SanDisk 2006 Annual Report Download - page 88

are inherently uncertain. Critical estimates in valuing certain of the intangible assets include but are not limited to
future expected cash flows from product sales, customer relationships and acquired developed technologies and
patents, expected costs to develop the in-process research and development into commercially viable products and
estimated cash flows from the projects when completed, as well as assumptions about the expected life of the core
technology and discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or
validity of such assumptions, estimates or actual results.
Results of Operations
Product Revenues.
FY 2006
Percent
Change FY 2005
Percent
Change FY 2004
(In millions, except percentages)
Retail.............................. $1,975.4 22% $1,621.0 31% $1,236.0
OEM .............................. 951.0 113% 445.6 21% 366.8
Product revenues...................... $2,926.4 42% $2,066.6 29% $1,602.8
The increase in our 2006 product revenues was comprised of a 246% increase in the number of megabytes sold,
partially offset by a 59% reduction in our average selling price per megabyte. The markets that we sell to have
experienced price elasticity of demand. In 2006, as the price per megabyte decreased, the average memory density
of our products sold increased by 67%. Our unit sales also increased by 106% with the growth in our unit sales
primarily attributable to growth in sales of cards for mobile phones and flash-based digital audio players. OEM
revenues particularly benefited from higher sales of mobile cards to mobile phone manufacturers, 3-D gaming cards
and from our acquisition of msystems, which accounted for an additional $115 million of revenue. Retail revenue
growth benefited primarily from higher sales of mobile cards, flash-based digital audio players and USB flash
drives. We expect to continue to reduce our price per megabyte, including price reductions already initiated in 2007,
as a result of competitive pressures, industry supply and demand, as well as technology advances.
The increase in our 2005 product revenues consisted of a 166% increase in the number of megabytes sold and
partially offset by a 52% reduction in our average selling price per megabyte. In 2005, as the price per megabyte
came down, the average memory density of our products sold increased by 115%. Our unit sales also increased by
23% with the growth in our unit sales primarily attributable to growth in the markets for mobile cards for camera-
phones and music-centric phones, USB flash drives and flash-based digital audio players. Partially offsetting the
2005 growth in revenues was the fact that fiscal 2005 consisted of 52 weeks as compared to 53 weeks in the prior
year.
Geographical Product Revenues.
Revenue
Percent of
Total Revenue
Percent of
Total Revenue
Percent of
Total
FY 2006 FY 2005 FY 2004
(In millions, except percentages)
NorthAmerica........... $1,298.6 44% $1,049.6 51% $ 768.1 48%
Japan.................. 194.0 7% 104.4 5% 165.4 10%
EMEA................. 728.4 25% 501.0 24% 420.6 26%
Other foreign countries .... 705.4 24% 411.6 20% 248.7 16%
Product revenues ......... $2,926.4 100% $2,066.6 100% $1,602.8 100%
In 2006, on an absolute basis, revenues in all regions increased year-over-year. Revenue from other foreign
countries, which is primarily Asia, increased the most, primarily reflecting increased sales to mobile phone
manufacturers and their related contract manufacturers. Sales in Japan increased primarily from higher sales of 3-D
gaming cards from our acquisition of Matrix. The increase in sales in North America was due primarily to sales of
our flash-based digital audio players, sales of cards for mobile phones and USB drives.
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Annual Report