SanDisk 2002 Annual Report Download - page 20

18 Sa nD isk C o rp ora tio n
Our quarterly and annual operating results have fluctu-
ated significantly in the past and w e expect that they w ill
continue to fluctuate in the future. This fluctuation is a result
of a variety of factors, including the following:
• unpredictable or declining dem and for our products;
• decline in the average selling prices of our products due
to com petitive pricing pressures;
• seasonality in sales of our products;
• natural disasters affecting the countries in w hich w e
conduct our business, particularly Japan, w here our
principal source of NAND flash m em ory w afer capacity
is located and Taiw an, South Korea, China and the
United States;
• excess capacity of flash m em ory from our com petitors
and our ow n flash w afer capacity, w hich m ay cause a
decline in our average selling prices;
• difficulty of forecasting and m anaging inventory levels;
particularly, building a large inventory of unsold product
due to non-cancelable contractual obligations to pur-
chase m aterials such as flash wafers, controllers,
printed circuit boards and discrete com ponents;
• expenses related to obsolescence or devaluation of
unsold inventory;
• w ritedowns of our equity investm ents and prepaid
w afer credits,
• adverse changes in product and custom er m ix;
• slow er than anticipated m arket acceptance of new or
enhanced versions of our products, such as the recently
announced m iniSD card targeted at advanced m obile
phones;
• increased sales by our com petitors;
• com peting flash m em ory card standards, w hich dis-
place the standards used in our products, such as the
new xD Picture card form at w hich is replacing our
Sm artM edia card in new digital cam era m odels from
Olym pus and Fuji;
• changes in our distribution channels;
• fluctuations in our license and royalty revenue;
• fluctuations in product costs, particularly due to fluctua-
tions in m anufacturing yields and utilization;
• availability of sufficient silicon w afer foundry capacity to
m eet custom er dem and;
• shortages of com ponents such as capacitors and
printed circuit boards required for the m anufacturing of
our products;
• significant yield losses, w hich could affect our ability to
fulfill custom er orders and could increase our costs;
• m anufacturing flaw s affecting the reliability, functionality
or perform ance of our products, w hich could increase
our product costs, reduce dem and for our products or
require product recalls;
• increased research and developm ent expenses;
• exchange rate fluctuations, particularly the U.S. Dollar to
Japanese Yen exchange rate;
• changes in general econom ic conditions, particularly in
Japan and the European Union; and
• reduced sales to our retail custom ers if consum er confi-
dence w orsens due to declining econom ic conditions,
w ar in Iraq, the conflict in the Korean Peninsula or else-
w here, or due to terrorist acts.
Diffic ulty o f e stim ating future silic on w afe r nee d s m ay
c aus e us to o ve re stim ate o ur ne e d s and build exc e s s
inve nto ries, o r und e res tim ate o ur nee d s a nd have a
sho rtag e o f silic on w afe rs, e ithe r o f w hich w ill harm o ur
financ ial re sults.
Under the term s of our w afer supply agreem ents w ith
FlashVision, Hitachi, Sam sung, Toshiba and UM C, w e are
obligated to provide a six-m onth rolling forecast of antici-
pated purchase orders. Generally, the estim ates for the first
three m onths of each rolling forecast are binding com m it-
m ents. The estim ates for the rem aining m onths of the fore-
cast m ay only be changed by a certain percentage from the
previous m onth’s forecast. In addition, w e are obligated to
purchase 50% of FlashVision’s w afer production. This limits
our ability to react to fluctuations in dem and for our products.
For exam ple, if custom er demand falls below our forecast
and w e are unable to reschedule or cancel our orders, w e
m ay end up w ith excess inventories, w hich could result in
higher operating expenses and reduced gross m argins.
Conversely, if custom er demand exceeds our forecasts, w e
m ay be unable to obtain an adequate supply of w afers and
flash m em ory products to fill custom er orders, w hich could
result in dissatisfied custom ers, lost sales and low er rev-
enues. If w e are unable to obtain scheduled quantities of
w afers or flash mem ory products w ith acceptable price
and/or yields from any foundry, our business, financial condi-
tion and results of operations could be harm ed. Because the
m ajority of our CF card, SD card, M em ory Stick, Sm artM edia
card, and M ultiMediaCard products are sold into emerging
consum er m arkets, it has been difficult to accurately forecast
future sales. In addition, bookings visibility rem ains low due
to the current econom ic uncertainty in our m arkets. A sub-
stantial m ajority of our quarterly sales are currently, and have
historically been, from orders received and fulfilled in the
sam e quarter, w hich makes accurate forecasting very diffi-
cult. Our product order backlog m ay fluctuate substantially
from quarter to quarter.
Variab ility o f e xp e nse leve ls and s ig nific a nt fixe d c o s ts
w ill harm o ur b us iness if o ur re venue s d o not e xc ee d o ur
op e rating e xp e nse s.
We m ay need to hire additional personnel in certain busi-
ness areas or otherw ise increase our operating expenses in
the future to support our sales and m arketing efforts,
research and developm ent, and general and administrative
activities. We have significant fixed costs and w e cannot
readily reduce these expenses over the short term . If our
revenues do not increase proportionately to our operating
expenses, or if revenues decrease or do not m eet expecta-
tions for a particular period, our business, financial condition
and results of operations w ill be harm ed.
Lic e nse fe e s a nd ro yaltie s fro m o ur p a tent c ro ss
lic ense ag re e m e nts a re variab le and fluc tuate fro m
pe rio d to p erio d m aking it d iffic ult to p re d ic t o ur roy-
alty reve nue s.
Our intellectual property strategy consists of cross-licens-
ing our patents to other m anufacturers of flash products.
Under these arrangem ents, w e earn license fees and royal-
ties on individually negotiated term s. Our incom e from patent
licenses and royalties can fluctuate significantly from quarter
to quarter. A substantial portion of this incom e com es from
royalties based on the actual sales by our licensees. The tim -
ing of revenue recognition from these paym ents is depend-
ent on the term s of each contract and on the tim ing of prod-
uct shipm ents by the third parties. We align actual reported
royalty revenues w hen reports are received during the