SanDisk 2009 Annual Report Download - page 70

OEM and retail-based customers, and we expect fluctuations to continue as our markets and strategies evolve,
which could make our revenues less predictable from period-to-period. 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. Our non-compliance with the
contractual terms of significant customer contracts may harm the business covered under these contracts and our
financial results. Additionally, our license and royalty revenues may decline significantly in the future as our
existing license agreements and patents expire or if licensees fail to perform on a portion or all of their
contractual obligations. As an example, we expect our license and royalty revenues will decline in fiscal year
2010 due to a new license agreement with an existing licensee at a lower effective royalty rate as compared to the
previous license agreement. 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.
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 not use our products, our results of
operations and financial condition could be harmed. In 2009, we added OEMs to whom we are selling private
label products, wafers and components. The sales to these OEMs could be more variable than the sales to our
historical customer base, and these OEMs may be more inclined to switch to an alternative supplier based on
short-term price fluctuations. Sales to these OEMs could also cause a decline in our branded product sales. In
addition, we are selling certain customized products and if the intended customer does not purchase these
products as scheduled, we may incur excess inventory or rework costs.
Our business depends significantly upon sales through retailers and distributors, and if our retailers and
distributors are not successful, we could experience reduced sales, substantial product returns or increased price
protection, any of 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 well as
participation in various cooperative marketing programs. 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. Price protection against declines in our selling prices has the effect of reducing
our deferred revenues and eventually, our revenues. If our retailers and distributors are not successful, due to
weak consumer retail demand caused by an economic downturn, decline in consumer confidence, or other
factors, we could continue to experience reduced sales as well as substantial product returns or price protection
claims, which would harm our business, financial condition and results of operations. 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. Certain of our retail and distributor
partners are experiencing financial difficulty and prolonged negative economic conditions could cause liquidity
issues for our retail and distributor customers and channels. For example, two of our North American retail
customers, Circuit City Stores, Inc. and Ritz Camera Centers, Inc., filed for bankruptcy protection in 2008 and
2009, respectively. Negative changes in customer credit worthiness; the ability of our customers to access credit;
or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our revenue
and our ability to collect outstanding receivable balances. In addition, we have certain retail customers to which
we provide inventory on a consigned basis, and a bankruptcy or shutdown of these customers could preclude us
from taking possession of our consigned inventory, which could result in inventory charges.
The future growth of our business depends on the development and performance of new markets and
products for NAND-based flash memory. Our future growth is dependent on development of new markets, new
applications and new products for NAND-based flash memory. Historically, the digital camera market provided
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