SanDisk 2013 Annual Report Download - page 142

cost-effectively with the 2D NAND flash architecture. We are investing in our 3D NAND architecture,
which we refer to as BiCS, and we expect to begin to ramp BiCS in fiscal year 2016. We are also investing
in 3D ReRAM technology which we believe may be a future alternative to NAND. We expect 2D NAND,
3D NAND and potential future technologies, including 3D ReRAM, to co-exist for an extended period of
time.
Through our investments in our ventures with Toshiba and our in-house assembly and test facility, we
have invested heavily in a vertically integrated business model. We purchase substantially all of our NAND
flash supply requirements through Flash Ventures, our significant flash venture relationships with Toshiba,
which produce and provide us with leading-edge, high-quality, low-cost NAND flash wafers. While
substantially all of our flash memory supply is purchased from the Flash Ventures, from time-to-time, we
also purchase flash memory from other NAND flash manufacturers. While we do not unilaterally control
the operations of Flash Ventures, we believe that our vertically integrated business model helps us to
reduce the costs of producing our products, increases our ability to control the quality of our products and
speeds delivery to our customers. Our vertically integrated manufacturing operations are concentrated in
two locations, with Flash Ventures located in Yokkaichi, Japan, and our in-house assembly and test
operations located in Shanghai, China. We also utilize third-party contract manufacturers in China,
Malaysia and Taiwan.
Most of our products are made by combining NAND flash memory with a controller and firmware.
We use controllers which we have designed in-house as well as controllers purchased from third-parties.
Our controllers that are designed in-house are manufactured at third-party foundries. The vast majority of
our products use firmware that is developed in-house.
Beginning in the first quarter of fiscal year 2013, we report only revenue, which includes product
revenue and license and royalty revenue. In addition, during the first quarter of fiscal year 2013, we have
recast our sales channels to be Retail and Commercial. Retail channel sales are made directly to retail
customers and indirectly through distributors to retail customers. Commercial channel sales are made
directly and through distributors to OEMs, system integrators and value-added resellers who bundle,
embed or integrate our data storage solutions. Our Commercial revenue also includes license and royalty
revenue related to IP. We have adjusted all prior year comparative amounts and explanations within
Management’s Discussion and Analysis of Financial Condition and Results of Operations to reflect these
changes in classification to be consistent for all periods presented.
Industry and Company Trends
We operate in an industry characterized by rapid technology transitions and evolving end-user
markets for NAND flash. Historically, flash memory cards for imaging devices and USB drives provided
the majority of our revenue. With the emergence of smartphones, tablets and other mobile devices, which
we refer to as mobile products, our sales of embedded and removable NAND flash solutions for the mobile
market grew to represent the largest percentage of our revenue, and we continue to see growth in
smartphone and tablet adoption as well as in the average capacity of our embedded and removable
products used in these mobile products. We believe these trends will lead to continued revenue growth for
our mobile products; however, we believe that demand for NAND flash in the mobile market will grow at a
slower rate than in the past. Over the past two years, we have seen significant growth in our client SSD and
enterprise SSD solutions, and we believe that over the next several years, the largest growth areas for
NAND flash will be SSD solutions in the client computing and enterprise data center markets. We expect
the retail market for NAND flash in imaging products and USB drives to be approximately constant or
declining over the next several years. We continue to focus on adapting our business to the changing
end-markets for NAND flash and aligning our resources accordingly.
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