SanDisk 2005 Annual Report Download - page 90

in excess of demand from existing or new competitors, technology transitions, including adoption of multi-level
cell, or MLC, by other competitors, new technologies or other strategic actions by competitors to gain market share.
If our technology transitions and cost reductions fail to keep pace with the rate of price decline or our price
decreases fail to generate sufficient additional demand, our gross margin and operating results will be negatively
impacted.
Our revenue depends in part on the success of products sold by our OEM customers. A portion of our sales
are to a number of OEMs, who bundle our flash memory products with their products, such as cameras or handsets.
Our sales to these customers are dependent upon the OEM choosing our products over those of our competitors and
on the OEM’s ability to create, introduce, market and sell these products successfully in its respective markets.
Should our OEM customers be unsuccessful in selling their current or future products that include our product, or
should they decide to discontinue bundling our products, our results of operation and financial condition could be
harmed.
The continued growth of our business depends on the development of new markets and products for NAND
flash memory. Over the last several years, we have derived the majority of our revenue from the digital camera
market. This market continues to experience slower growth rates for our products and continues to represent a
declining percentage of our total revenue and therefore, our growth will be increasingly dependent on the
development of new markets and new products for NAND flash memory. Furthermore, in 2005, our revenue
from the digital camera market grew by only 4% over the prior year, and it is possible that our revenue from this
market could decline in future years. Newer markets for flash memory include USB drives, handsets, gaming and
digital audio players. There can be no assurance that new markets and products will develop and grow fast enough,
or that new markets will adopt NAND flash technologies or our products, to enable us to continue our growth.
We continually seek to develop new applications, products, technologies and standards, which may not be
widely adopted by consumers or, if adopted, may reduce demand by consumers for our older products. We
continually seek to develop new applications, products and standards and enhance existing products and standards
with higher memory capacities and other enhanced features. New applications, such as the adoption of flash
memory cards in mobile handsets, can take several years to develop. Early successes in working with handset
manufacturers to add card slots to their mobile phones does not guarantee that consumers will adopt memory cards
used for storing songs, images and other content. Our new products may not gain market acceptance and we may not
be successful in penetrating the new markets that we target, such as handsets, digital audio players or pre-recorded
flash memory cards. As we introduce new standards or technologies, such as TrustedFlash, it can take time for these
new standards or technologies to be adopted, for consumers to accept and transition to these new standards or
technologies and for significant sales to be generated from them, if this happens at all. Moreover, broad acceptance
of new standards, technologies or products by consumers may reduce demand for our older products. For example,
the digital still camera market is shifting away from use of CompactFlash memory cards to other form factors, such
as SD cards. If this decreased demand is not offset by increased demand for our other form factors or our new
products, our results of operations could be harmed. Any new applications, products, technologies or standards we
develop may not be commercially successful.
We face competition from numerous manufacturers and marketers of products using flash memory, as well as
from manufacturers of new and alternative technologies, and if we cannot compete effectively, our results of
operations and financial condition will suffer. Our competitors include many large domestic and international
companies that have greater access to advanced wafer manufacturing capacity and substantially greater financial,
technical, marketing and other resources than we do, which allows them to produce flash memory chips in high
volumes at low costs and to sell these flash memory chips themselves or to our flash card competitors at a low cost.
Some of our competitors may sell their flash memory chips at or below their true manufacturing costs to gain market
share and to cover their fixed costs. Such practices have been common in the DRAM industry during periods of
excess supply, and have resulted in substantial losses in the DRAM industry. In addition, many semiconductor
companies have begun to bring up substantial new capacity of flash memory, including MLC flash memory. For
example, Samsung began shipping its first MLC chips in the third quarter of 2005 and further ramped its MLC
output in the fourth quarter of 2005. In addition, Hynix is aggressively ramping NAND output and IM Flash is
expected to produce significant NAND output in the future. If the combined total new flash memory capacity
exceeds the corresponding growth in demand, prices may decline dramatically, adversely impacting our results of
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Annual Report