SanDisk 2014 Annual Report Download - page 115

to reduce the cost of NAND flash is our ability to continue to transition our NAND flash manufacturing
technology to smaller geometries. We began transitioning to the 15-nanometer node (also referred to as
1Z-nanometer), in the second half of fiscal year 2014 and expect to continue ramping production on this
node throughout fiscal year 2015. Beyond the 15-nanometer node, there is no certainty that further
technology scaling can be achieved 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 invest in a 3D NAND pilot line
in the second half of fiscal year 2015 and ramp volume production of 3D NAND 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 facilities,
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 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 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, Taiwan and the U.S.
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.
Our revenue is derived from two sales channels, the Retail sales channel and the Commercial sales
channel. 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, and
directly to enterprise customers. Our Commercial revenue also includes license and royalty revenue
related to our IP.
Industry and Company Trends
We operate in an industry characterized by rapid technology transitions and evolving end-user
markets for NAND flash. We believe that over the next several years, the largest growth areas for NAND
flash will be SSD solutions in the enterprise and hyperscale data center and client computing markets.
Within the market for mobile and connected applications, we expect growth in the adoption of
smartphones and other mobile devices, as well as increasing storage capacity in these devices, to continue
to drive increasing NAND flash storage demand. In addition, we expect to see growth in the usage of
NAND flash memory in new applications, such as automobiles and connected homes. We expect the
market for NAND flash memory solutions in consumer electronics, such as imaging devices 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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Annual Report