SanDisk 2007 Annual Report Download - page 58

Our average selling prices, net of promotions, may decline faster than cost reductions due to industry or
SanDisk excess supply, competitive pricing pressures or strategic price reductions initiated by us or our compet-
itors. The market for NAND flash products is competitive and characterized by rapid price declines. As an
example, our average selling price per megabyte for product revenues declined 60% in fiscal year 2007 compared to
fiscal year 2006. Price declines may be influenced by, among other factors, supply in excess of demand, technology
transitions, including adoption of MLC technology by other competitors, conversion of industry DRAM capacity to
NAND and new technologies or other strategic actions by competitors to gain market share. If our technology
transitions take longer or are more costly than anticipated to complete, or our cost reductions fail to keep pace with
the rate of price declines, our gross margins and operating results will be negatively impacted, which could generate
quarterly or annual net losses. Over our history, price decreases have generally been more than offset by increased
unit demand and demand for products with increased storage capacity. However, in the recent past, price declines
have outpaced growth in demand for higher capacities for some products resulting in reduced revenue growth. There
can be no assurance that current and future price reductions will result in sufficient demand for increased product
capacity or unit sales, which could harm our margins and revenue growth.
Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose one
of our major licensees or customers or experience any material reduction in orders from any of our customers, our
revenues and operating results would suffer. In fiscal years 2007, 2006 and 2005, revenues from our top 10
customers and licensees accounted for approximately 46%, 52% and 50% of our total revenues, respectively. In
fiscal years 2007 and 2006, no single customer or licensee accounted for greater than 10% of our total revenues. In
fiscal year 2005, Best Buy accounted for 11% of our total revenues. The composition of our major customer base
has changed over time, and we expect this pattern to continue as our markets and strategies evolve. If we were to lose
one of our major customers or licensees, or experience any material reduction in orders from any of our customers or
in sales of licensed products by our licensees, our revenues and operating results would suffer. Additionally, our
license and royalty revenues may decline significantly in the future as our existing license agreements and key
patents expire or if licensees fail to perform on a portion or all of their contractual obligations. Our sales are
generally made from standard purchase orders rather than long-term contracts. Accordingly, our customers may
generally terminate or reduce their purchases from us at any time without notice or penalty. In addition, the
composition of our major customer base changes from year-to-year as we enter new markets, making our revenues
from these major customers less predictable from year-to-year.
Our business depends significantly upon sales through retailers and distributors, and if our retailers and
distributors are not successful, we could experience substantial product returns, which would negatively impact our
business, financial condition and results of operations. A significant portion of our sales are made through
retailers, either directly or through distributors. Sales through these channels typically include rights to return
unsold inventory and protection against price declines. As a result, we do not recognize revenue until after the
product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in the
case of sales to distributors. If our retailers and distributors are not successful, due to, for example, the negative
impact on consumer retail demand caused by a decline in consumer confidence, economic weakness, or other
factors, we could experience reduced sales as well as substantial product returns or price protection claims, which
would harm our business, financial condition and results of operations. Availability of sell-through data varies
throughout the retail channel, which makes it difficult for us to forecast retail product revenues. Our arrangements
with our retailers and distributors also provide them price protection against declines in our recommended selling
prices, which has the effect of reducing our deferred revenues and eventually our revenues. Except in limited
circumstances, we do not have exclusive relationships with our retailers or distributors, and therefore, must rely on
them to effectively sell our products over those of our competitors.
Our revenues depend in part on the success of products sold by our OEM customers. A significant portion of
our sales are to OEMs, which either bundle or embed our flash memory products with their products, such as mobile
phones, GPS devices and computers. 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 their 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.
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