SanDisk 2014 Annual Report Download - page 90

design, qualification and test cycles prior to sales. OEM customers in the enterprise storage 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. When we acquire companies, such as
Fusion-io, Inc., or Fusion-io, that have products using flash memory other than our captive flash memory,
we typically transition these products to our captive memory, and any delays in the qualification of our
captive memory for these products may cause unexpected declines in our revenue or margins from these
products. We expect growing demand for our SSD solutions from hyperscale customers. These hyperscale
customers may place orders for significant volumes with short lead times that may be difficult for us to
forecast and fulfill, which could result in the loss of sales opportunities and adversely affect our business.
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. We have also entered into a non-binding memorandum of
understanding with Toshiba to jointly invest in a new wafer fabrication facility in Yokkaichi, Japan, the
primary purpose of which is to secure space for converting existing 2D NAND capacity to 3D NAND
capacity beginning in 2016. 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’ 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, the
technology path beyond NAND flash memory, or expansions or conversions of fab capacity; 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 adversely impact our
results of operations.
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