SanDisk 2006 Annual Report Download - page 62

cameras or mobile phones. Our sales to these customers are dependent upon the OEMs choosing our products over
those of our competitors and on the OEMs’ ability to create, introduce, market and sell its products successfully in
their markets. Should our OEM customers be unsuccessful in selling their current or future products that include our
products, or should they decide to discontinue utilizing our products, our results of operation and financial condition
could be harmed. Our future OEM revenues may be significantly impacted by our decision to de-emphasize the
former msystems private label USB business and focus on our branded business.
The continued growth of our business depends on the development of new markets and products for NAND
flash memory and continued elasticity in our existing markets. Over the last several years, we derived the majority
of our revenues from the digital camera market. This market continues to experience slower growth rates 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, new applications and new products for NAND flash memory. For
example, in fiscal 2006, our revenue from the digital camera market grew by only 2% 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
digital audio and video players, mobile phones and solid state drives. 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 in general
or our products in particular, to enable us to continue our growth. There can be no assurance that the increase in
average product capacity and unit demand in response to price reductions will continue to generate revenue growth
for us as it has in the past.
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. Any new applications, products, technologies,
standards or enhancements we develop may not be commercially successful. New applications, such as the
adoption of flash memory cards in mobile phones, can take several years to develop. Early success in working with
mobile phone 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 in mobile phones. Our new products, such as Sansa»
View, pre-recorded flash memory cards and solid state drives, may not gain market acceptance and we may not be
successful in penetrating the new markets that we target. 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. 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.
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. Our primary semiconductor
competitors include Samsung, Toshiba, Hynix, IM Flash and STMicro. Samsung, in addition to ramping its
overall NAND output, continues to ramp its MLC output. In addition, Hynix, is aggressively ramping NAND output
and IM Flash, is expected to produce significant NAND output in the future. All leading suppliers, including
ourselves, have been substantially increasing NAND capacity, which is resulting in prices declining at a faster rate
than cost reductions. We cannot predict when the balance between supply and demand will be achieved. In addition,
current and future competitors produce or could produce alternative flash memory technologies that compete
against our NAND flash memory technology which may reduce demand or accelerate price decline for NAND. If
the balance between supply and demand is not achieved or if pricing continues to decline at a rate faster than cost
reduction, our results of operations and financial condition could be harmed.
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Annual Report