SanDisk 2005 Annual Report Download - page 4

Shareholder Letter
To our Stockholders,
I would like to thank our customers, stockholders, dedicated employees, strategic partners and suppliers for
helping us make 2005 another great year for SanDisk. Our revenues grew 30% to $2.3 billion, operating
income was 25% of revenue and diluted earnings per share increased 39% to $2.00. 2005 was a pivotal year as
we executed our technology transition to 70 nanometer (nm) NAND Multilevel Cell (MLC) with the
industry's first 8 gigabit chip and began to ramp production at the new 300-millimeter (mm) Flash Partners
investment in Fab 3. In addition, 2005 was our first year of significant revenues from our mobile cards sold
into the handset market, as well as from our MP3 players and gaming cards. With retail outlets growing to
150,000 worldwide storefronts, SanDisk is gaining brand awareness and is attractively positioned as the retail
market leader and industry innovator for the growing digital consumer revolution.
Strong Financial Results Revenue growth was strong with product revenue growing 29% and licensing and
royalties increasing 37% to $239 million. Our price per megabyte declined 52%, leading to the emergence and
growth of new applications such as flash MP3 players and cards for both mobile phones and gaming. Our
markets remain price elastic, and in 2005 our megabytes sold increased 166% and our average card capacity
doubled. We were able to reduce costs at a rate faster than the decline in pricing, leading to higher product
gross margin and a record operating margin of 25% for the year. Cash from operations grew by $481 million
resulting in cash and short-term investments of $1.7 billion at year-end.
Increasing Capacity and Flexible Sourcing In 2005 we increased our flash memory capacity through
completion of the production transition to 90nm NAND MLC technology, the start of 70nm at our
FlashVision venture with Toshiba, and the initial ramp of 300mm production late in the year at the Fab 3
Flash Partners venture. Fab 3 is expected to rapidly ramp leading edge production capacity in 2006 and 2007,
and it is a crucial element in our strategy for market leadership in the growing consumer markets that we
address. We sourced 35% of our 2005 flash memory supply from third-party manufacturers, providing us
flexibility to vary our supply and the ability to increase our market share during the year.
Technical Innovation We continue to relentlessly drive technology and product innovations, and we have more
than 500 U.S. patent applications pending, mostly relating to advanced NAND MLC as well as advanced
generation card storage solutions and systems, such as the TrustedFlash
TM
and U3
TM
platforms. In January
2006, we completed the acquisition of Matrix Semiconductor, Inc., a technology startup that is pioneering
three dimensional semiconductor memory which we believe may have profound impact in future years when
Moore's Law slows down the scaling of current two dimensional flash memory.
Intensifying Competition As our markets become sizable, new competitors are entering from entrenched,
well-financed semiconductor manufacturers. In 2005 the significant capacity additions from these suppliers
was well absorbed by the burgeoning demand in the second half of the year. These competitors are currently
trailing our technology lead, particularly in MLC, and it is clear to us that the key to retaining market
leadership and strong profitability is through staying ahead in technology, manufacturing and Intellectual
Property (IP). These are the areas where we continue to invest much of our energies and passion, and where
our strategic partnership with Toshiba shines. Concurrently, we intend to leverage our growing IP, and where
necessary, vigorously pursue infringers.