SanDisk 2000 Annual Report Download - page 20

18 . 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
O u r s e llin g p r ic e s m a y b e a ffe c t e d b y e x c e s s
c a p a c it y in the m a rk e t fo r fla s h m e m o r y p r o d u c t s .
In the first nine m o nths o f 200 0, ind ustry- w id e dem and
fo r flash m em ory p ro d uc ts excee d ed the availab le
sup ply, drive n b y an explosio n in the g ro w th of cellular
p ho nes and th e ac c e le rating shift in c o nsum er e lec-
tro nic s from analo g to d ig ital d evices. Flash m e m o ry
sup pliers, inc lud ing SanDisk, re sp o nded to this strong
d em and b y significantly inc re asing investm ents in ne w
ad vanced flash m em o ry p ro d uctio n c ap acity. This has
led to a sig nific ant inc rease in w o rld w id e flash m em o ry
sup ply at a tim e w hen c usto m e r dem and has
d ecreased sig nific antly, c ausing exc e ss supply in the
m arkets fo r o ur p ro d uc ts and sig nific ant d ec lines in
averag e selling p ric es. If this s ituatio n c o ntinue s
thro ugho ut 2 001, w e exp e c t that p ric e dec lines for o ur
p ro d uc ts c o u ld b e sig nific ant o n an annualized b asis. If
w e c anno t reduc e o ur p ro d uc t m anufac turing costs in
200 1 to offset these re d uc e d prices, our g ro ss m arg ins
and ne t p rofitab ility w ill suffer.
O u r b u s in e s s d e p e n d s up o n c o n s u m e r p r o d u c t s .
In 20 0 0, w e c o ntinue d to re c eive m o re p ro d uc t re v-
enue and s hip m o re units o f p ro d uc ts fo r c o nsum er
elec tro nic s ap p lic atio ns, p rincipally d igital cam eras,
c o m p are d to o ther ap plicatio ns . The c onsum er m arke t
is inte nsely c o m p etitive and is m ore price se nsitive
than our o ther target m arkets. In ad d ition, w e m ust
sp e nd m o re o n m arketing and prom o tio n in c o nsum er
m arkets to establish b rand nam e recognitio n and d rive
d e m and .
A sig nific ant p o rtion o f o ur sales to the c o nsum er
elec tro nic s m arke t is m ad e thro ug h d istributo rs and to
retailers. Sale s thro ugh the se c hannels typ ic ally inc lud e
rig hts to return unso ld invento ry. As a result, w e d o no t
rec og nize re venue until after the p rod uc t has b e e n
so ld thro ugh to the e nd use r. If o ur d istrib uto rs and
retailers are no t successful in this m arke t, there c o uld
b e substantial p ro d uc t re turns, w hic h w o uld harm o ur
b usiness, financial c ond itio n and results o f o p e rations.
Th e re is s e a s o na lit y in o u r b us in e s s .
Sale s of our pro du c ts, in p artic ular the sale of
Co m p actFlash and M ultiM ed iaCard p ro d uc ts, in the
c o nsum er e lec tronic s m arket m ay b e sub ject to se a-
so nality. As a result, produc t sale s m ay b e im p acted
b y seaso nal p urc hasing p atterns w ith hig her sales
g enerally o c c urring in the se c o nd half of each ye ar. In
ad d ition, in the past w e have exp e rienced a d ecre ase
in orders in the first q uarte r from o ur Jap anese OEM
c usto m ers p rim arily b e c ause m o st c usto m e rs in Jap an
o p erate o n a fiscal ye ar end ing in M arc h and p re fe r to
d elay p urchases until the b e g inning of the ir next fisc al
year. Althoug h w e d id no t exp erience se asonality in
200 0, w e c anno t assure yo u that w e w ill no t exp eri-
enc e se asonality in 200 1 o r future years.
In t r a ns it io nin g to n e w p r o c e s s e s a n d p r o d u c ts ,
w e fa c e p r o d u c tio n a nd m a r k e t a c c e p ta nc e ris k s .
