SanDisk 2000 Annual Report Download - page 14

12 . Sa n D is k C o r p o ra t io n . 2 0 0 0 A n n ua l Re p o r t
m o nths o f 200 0, due to inc re ased d em and in the con-
sum er ele c tro nic s and c ellular pho ne m arke ts. This
inc re ase d dem and c aused supply c o nstraints fo r m o st
o f 200 0. H o w ever, sem ic ond uc tor m anufac ture rs,
inc luding UM C and Toshib a have b een ad din g new
ad vanced w afer fab c apac ity. This ad d itio nal cap ac ity,
alo ng w ith slow ing ec o nom ic c o n d itio ns e xp e rienc ed
late in the fo urth q uarter o f 2 000 and into 200 1, has
resulte d in e xc ess sup p ly and inte nse pricing pressure .
If ind ustry- w ide d em and fo r o ur produc ts c o ntinues to
b e b e lo w the industry- w id e availab le supply, o ur prod-
uc t p ric es could dec re ase furthe r c ausing o ur reve nues
and p ro fits to d e c line sig nific antly. Und e r o ur w afer
sup ply ag re em ents, there are lim its o n the num ber o f
w afers w e can o rd er and o ur ab ility to c hang e that
q uantity, e ither up o r d o w n, is restric te d . Ac c o rd ingly,
o ur ab ility to react to signific ant fluctuatio ns in d em and
fo r o ur produc ts is lim ite d . If c usto m e r dem and falls
b elow o ur fo re c ast and w e are unab le to re sc hed ule o r
c ancel o ur orders for w afers o r o ther long lead- tim e
ite m s suc h as c o ntro ller c hip s o r p rinte d circuit b o ard s,
w e m ay end up w ith excess invento ries, w hich c ou ld
result in hig he r operating exp ense s and red uc ed g ro ss
m arg ins. If c usto m er d e m and e xc e eds o ur forec asts,
w e m ay b e unab le to o b tain an ad e q uate supply o f
w afers to fill c usto m e r o rd e rs, w hich could result in lost
sale s and lo w e r re venue s. If w e are unab le to o b tain
ad e q uate q uantities o f flash m e m o ry w afe rs w ith
ac c e p table p ric es and yie ld s fro m o ur c urrent and
future w afe r fo undrie s, o ur b usine ss, financ ial c o nd ition
and results o f o p e rations c o uld b e harm ed .
W e have fro m tim e to tim e taken w rite- d o w ns for
exc ess invento rie s, and m ay b e fo rc ed to d o so ag ain
if the current d eterio ratio n in m arke t d em and fo r o ur
p ro d uc ts c o n tinues an d o ur inve ntory levels exc e ed
c usto m er o rd ers. In ad d ition, w e m ay have to w rite-
d o w n o ur invento rie s if c o ntinued p ric ing p re ssure
results in a ne t realizab le value that is low er than our
c o st, or if p art o f the inve ntory b ecom es o b solete. Due
to the current m arke t d em and fo r o ur produc ts c hang -
ing so rap id ly, w e e nd e d the fo urth q uarte r w ith sig nifi-
c ant am ounts o f e xc e ss inve ntory. Althoug h w e are
w o rking to reduc e this invento ry in line w ith the c urre nt
leve l of business, w e are ob lig ate d to ho no r existing
p urc hase o rd e rs, w hich w e have plac ed w ith our sup -
p liers. Furtherm o re , to assure favo rab le future b usi-
ne ss relatio ns w ith our m ajo r sup p liers, w e m ay
c ho o se no t to shut dow n the ir p ro d uc tio n o f o ur p ro d -
uc ts. In the case o f FlashVisio n m anufac turing at
Do m inio n in Virg inia, b o th Tos hib a and SanDisk are
o b lig ated to purc hase their share o f the p ro d uc tion
o utp ut, w hich m ay m ake it m o re d iffic ult fo r us to
red uc e o ur invento ry.
Exc e ss inve ntory no t o nly tie s up our c ash, b ut
also c an re sult in substantial lo sses if suc h invento ry, o r
larg e p o rtions the reof, has to be revalued d ue to low er
m arket p ric ing o r p ro d u c t obso le sc e nc e . The se inven-
to ry ad justm ents d ec rease g ro ss m argins and have
resulte d , and c o uld in the future re sult in, fluctuatio ns in
g ro ss m arg ins and net earning s in the quarter in w hic h
the y occur. Se e “ Fac to rs That M ay Affec t Future
Results – Our Operating Results M ay Fluctuate
Sig nific antly.”
Exp o rt sales are an im p o rtant part of o ur business,
rep re se nting 5 7% , 53% and 56% o f o ur total reve nue s
in 20 0 0, 1999 , and 19 9 8, re sp ec tive ly. Our sales m ay
b e im p acted b y changes in econo m ic c o nd itions in our
inte rnatio nal m arkets. Ec o nom ic c o nditio ns in o ur inte r-
national m arkets, inc luding Asia and the Euro p e an
Unio n, m ay adverse ly affect o u r re venues to the e xte nt
that dem and fo r our p ro d uc ts in the se reg io ns
d eclines. Give n the re c e nt econo m ic c o nd itions in Asia
and the Euro p e an Unio n and the w e akness of the
Euro , Ye n and o ther c urrenc ies relative to the Unite d
States d o llar, our p ro d uc ts m ay b e relative ly m o re
exp ensive in these regions, w hic h could result in a
d ecrease o f o ur sales in the se reg io ns. W hile m o st o f
o ur sale s are d e no m inate d in U.S. Do llars, w e invo ic e
c ertain Jap anese c usto m e rs in Japane se Ye n and are
sub jec t to exc hang e rate fluctuatio ns o n the se transac -
tio ns w hic h could affect our b usine ss, financ ial c o nd i-
tio n and results of operatio ns. See “ Fac tors That M ay
Affe c t Future Results – Our international op eratio ns
m ake us vulnerab le to changing c ond itio ns and c urren-
c y fluc tuatio ns.”
Fo r the foresee ab le future, w e exp ect to re alize a
sig nific ant p ortion of our re venue s fro m rec ently
intro d uc ed and new p ro d uc ts. Typ ic ally, n ew p ro d uc ts
initially have lo w er g ro ss m argins than m ore m ature
p ro d uc ts b e c au se the m an ufac turing yie ld s are lo w e r
at the start o f m anufac turing eac h suc c e ssive p ro d uc t
g eneratio n. In additio n, m anufac turing yield s are gener-
ally low er at the start o f m anufac turing any p ro d uc t at
a new fo und ry. To rem ain c o m p e titive , w e are fo c using
o n a num b e r o f p ro g ram s to lo w er m anufacturing
c o sts, inc luding deve lo p m e nt o f fu ture generatio ns o f
D2 flash and ad vanc ed tec hno lo g y w afe rs. There c an
b e no assuranc e that w e w ill suc c essfully d evelo p such
p ro d uc ts o r p ro c esse s o r that d evelo p m ent o f suc h
p ro c esse s w ill lo w er m anufacturing c o sts. If the c urre nt
ind ustry- w ide and w o rld w id e ec o nom ic slow d o w n c o n-
tinues fo r the rest o f fiscal 2 0 01, w e m ay b e unab le to
effic iently utilize the N AN D flash w afer p ro d uc tion fro m
FlashVision, w hic h w o uld fo rc e us to am o rtize the fix ed
c o sts o f the fab ric ation fac ility o ver a reduc ed w afe r
o utp ut, m aking the se w afe rs sig nific antly m ore expen-
sive. See “ Facto rs That M ay Affe c t Future Re sults – W e
m ust achieve ac c e p table m anufac turing yie ld s.”
R e s u lt s o f O p e r a t io n s
Prod uc t Revenue s. In 2 000 , o ur p rod uc t revenues
inc re ase d 156% to $ 5 26.4 m illio n fro m $20 5 .8 m illion in
19 99. The inc re ase c o nsisted o f an in c rease o f 173% in
unit sales, w hic h w as p artially offset by a 7% d e c line in
averag e selling p ric es per unit. In 20 00, the larg e st
inc re ase in unit vo lum e cam e from sales o f
Co m p actFlash Pro d uc ts that re p resente d 4 7% o f p ro d -
uc t reve nu es and M ultiM e d iaCard p ro d uc ts that rep re -
se nte d 21% o f p ro d uc t re venues. The c o ntinuing m o ve
to w ard s higher c ap ac ity card s in 20 00 p artially o ffset a
d ecline in the averag e se lling p ric e p e r m e g ab yte o f