SanDisk 2010 Annual Report Download - page 144

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
the majority of our revenues; however the mobile phone market now represents approximately half of our
product revenues. Other markets for flash memory include digital audio and video players, USB drives, tablets,
GPS devices and SSDs. We cannot assure you that the use of flash memory in mobile handsets or other existing
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 grow. Our revenue and future growth is also
significantly dependent on international markets, and we may face difficulties entering or maintaining sales in
some international markets. Some international markets are subject to a higher degree of commodity pricing or
tariffs and import taxes than in the U.S., subjecting us to increased pricing and margin pressure.
Our strategy of investing in captive manufacturing sources could harm us if our competitors are able to
produce products at lower costs or if industry supply exceeds demand. We secure captive sources of NAND
through our significant investments in manufacturing capacity. We believe that by investing in captive sources of
NAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of high
demand. Our significant investments in manufacturing capacity require us to obtain and guarantee capital
equipment leases and use available cash, which could be used for other corporate purposes. To the extent we
secure manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other
NAND suppliers, we may not achieve an adequate return on our significant investments and our revenues, gross
margins and related market share may be harmed. For example, we recorded charges of $121 million and
$63 million in fiscal year 2008 and the first quarter of fiscal year 2009, respectively, for adverse purchase
commitments associated with under-utilization of Flash Ventures’ capacity.
Our business and the markets we address are subject to significant fluctuations in supply and demand, and
our commitments to Flash Ventures may result in periods of significant excess inventory. The start of production
by Flash Alliance at the end of fiscal year 2007 and the ramp of production in fiscal year 2008 increased our
captive supply and resulted in excess inventory. As a result, we restructured and reduced our total capacity at
Flash Ventures in the first quarter of fiscal year 2009. However, since the second half of 2010, we have invested
in expanded wafer capacity in Flash Alliance, and Flash Forward will further increase our captive memory
supply beginning in the third quarter of fiscal year 2011. Increases in captive memory supply from these ventures
could harm our business and results of operations if our committed supply exceeds demand for our products. The
adverse effects could include, among other things, significant decreases in our product prices, significant excess,
obsolete or lower of cost or market inventory write-downs or under-utilization charges, such as those we
experienced in fiscal year 2008, which would harm our gross margins and could result in the impairment of our
investments in Flash Ventures.
We continually develop new applications, products, technologies and standards, which may not be widely
adopted by consumers or, if adopted, may reduce demand for our older products; and our competitors seek to
develop new standards which could reduce demand for our products. We continually devote significant resources
to the development of new applications, products and standards and the enhancement of 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. The success of our
new products is dependent on a number of factors, including market acceptance, OEM design wins, our ability to
manage risks associated with new products and production ramp issues. New flash storage solutions, such as
embedded flash drives and SSDs, that are designed for devices such as tablets, eReaders, notebooks and desktop
computers are emerging rapidly and are expected to grow significantly in the coming years. We cannot guarantee
that OEMs will adopt our solutions, that products that include our solutions will be successful or that these
markets will grow as we anticipate. For certain solutions, such as SSDs, to be adopted widely, the cost of flash
memory must still decline further so that the price point for the end consumer is compelling. In addition, we will
need to develop new SSDs and other embedded flash solutions for mobile computing products and enterprise
applications, and our current or new solutions must meet the specifications required to gain customer
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