General
Suc c e ssive generatio ns o f o ur p ro d uc ts h ave incorp o-
rate d sem ic o nd ucto r d e vic es w ith g reate r m e m o ry
c ap acity p e r c hip . Tw o im p o rtant fac to rs have enab led
us to d ecrease the c o st p e r m e g ab yte o f o ur flash
d ata sto rag e p ro d ucts: the d e velopm ent of hig he r
c ap acity sem ic on d uc tor d evices and the im p le m enta-
tio n o f sm aller g eom etry m anufac turing p ro c e sses. A
num ber o f c hallenges exist in ac hieving a lo w e r c o st
p er m e g ab yte , inc lud ing :
• lo w e r yie ld s o ften e xp e rienc ed in the early p ro d uc-
tio n o f ne w sem ic o nd ucto r d evic e s;
• m anufac turing flaw s w ith new p ro c e sses inc lud ing
m anufacturing p ro c e sse s at o ur subcontracto rs
w hic h m ay b e e xtre m e ly c o m plex;
• p ro b le m s w ith d e sig n and m anufac turing of prod-
uc ts that w ill inc o rp o rate the se devic e s; and
• p ro d uctio n d elays.
Bec ause o ur p ro d ucts are c o m p le x, w e p erio d ic ally
exp erie nc e sig nific ant d e lays in the d eve lo p m e nt and
vo lum e p ro d uc tio n ram p up o f o ur p rod uc ts . Sim ilar
d elays could occ ur in the future and c o uld harm o ur
b usiness, financial c ond itio n and results o f o p e rations.
D2 fla sh te c hno lo g y
W e have d eve lo p e d new p ro d uc ts base d o n D2 flash
te c hnology, a flash archite c ture d esig ne d to sto re tw o
b its in eac h flash m em ory c ell. H ig h d ensity flash
m em o ry, suc h as D2 flash, is a co m p lex tec hno lo g y
that re q uire s stric t m anufac turing contro ls and e ffec-
tive test scree ns. Pro b le m s enc o untere d in the shift to
vo lum e p ro d uc tio n for ne w flash produc ts c o uld im p act
b o th reliab ility and yields, and result in inc re ased m an-
ufac turing c osts and reduc e d p ro d uct availab ility. W e
m ay no t b e ab le to m anufac ture future generatio ns o f
o ur D2 p ro d uc ts w ith yield s suffic ient to re sult in lo w e r
c o sts p e r m eg abyte. If w e are unab le to b ring future
g eneratio ns o f o ur 256 and 512 m e g ab it flash m e m o ry
into full p ro d uc tio n as q uic kly as p lanne d o r if w e e xp e -
rienc e unplanned yield o r re liab ility p ro b le m s, o ur rev-
enue s and g ro ss m arg ins w ill d e c line .
Secure Dig ital Ca rd p ro d uc ts
SanDisk, alo ng w ith M atsushita and Toshib a, jointly
d eve lo p e d and w ill p ro m o te the Sec ure Dig ital Card.
The Se c ure Dig ital Card is an enhanced versio n of our
M ultiM ed iaCard that inc o rp o rates ad vanc ed sec urity
and c o p yrig ht p ro te c tio n feature s req uired b y the
em erg ing m arkets fo r the e lec tro nic d istrib utio n o f
m usic, video and o ther c o p yrig hted w o rks. We b egan
ship ping o ur Se c ure Dig ital Card p ro d uc ts in the first
q uarter o f 200 1, and e xp ec t to b egin hig h- vo lu m e p ro -
d uc tion in the first half o f 2 001.
The Se c ure Dig ital Card inc o rp o rates a num ber o f
ne w feature s, in c lud ing SDM I co m p liant sec urity and
c o p y p ro tec tio n, a m e c hanic al w rite p ro tec t sw itc h and
a hig h d ata transfer rate. W e have neve r b e fore built
p ro d uc ts inco rpo rating these fe atures. Any p ro b lem s
o r d e lays in estab lishing p ro d uc tion cap ab ilities o r
ram p ing up p ro d uc tion volum es of our Se c ure Dig ital
Card p ro d uc ts could re sult in lo st sale s or inc re ased
m anufacturing c o sts in 2 0 01 and beyo nd. In ad d itio n,
w e c anno t b e sure that m anu facture rs of consum er
elec tro nic p ro d uc ts w ill deve lo p new p ro d ucts that use
the Sec ure Dig ital Card o r that c o ntent provid ers such
as m usic stud io s w ill ag ree to d istrib ute th eir c o p y-
rig hte d co nte nt for sto rag e o n Sec ure Dig ital Card s.
Fo r e xam p le, in 2 0 00 the m ajo r U.S. b ased c o ntent