SanDisk 2010 Annual Report Download - page 172

production transitioning from 43-nanometer to 32-nanometer technology, increased usage of X3 technology, and
production at Flash Partners and Flash Alliance running at full utilization in fiscal year 2010 compared to less
than full utilization in the first half of fiscal year 2009. While cost reductions exceeded average selling price
reductions in fiscal year 2010, the rate of cost decline of our memory products was less in fiscal year 2010 than
fiscal year 2009 in part due to the appreciation of the Japanese yen, which resulted in an increase in our foreign-
denominated costs. Furthermore, the increase in product gross margin was partially offset by an ($18) million
charge related to a power outage experienced at Fab 3 and Fab 4 in the fourth quarter of fiscal year 2010.
Product gross margins in fiscal year 2009 increased 43.3 percentage points compared to fiscal year 2008 due
to manufacturing costs declining faster than prices and a net benefit of $364 million, primarily from the sale of
inventory which had been previously partially reserved in fiscal year 2008 to reflect the market value of certain
inventory which was determined to be below cost. The increase in product gross margin in fiscal year 2009 as
compared with fiscal year 2008 was also due to charges in 2008 for the impairment of our investments in Flash
Ventures of ($83) million and for adverse purchase commitments of ($121) million associated with under-
utilization of Flash Ventures’ capacity. The rate of decline in average selling price per gigabyte slowed in fiscal
year 2009 due to an improved balance between supply and demand, impacted in part by our actions in early fiscal
year 2009 to sell a portion of our manufacturing capacity in Flash Ventures to Toshiba, and hold the remaining
wafer output capacity constant. The rate of cost decline of our memory products was similar in fiscal years 2009
and 2008.
Research and Development.
FY 2010
Percent
Change FY 2009
Percent
Change FY 2008
(In millions, except percentages)
Research and development ........................... $ 422.6 10% $ 384.2 (11)% $ 429.9
Percent of revenue ................................. 8.7% 10.8% 12.8%
Our fiscal year 2010 research and development expense increased from fiscal year 2009 primarily due to
higher third-party engineering costs of $23 million and employee-related costs of $14 million related to increased
headcount and compensation expense.
Our fiscal year 2009 research and development expense was reduced from fiscal year 2008 primarily due to
lower usage of third-party engineering services of ($37) million and lower employee-related costs of ($3) million
due to decreased headcount and lower share-based compensation expense.
Sales and Marketing.
FY 2010
Percent
Change FY 2009
Percent
Change FY 2008
(In millions, except percentages)
Sales and marketing ................................ $ 209.8 1% $ 208.5 (36)% $ 328.1
Percent of revenue ................................. 4.4% 5.8% 9.8%
Our fiscal year 2010 sales and marketing expense did not change significantly in total or by expense
category from fiscal year 2009.
Our fiscal year 2009 sales and marketing expense was reduced from fiscal year 2008 primarily due to
decreased branding and merchandising costs of ($99) million and lower outside service costs of ($19) million.
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