SanDisk 2011 Annual Report Download - page 6

Near-Term Challenges
SanDisk recently reported its results for the first quarter of fiscal 2012. While we achieved record financial
results in 2011, our financial results in the first quarter of fiscal 2012 and our near-term prospects have been less
than we had anticipated. Industry demand has been weaker than we had expected and we believe supply has
increased more than we had estimated at the beginning of the year. This led to a greater than expected price
decline, particularly in the second half of the first quarter of fiscal 2012, impacting our revenue and gross margin.
As the product offerings in the competitive mobile phone market continue to evolve at a rapid pace, we have
observed during the first quarter that some of our mobile OEM customers adjusted their bill of materials leading
to a lower rate of OEM card bundling and a reduction in bundled card capacity. It is too soon to determine
whether this is temporary or a longer-term trend and we are monitoring it carefully.
Over the course of the last two to three years, our embedded business for the OEM channel has grown nicely for
us and our approach to drive it through a diversified customer base has worked as well. We are a supplier to all
the major mobile phone and tablet manufacturers. However, the mobile industry market share is becoming
increasingly concentrated and for SanDisk to broadly address the mobile market opportunities now requires a
more diversified portfolio of embedded offerings, which include not only our iNAND™solution, but also new
embedded solutions such as customer specific multi-chip packages (MCP) and other unique and proprietary
embedded products.
We have been somewhat late in adapting our embedded product road map to the broad set of requirements of the
leading mobile OEM customers and this has limited our embedded growth opportunity in the first half of 2012.
We are already in the process of developing and qualifying our new embedded products for the leading mobile
OEMs. We believe these new products will also expand our embedded market opportunity to a broader range of
handsets, tablets and other devices for both the established and emerging markets compared to what we are able
to address in the first half of 2012. In fact, we have just completed qualification of our MCP embedded solution
with a leading OEM and are in qualification at several other customers. With continued successful completion of
products development and customer qualifications, we expect our new iNAND, MCP and other embedded
offerings to be strong contributors to our revenue in the second half of 2012, enabling us to gain embedded share
with leading mobile OEMs later this year.
From an industry supply perspective, the rate of growth in petabytes was more than we had originally estimated,
and we believe this contributed to an imbalance between supply and demand. We have made the decision to not
engage in any further ramp of Fab 5 capacity during 2012. Given the strong secular demand drivers for NAND
and estimated industry supply growth, we believe that supply and demand will be in better balance in the second
half of 2012.
We believe our business results for the first half of 2012 will reflect a temporary setback to our long-term vision
and objectives. The SanDisk team is focused on addressing the current challenges and we fully expect stronger
performance in the second half of 2012.
Long-Term Prospects Remain Solid
The smartphone, tablet and SSD markets are three large, growing markets that we believe will drive our business
for the next several years. Smartphones, the first key demand driver, have been growing rapidly as their share of
the overall mobile phone market has continued to increase over the last several years. Not only are unit volumes
expected to increase, but the average NAND capacity per smartphone is expected to increase as well. Our
embedded solutions, including iNAND, MCP and other proprietary embedded solutions, are designed to address
the vast majority of the embedded flash opportunities in the smartphone market.
The tablet market emerged in mid-2010 and it is changing the way people work, play and interact with one
another. As more powerful processors and supporting chipsets are implemented in tablet designs, these devices