SanDisk 2011 Annual Report Download - page 78

• the financial strength of our customers;
• errors or defects in our products caused by, among other things, errors or defects in the memory or
controller components, including memory and non-memory components we procure from third-party
suppliers; and
• the other factors described in this “Risk Factors” section and elsewhere in this report.
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 or sufficient demand for
our products, our revenues may decline. Historically, the NAND flash memory industry has experienced
extended periods of over-supply, during which our price declines exceeded our cost declines, resulting in
declining or even negative product gross margins. 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 actions taken by us or our competitors to gain market share.
Industry capacity is expected to continue to grow, and if capacity grows at a faster rate than market demand, the
industry could again experience significant price declines, which would negatively affect our average selling
prices, or we may incur adverse purchase commitments due to 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, there have been periods during which 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.
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 that 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 in selling their current or future products in sufficient volume, or should
they decide not to use our products, our operating results and financial condition could be harmed. Our OEM
revenue is dependent in part upon our embedded flash storage solutions meeting OEM product specifications and
achieving design wins in our product categories such as mobile phones, tablets, ultrabooks and notebooks.
Embedded flash storage solutions typically require lengthy customer product qualifications, which could slow the
adoption of our latest technology transitions and thereby have a negative impact on our gross margins by limiting
our ability to reduce costs. Also, since our embedded solutions are specifically qualified, we could be restricted
from using non-captive supply, resulting in the potential need for further capital investment in our captive
capacity. In fiscal year 2011, many new tablets were introduced to the market, and some of these tablets have not
gained market acceptance. If tablets or other product categories do not grow as anticipated, or we supply OEMs
that are not successful in commercializing their products in sufficient volume, we could build excess capacity for
demand that does not materialize.
We sell non-branded products, wafers and components to certain OEM customers. The sales to these OEMs
can be more variable than 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 or the timing of product availability. Sales to
these OEMs could also cause a decline in sales of our branded products. In addition, we sell certain customized
products and if the intended customer does not purchase these products as scheduled, we may incur excess
inventory or rework costs.
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