SanDisk 2007 Annual Report Download - page 83

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
December 30,
2007
%of
Revenue
December 31,
2006
%of
Revenue
January 1,
2006
%of
Revenue
Fiscal Years Ended
(In thousands, except percentages)
Product revenues ............. $3,446,125 88.4% $2,926,472 89.8% $2,066,607 89.6%
License and royalty revenues .... 450,241 11.6% 331,053 10.2% 239,462 10.4%
Total revenues.............. 3,896,366 100.0% 3,257,525 100.0% 2,306,069 100.0%
Cost of product revenues ....... 2,693,647 69.1% 2,018,052 62.0% 1,333,335 57.8%
Gross profit ................. 1,202,719 30.9% 1,239,473 38.0% 972,734 42.2%
Operating expenses
Research and development .... 418,066 10.7% 306,866 9.4% 194,810 8.5%
Sales and marketing ......... 294,594 7.6% 203,406 6.3% 122,232 5.3%
General and administrative .... 181,509 4.7% 159,835 4.9% 79,110 3.4%
Write-off of acquired in-process
technology .............. — — 225,600 6.9% — —
Restructuring .............. 6,728 0.2% — — — —
Amortization of acquisition-
related intangible assets ..... 25,308 0.6% 17,432 0.5% — —
Total operating expenses .... 926,205 23.8% 913,139 28.0% 396,152 17.2%
Operating income ............. 276,514 7.1% 326,334 10.0% 576,582 25.0%
Other income ................ 121,902 3.1% 104,374 3.2% 36,725 1.6%
Income before taxes ........... 398,416 10.2% 430,708 13.2% 613,307 26.6%
Provision for income taxes ...... 174,848 4.5% 230,193 7.1% 226,923 9.8%
Minority interest .............. 5,211 0.1% 1,619 — — —
Net income ................. $ 218,357 5.6% $ 198,896 6.1% $ 386,384 16.8%
General
We are the inventor of and worldwide leader in NAND-based flash storage cards. Our mission is to provide
simple, reliable and affordable storage for consumer use in portable devices. We sell SanDisk branded products for
consumer electronics through broad global retail and original equipment manufacturer, or OEM, distribution
channels.
We design, develop and manufacture products and solutions in a variety of form factors using our flash
memory, controller and firmware technologies. We source the vast majority of our flash memory supply through our
significant venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading edge low-cost
memory wafers. Our cards are used in a wide range of consumer electronics devices such as mobile phones, digital
cameras, gaming devices and laptop computers. We also produce Universal Serial Bus, or USB, drives, MP3 players
and other flash storage products that are embedded in a variety of systems for the enterprise, industrial, military and
other markets.
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 is price elastic. Accordingly, we expect
that as we reduce the price of our flash devices, consumers will demand an increasing number of megabytes and/or
units of memory and that over time, new markets will emerge. 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
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