SanDisk 2006 Annual Report Download - page 84

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
December 31,
2006
%of
Revenue
January 1,
2006
%of
Revenue
January 2,
2005
%of
Revenue
Years Ended
(In thousands, except percentages)
Product revenues .............. $2,926,472 89.8% $2,066,607 89.6% $1,602,836 90.2%
License and royalty revenues ..... 331,053 10.2% 239,462 10.4% 174,219 9.8%
Total revenues .............. 3,257,525 100.0% 2,306,069 100.0% 1,777,055 100.0%
Cost of product revenues ........ 2,018,052 62.0% 1,333,335 57.8% 1,091,350 61.4%
Gross profit .................. 1,239,473 38.0% 972,734 42.2% 685,705 38.6%
Operating expenses
Research and development ..... 306,866 9.4% 194,810 8.5% 124,994 7.0%
Sales and marketing .......... 203,406 6.3% 122,232 5.3% 91,296 5.1%
General and administrative ..... 159,835 4.9% 79,110 3.4% 50,824 2.9%
Write-off of acquired in-process
technology ............... 225,600 6.9% — — — —
Amortization of acquisition-
related intangible assets ..... 17,432 0.5% — — — —
Total operating expenses..... 913,139 28.0% 396,152 17.2% 267,114 15.0%
Operating income ............. 326,334 10.0% 576,582 25.0% 418,591 23.6%
Other income, net ............. 104,374 3.2% 36,725 1.6% 4,609 0.2%
Income before taxes ........... 430,708 13.2% 613,307 26.6% 423,200 23.8%
Provision for income taxes....... 230,193 7.1% 226,923 9.8% 156,584 8.8%
Minorityinterest.............. 1,619 — — — — —
Net income .................. $ 198,896 6.1% $ 386,384 16.8% $ 266,616 15.0%
General
We are one of the world’s largest suppliers of NAND flash-based data storage products for the consumer,
mobile communications, and industrial markets. Our mission is to be the preferred choice of personal storage
solutions for the worldwide digital economy. We seek to achieve our mission by developing leading technologies
and innovative products and delivering our products through both OEM and retail channels.
We design, develop, market and manufacture products and solutions in a variety of form factors using our flash
memory, controller, and firmware technologies. Our products are used in a wide range of consumer electronics
devices such as digital cameras, mobile phones, USB drives, gaming consoles, MP3 players and other digital
devices. Our products are also embedded in a variety of systems for the enterprise, industrial, military and other
markets. Flash storage technology allows data to be stored in a low-power consumption, durable and compact
format that retains the data after the power has been turned off.
As a supplier to this industry, our results are primarily driven by worldwide demand for flash storage devices,
which in turn depends on end-user demand for electronic products. We believe the market for flash storage has price
elasticity of demand. We expect that as we reduce the price of our flash devices, consumers will demand an
increasing number of megabytes of memory. In order to profitably capitalize on price elasticity of demand in the
market for flash storage products, we must reduce our cost per megabyte at a rate similar to the change in selling
price per megabyte to the consumer. We seek to achieve these cost reductions through technology improvements
primarily focused on increasing the amount of memory stored in a given area of silicon.
35
Annual Report