SanDisk 1999 Annual Report Download - page 28

Our business depends upon consumer products.
In 1999, we received more product revenue and shipped more units of
products destined for consumer electronics applications, principally
digital cameras, than for any other application. We believe that these
products will encounter intense competition and be more price sensi-
tive than products sold into our other target markets. In addition, we
must spend more on marketing and promotion in consumer markets to
establish brand name recognition and preference.
A significant portion of sales to the consumer electronics market is
made through distributors and to retailers. Sales through these chan-
nels typically include rights to return unsold inventory. As a result,
we do not recognize revenue until after the product has been sold to
the end user. If our distributors and retailers are not successful in
this market, there could be substantial product returns, which would
harm our business, financial condition and results of operations.
Sales to a small number of customers represent
a significant portion of our revenues.
More than half of our revenues come from a small number of
customers. For example, sales to our top 10 customers accounted
for approximately 57%, 59%, and 67%, respectively, of our product
revenues for 1999, 1998, and 1997. In fiscal 1999, one customer
accounted for more than 10% of product sales. In fiscal year 1998,
two customers each accounted for 10% or more of our product
sales. If we were to lose any of these customers or experience any
material reduction in orders from these customers, our revenues and
operating results would suffer. Our sales are generally made by
standard purchase orders rather than long-term contracts. In addi-
tion, the composition of our major customer base changes from year
to year as the market demand for our customers’ products change.
Our multiple sales channels may compete for a
limited number of customer sales.
Web based sales of our products today represent a small but growing
portion of our overall sales. Sales on the Internet tend to undercut
the traditional distribution channels and may dramatically change
the way our consumer products are purchased in future years. We
cannot assure you that we will successfully manage the inherent
channel conflicts between our retail channel customers and cus-
tomers that wish to purchase directly on the Internet.
There is seasonality in our business.
Sales of our products, in particular the sale of CompactFlash
products, in the consumer electronics applications market may be
subject to seasonality. As a result, product sales may be impacted by
seasonal purchasing patterns with higher sales generally occurring in
the second half of each year. In addition, in the past we have
experienced a decrease in orders in the first quarter from our
Japanese OEM customers primarily because most customers in
Japan operate on a fiscal year ending in March and prefer to delay
purchases until the beginning of their next fiscal year. For example,
our product revenues were 24% lower in the first quarter of 1998
than in the fourth quarter of 1997, mostly due to these seasonal fac-
tors. Although we did not experience this seasonality in the first
quarter of 1999 and are not able to fulfill all demand from our
Japanese customers in the first quarter of 2000, we cannot assure
you that we will not experience seasonality in the future.
We must achieve acceptable
wafer manufacturing yields.
The fabrication of our products requires wafers to be produced in a
highly controlled and ultra clean environment. Semiconductor com-
panies that supply our wafers sometimes have experienced
problems achieving acceptable wafer manufacturing yields.
Semiconductor manufacturing yields are a function of both our
design technology and the foundry’s manufacturing process tech-
nology. Low yields may result from design errors or manufacturing
failures. Yield problems may not be determined or improved until an
actual product is made and can be tested. As a result, yield prob-
lems may not be identified until the wafers are well into the
production process. The risks associated with yields are even greater
because we rely on independent offshore foundries for our wafers
which increases the effort and time required to identify, communi-
cate and resolve manufacturing yield problems. If the foundries
cannot achieve the planned yields, this will result in higher costs
and reduced product availability, and could harm our business,
financial condition and results of operations.
Under the terms of our nonbinding memorandum of understanding
with Toshiba, we and Toshiba will jointly form and fund a joint ven-
ture which will equip and operate a silicon wafer manufacturing line
in Virginia to manufacture 512 megabit and 1 gigabit flash memory
chips and Secure Digital Memory Card controllers. However, we can-
not assure you that this manufacturing line will produce satisfactory
quantities of wafers with acceptable prices and yields. Any failure in
this regard could materially harm our business, financial condition
and results of operations. In addition, the construction and opera-
tion of this line will cause us to incur significant expense and may
result in the diversion of resources from other important areas of
business. We cannot assure you that we or Toshiba will be able to
secure sufficient funding to support this manufacturing line. In
addition, we have no experience in operating a wafer manufacturing
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SanDisk Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS