SanDisk 2000 Annual Report Download - page 19

17 . 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
• sho rtag e s o f c o m p o nents suc h as c ap ac ito rs and
p rinte d circuit b o ard s required for the m anufac tur-
ing o f o ur produc ts;
• signific ant yield lo sses w hich c o uld affec t o ur ab ili-
ty to fulfill c usto m e r ord ers and c o uld inc re ase o ur
c o st s;
• m anufac turing flaw s affec ting the re liab ility, func-
tio nality o r p erfo rm ance o f o ur p ro d uc ts w hic h
c o uld inc re ase our p ro d uct costs, red uce d em and
fo r o ur produc ts o r req uire p ro d uc t recalls;
• le ng thening in m anufac turing c yc le tim es d ue to
o ur sup p lie rs o p erating at p eak c ap acity;
• incre ased researc h and d evelo p m ent e xp e nses;
• e xc hang e rate fluc tuatio ns, p artic ularly the U.S.
d o llar to Japane se ye n exc hang e rate;
• c hang e s in general ec o no m ic c o nd itions, p artic u-
larly in Japan and the Euro p e an Unio n;
• natural d isaste rs affe c ting the c o untries in w hich
w e c o nduc t o ur business, p articularly Taiw an,
Jap an and the United States;
Diffic ulty of estim a ting silic on w afe r need s
W hen w e o rd e r silic o n w afers from o ur found rie s, w e
have to e stim ate the num b e r o f silico n w afers ne eded
to fill p rod uc t o rd ers seve ral m o nths into the future. If
w e o ve restim ate this num b e r, w e w ill b uild exc ess
invento rie s, w h ic h c o uld harm o ur g ross m arg ins and
o p erating results . Booking s visib ility d e c line d signifi-
c antly late in the fo urth q uarte r o f 2 0 00, and re m ains
lo w in 2 001 d ue to the current ec ono m ic unc e rtainty in
o ur m arke ts. On the othe r hand , if w e und e restim ate
the num b e r of silic o n w afers nee d ed to fill p ro d uc t
o rd ers, w e m ay b e unab le to o b tain an ad e q uate sup-
p ly o f w afe rs, w hich could harm o ur produc t reve nues.
Bec ause o ur larg e st vo lum e p rod uc ts, Co m p actFlash
and M ultiM ediaCard , are so ld into em erg ing c o nsum e r
m arkets, it has b e en d iffic ult to acc urately fo re c ast
future sales. A sub stantial m ajo rity o f o ur q uarterly
sale s have historically b e en fro m orders rec eive d and
fulfille d in the sam e q uarter, w hic h m akes ac c urate
fo re c asting very d iffic ult. In add itio n, o ur p ro d uct o rd e r
b ac klog m ay fluc tuate sub stantially fro m q uarter to
q uarter.
Antic ip ate d g ro w th in e xpe nse le ve ls
W e sig n ific antly inc rease d our e xp e nse leve ls in 200 0
to sup p o rt o ur g ro w th. W e m ay ne ed to hire additio nal
p erso nne l or inc re ase o ur op erating exp ense s in 20 01
to sup p o rt o ur sales and m arketing effo rts and
research and d eve lo p m e nt ac tivities, inc luding our
jo int venture w ith To shiba p ro vid ing for the d evelo p -
m ent o f 512 m e g ab it and 1 g ig abit flash m e m o ry
c hip s. We have sig nific ant fixe d c o sts and w e c anno t
read ily re d uc e these e xp e nses o ver the short term . If
o ur reve nue s d o no t inc re ase proportio nately to o ur
o p erating exp ense s, o r if reve nues d e c rease o r d o
no t m e et e xp e c tatio ns for a p articular perio d , suc h as
w e are fo recasting fo r the first q uarter o f 200 1, o ur
b usiness, financial c ond itio n and results o f o p e rations
w ill b e harm e d .
Va riab ility o f ave rag e s elling p ric e s a nd
g ro ss m arg in
Our p ro d uc t m ix varie s q uarterly, w hich affects o ur
o verall ave rag e selling p ric e s and g ro ss m argins. Our
Co m p actFlash and M ultiM ed iaCard p ro d uc ts, w hic h
c urrently rep re se nt the m ajo rity o f o ur p ro d uc t rev-
enue s, have lo w er ave rag e s elling p ric e s and g ro ss
m arg ins than o ur hig her cap ac ity FlashDisk and
FlashDrive p ro d uc ts. W e b e lieve that sales of
Co m p actFlash and M ultiM ed iaCard p ro d uc ts w ill c o n-
tinue to rep re se nt a sig nific ant perc e ntag e o f o ur p ro d -
uc t reve nu es as c o n sum er ap p lic ations, suc h as d ig ital
c am e ras and d ig ital m usic players, b ecom e m o re p o p -
ular. In fisc al 200 0 , ave rag e selling p ric e s per m egab yte
d ecreased 2 2% c o m p are d to fisc al 19 99, re flec ting the
Flash m em o ry sup p ly shortag es that p re vaile d d uring
the first nin e m o nths o f the year, w hic h he lp e d to kee p
se lling p ric es in 2 000 m ore stable than in 1999 .
Average se lling p ric es p e r m eg abyte d ec line d 5 2% in
19 99 c o m p are d to 1998 . Due to re c ent inc rease s in
flash m em ory found ry c ap ac ity and the ec o no m ic slo w -
d o w n in the first q uarter o f 2 001, w e exp ec t that the
d ecline in o ur averag e se lling p ric es in 2 001 w ill b e
m o re se vere than in 2 0 00. If w e cannot re d uc e our
p ro d uc t m anufac turing c o sts in 20 0 1 to offset these
red uc ed p ric es, o ur g ro ss m arg ins and ne t profitability
w ill suffer.
Va riab ility o f lic e nse fe e s and ro yalties
Our intelle c tual p ro p e rty strategy c o nsists o f c ro ss-
lic ensing o ur p atents to othe r m anufac turers o f flash
p ro d uc ts. Und e r these arrang em ents, w e earn lic e nse
fe es and royaltie s on ind ivid ually ne g o tiated te rm s. The
tim ing o f revenue re c o g nition fro m these p aym ents is
d ependent o n the te rm s o f eac h c o ntrac t and o n the
tim ing o f p ro d uct ship m e nts b y the third p artie s. Our
inc o m e fro m pate nt lic e nses and ro yalties c an fluc tu-
ate sig nific antly from q uarte r to q uarter. A sub stantial
p o rtio n o f this inc o m e c o m es fro m ro yalties b ased o n
the ac tual sales by o ur lic ense es. Give n the c urrent
m arket o utlook fo r 20 01, sales o f lic e nsed flash p rod -
uc ts b y o ur licensees m ay b e sub stantially lo w e r than
the correspond ing sales in recent q uarte rs, w hich m ay
c ause a sub stantial d ro p in o ur ro yalty reve nues.
Bec ause these revenues have hig her g ro ss m arg ins
than produc t reve nues, g ross m arg ins and net inc o m e
fluctuate sig nific antly w ith c hang es in lic e nse and ro y-
alty reve nues.
C o n t in u in g d e c lin e s in o u r a ve r a g e s a le s p r ic e s
m a y r e s u lt in d e c lin e s in o u r g ro s s m a rg in s .
In 20 0 0, the averag e price p er m e g ab yte ship p e d
d eclined 2 2% c o m p are d to 1999 . Flash data storag e
m arkets are inte nsely c o m p etitive and ac c o rd ing ly,
p ric e reduc tio ns fo r our p ro d ucts are nec e ssary to
m eet c o nsum e r p ric e points. Due to recent inc reases in
flash m em ory found ry c ap ac ity and the w o rld w id e ec o -
no m ic slo w - d o w n in the first q uarter o f 200 1, w e exp ect
that price d eclines fo r o ur p ro d ucts c o uld b e sig nific ant
o n an annualized b asis. If w e c anno t red uc e o ur p ro d -
uc t m anufac turing c o sts in 20 0 1 to o ffset these
red uc ed p ric es, o ur g ro ss m arg ins and ne t profitability
w ill suffer.