SanDisk 2010 Annual Report Download - page 142

production scheduled for the third quarter of our fiscal year 2011. We will need an adequate level of product
gross margins to sufficiently fund these capital expansions. If we fail to maintain adequate product gross margins
and profitability, our business and financial condition would be harmed and we may have to reduce, curtail or
terminate certain business activities, including funding technology development and capacity expansion.
Competitive pricing pressures and excess supply have resulted in lower average selling prices and negative
product gross margins in the past, and if we do not experience adequate price elasticity, our revenues may
decline. For more than a year through 2008, the NAND flash memory industry was characterized by supply
exceeding demand, which led to significant declines in average selling prices. Price declines exceeded our cost
declines in fiscal years 2008, 2007 and 2006. Significant price declines resulted in negative product gross
margins in fiscal year 2008 and the first quarter of fiscal year 2009. Price declines may be influenced by, among
other factors, supply exceeding demand, macroeconomic factors, technology transitions, conversion of industry
DRAM capacity to NAND, and new technologies or other strategic actions taken by us or our competitors to gain
market share. We, as well as other NAND manufacturers, have announced plans for new capacity expansion
primarily beginning in the second half of 2011. If capacity grows at a faster rate than market demand, the
industry could again experience significant price declines, which would negatively affect average selling prices,
or we may incur adverse purchase commitments associated with under-utilization of Flash Ventures’ capacity,
both of which would negatively impact our margins and operating results. Additionally, 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 product gross margins and operating results will be harmed, which could lead
to 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 fiscal year 2008 and the first half of 2009,
price declines outpaced unit and gigabyte growth resulting in reduced revenue as compared to prior comparable
periods. 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 revenues and margins.
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 2010, 2009 and 2008, revenues from
our top 10 customers and licensees accounted for approximately 46%, 42% and 48% of our total revenues,
respectively. All customers were individually less than 10% of our total revenues in fiscal years 2010 and 2009.
In fiscal year 2008, Samsung accounted for 13% of our total revenues through a combination of license and
royalty and product revenues. The composition of our major customer base has changed over time, including
shifts between 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. If we fail to
comply with the contractual terms of our significant customer contracts, the business covered under these
contracts and our financial results may be harmed. 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. 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 majority of our sales
are to OEM customers. Most of our OEM customers bundle or embed our flash memory products with their
products, such as mobile phones, GPS devices, tablets, and computers. We also sell wafers and components to
some of our OEM customers, as well as non-branded products which are re-branded and distributed by certain
OEM customers. 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, market and sell their products successfully in their markets.
If our OEM customers are not successful selling their current or future products that include our products, or
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