SanDisk 2014 Annual Report Download - page 93

may be different, it may be more difficult to negotiate or renew favorable license agreement terms or a
license agreement at all. For example, in the first quarter of fiscal year 2010, our license and royalty
revenue decreased sequentially, due primarily to a new license agreement with Samsung that was effective
in the third quarter of fiscal year 2009, with a term expiring in August 2016, and contains a lower effective
royalty rate compared to the previous license agreement. To the extent that we are unable to renew license
agreements under similar terms, or at all, our financial results would be harmed by the reduced license and
royalty revenue and we may incur significant patent litigation costs to enforce our patents against these
licensees. Our agreements may require us in certain instances to recognize license revenue related to a
particular licensee all in one period instead of over time which could create additional volatility in our
licensing revenue. A portion of our license and royalty revenue is based on sales of product categories as
well as underlying technology, and fluctuations in the sales of those products or technology adoption rates
would also result in fluctuations in the license and royalty revenue due to us under our agreements. If our
licensees or we fail to perform on contractual obligations, we may incur costs to enforce or defend the
terms of our licenses and there can be no assurance that our enforcement, defense or collection efforts will
be effective. If we license new IP from third parties or existing licensees, we may be required to pay license
fees, royalty payments or offset existing license revenue. In addition, we may be subject to disputes, claims
or other disagreements on the timing, amount or collection of royalties or license payments under our
existing license agreements.
In transitioning to new technologies and products, we may not achieve OEM design wins, our OEM
customers may delay transition to new technologies, our competitors may transition more quickly than we do, or
we may experience product delays, cost overruns or performance issues that could harm our business. The
transition to new generations of products, such as products containing 1Y-nanometer, 15-nanometer or
subsequent process technologies such as 3D NAND and/or X3 NAND memory architecture, is highly
complex and requires new controllers, new test procedures and modifications to numerous aspects of our
manufacturing processes, resulting in the need for extensive qualification of the new products by our OEM
customers and us. In addition, our competitors may transition to these new technologies more quickly or
more effectively than we are able to, which could harm our ability to compete effectively. If we fail to
achieve OEM design wins with new technologies such as 1Y-nanometer, 15-nanometer or subsequent
process technologies or the use of X3 in certain products, if our OEM customers choose to transition to
these new technologies more slowly than our roadmap plans, if the demand for the products that we
develop is lower than expected, if the supporting technologies to implement these new technologies are not
available, or if our competitors transition to these new technologies, including X3, more quickly or more
effectively than we are able to, we may be unable to achieve the cost structure required to support our
profit objectives or may be unable to grow or maintain our OEM market position. Furthermore, there can
be no assurance that technology transitions will occur on schedule or at the yields or costs that we
anticipate, that the tools and equipment required for the technology transitions will be available on a
cost-effective basis, or at all, or that products based on the new technologies will meet customer
specifications. The vast majority of products require controllers or firmware, and any delays in developing
or sourcing controllers or firmware, or incompatibility or quality issues relating to the controllers or
firmware in our products, could harm our revenue and gross margin, as well as business relationships with
our customers. Any material delay in a development or qualification schedule could delay deliveries and
harm our operating results.
We require an adequate level of product gross margin to continue to invest in our business, and our product
gross margin may vary significantly depending on a number of factors. Our ability to generate sufficient
product gross margin and profitability to invest in our business is influenced by supply and demand balance
in the flash memory industry, the mix of our product sales, 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 management of production capacity and
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Annual Report