SanDisk 2011 Annual Report Download - page 79

This is a TAB type table. Insert
conts here. Annual Report
We require an adequate level of product gross margins to continue to invest in our business. Our ability to
generate sufficient product gross margins and profitability to invest in our business depends in part on industry
and our supply/demand balance, our ability to reduce our cost per gigabyte at an equal or higher rate than the
price decline per gigabyte, our ability to develop new products and technologies, the rate of growth of our target
markets, the competitive position of our products, the continued acceptance of our products by our customers and
our ability to manage expenses. For example, we experienced negative product gross margins for fiscal year 2008
and the first quarter of fiscal year 2009 due to sustained aggressive industry price declines as well as inventory
charges primarily due to lower of cost or market write downs. As a result, we suspended new wafer capacity
investments in fiscal year 2009 and the first half of fiscal year 2010. In the second half of fiscal year 2010, we
began investing in expanded wafer capacity in Flash Alliance; and Flash Alliance capacity was fully completed
in the first quarter of fiscal year 2011. In July 2010, we and Toshiba entered into an agreement to create Flash
Forward to operate a 300-millimeter wafer fabrication facility in Fab 5, which began production in the third
quarter of fiscal year 2011. We will need to maintain an adequate level of product gross margins to continue
funding the capital expenditures for increased Fab 5 capacity. 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.
Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose
one or more of our major customers or licensees, or experience any material reduction in orders from any of our
customers, our revenues and operating results would suffer. Our ten largest customers represented approximately
48%, 44% and 42% of our total revenues in fiscal years 2011, 2010 and 2009, respectively. In fiscal year 2011,
Samsung accounted for 10% of our total revenues through a combination of product, license and royalty
revenues. No customer accounted for 10% or more of our total revenues in fiscal years 2010 and 2009. 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 or more 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 and we might face legal and financial liability related to unfulfilled contractual
obligations. Additionally, our license and royalty revenues may decline significantly in the future as our existing
license agreements and patents expire or if licensees or we fail to perform contractual obligations. Our sales are
generally made from standard purchase orders rather than long-term contracts. Accordingly, our customers,
including our major customers, may generally terminate or reduce their purchases from us at any time without
notice or penalty.
Our financial performance depends significantly on worldwide economic conditions and the related impact
on consumer spending, which have deteriorated in many countries and regions, including the U.S., and may not
recover in the foreseeable future. Demand for our products is harmed by negative macroeconomic factors
affecting consumer spending. Continuing high unemployment rates, low levels of consumer liquidity, risk of
default on sovereign debt and volatility in credit and equity markets have weakened consumer confidence and
decreased consumer spending in many regions around the world. These and other economic factors may reduce
demand for our products and harm our business, financial condition and operating results.
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. During the period that
we were ramping Flash Alliance, we experienced 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. In the second half of fiscal year 2010 through the first quarter of fiscal year
2011, we invested in expanded wafer capacity in Flash Alliance, bringing Flash Alliance to full capacity in the
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