 was not without challenges. Ongoing supply constraints and rapid shifts in the product mix required by
some customers prevented us from fulfilling all available demand towards the end of 2014. With inventory already at
very lean levels, a modest loss of output from the wafer fabs amplified the effects of supply constraints and resulted in
lower-than-anticipated fourth quarter results.
So far in 2015, we have been impacted by some additional challenges. In the first quarter, our client SSD sales to a
large customer came to an end. We have also experienced some product issues, and we are seeing certain market shifts
and softer-than-expected pricing in some areas of the business. We expect the combination of these factors to result in
a decline in revenue this year. I want to assure you that we understand the fundamental reasons behind these
challenges and—importantly—that we are taking immediate and aggressive actions to address the issues that are
causing our underperformance in the current fiscal year. Our top operational priority for 2015 is to regain the
excellence in execution that you have come to expect from us over the years. We have in place a solid foundation for
long-term profitable growth, a strong team and a clear strategy, and we remain fully focused on achieving consistent
growth, profits and cash flow.
Transforming the future of flash
Since late 2014, we have been ramping production of our industry-leading 15-nanometer node, using both X2 and
X3 technologies. In the second half of 2015, we will begin pilot production of 48-layer 3D NAND, the world’s most
advanced NAND technology, with commercial introduction targeted for 2016. We expect our 3D NAND will be
utilized across a broad range of offerings ranging from removable to enterprise storage solutions. The launch of
3D NAND represents a transformational change in memory architecture that will enable continued cost reductions
and the creation of new applications and markets.
Flash penetration in client and enterprise storage applications is accelerating. Client SSD adoption rates continue to
increase in the PC market, and SanDisk is addressing the market opportunities with a broad set of form factors and
wide deployment of three-bit-per-cell (X3) technology in both the retail and commercial channels. Meanwhile, in
enterprise markets, the shift to flash in datacenters is well underway, with many enterprise SSD products continuing to
penetrate market segments that historically have been served by hard disk drives. For example, we can now
demonstrate to customers that in many use cases it costs less to architect and install flash-based storage infrastructure
than HDDs, leading to a lower cost of acquisition. This cost crossover represents a tipping point for the enterprise
market, and as enterprise SSD densities increase further, we expect more and more datacenter infrastructure will likely
be architected using flash. In 2014, SanDisk introduced the world’s first 4 terabyte enterprise SAS SSD ideally suited
for HDD replacement. More recently, we launched our revolutionary InfiniFlash all-flash storage platform that
brings massive capacity with breakthrough price economics for big data workloads in hyperscale data centers. SanDisk
is well positioned to lead with both flash-based hardware and software to allow the highest level of performance in our
storage solution offerings.
Consumers across the world are adopting advanced smart mobile devices and increasingly these devices have higher
embedded storage capacities. The mobile market remains a key area of NAND flash consumption, and we continue to
innovate with embedded offerings including the iNAND Discrete, iNAND MCP and custom solutions. In 2015, we
expect to increase the use of X3 technology in our embedded portfolio.
Stockholders Letter