SanDisk 2005 Annual Report Download - page 107

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
January 1,
2006
%of
Revenue
January 2,
2005
%of
Revenue
December 28,
2003
%of
Revenue
Years Ended
(In thousands, except percentages)
Product revenues .............. $2,066,607 89.6% $1,602,836 90.2% $ 982,341 91.0%
License and royalty revenues ..... 239,462 10.4% 174,219 9.8% 97,460 9.0%
Total revenues .............. 2,306,069 100.0% 1,777,055 100.0% 1,079,801 100.0%
Cost of product revenues ........ 1,333,335 57.8% 1,091,350 61.4% 641,189 59.4%
Gross profit .................. 972,734 42.2% 685,705 38.6% 438,612 40.6%
Operating expenses
Research and development ..... 194,810 8.4% 124,994 7.0% 84,200 7.8%
Sales and marketing .......... 122,232 5.3% 91,296 5.1% 66,317 6.1%
General and administrative ..... 79,110 3.4% 50,824 2.9% 31,057 2.9%
Total operating expenses..... 396,152 17.2% 267,114 15.0% 181,574 16.8%
Operating income ............. 576,582 25.0% 418,591 23.6% 257,038 23.8%
Non-operating income (loss), net . . 36,725 1.6% 4,609 0.3% (15,157) (1.4)%
Income before taxes ........... 613,307 26.6% 423,200 23.8% 241,881 22.4%
Provision for income taxes....... 226,923 9.8% 156,584 8.8% 73,022 6.8%
Net income .................. $ 386,384 16.8% $ 266,616 15.0% $ 168,859 15.6%
General. Our flash data storage devices are marketed and sold primarily in the consumer electronics market.
We expect that as we reduce the price of our flash cards, consumers will demand an increasing number of megabytes
of memory. In order to profitably capitalize on price elasticity in the market for flash data storage cards, we must
reduce our cost per megabyte at a rate similar to the change in selling price per megabyte to the consumer.
Our operating results are affected by a number of factors including, among others, the unit volume of product
sales, the flash memory density of the products sold, competitive pricing pressures, availability of foundry capacity
from both captive and non-captive sources, the timing and volume of sell-through by our distributors and retail
customers to their customers, variations in manufacturing cycle times, fluctuations in manufacturing yields and
manufacturing capacity utilization, the timing of significant orders, our ability to accurately forecast demand and
obtain sufficient supply, changes in product and customer mix, market acceptance of new or enhanced versions of
our products, changes in the channels through which our products are distributed, timing of new product
announcements and introductions by us and our competitors, the timing of license and royalty revenues, fluctu-
ations in product costs, increased research and development expenses and exchange rate fluctuations. See Item 1A,
“Risk Factors.”
We operate in one business segment, flash memory products. Our chief decision-maker, our President and
Chief Executive Officer, evaluates our performance based on company-wide, consolidated results. Revenue is
evaluated based on geographic region and by product category.
Memory Sourcing. NAND memory is the largest component of the cost of our products. The majority of our
NAND memory is purchased from captive sources of supply and our ventures with Toshiba and our Toshiba foundry
arrangement. We also purchase flash memory products from non-captive sources, to supplement our captive supply,
allowing us to flexibly capture more market share. This non-captive supply enabled us to generate additional sales
and profits even though the gross margin on our non-captive supply is significantly lower than the gross margin on
our captive supply. However, our captive supply requires us to invest in capital assets, research and development and
start-up and other production costs. We expect to continue sourcing both captive and non-captive flash memory.
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