Western Digital 2006 Annual Report Download - page 41

Download and view the complete annual report

Please find page 41 of the 2006 Western Digital annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

The following table sets forth, for the periods indicated, summary information regarding volume shipments,
average selling prices (“ASP”) and revenues by geography, channel and product (in millions except percentages and ASP):
June 30,
2006
July 1,
2005
July 2,
2004
Years Ended
Net revenue ................................. $4,341.3 $3,638.8 $3,046.7
Unit shipments ............................... 73.3 61.4 48.3
ASP (per unit)................................ $ 59 $ 59 $ 63
Revenues by Geography (%)
Americas .................................. 36% 38% 41%
Europe . .................................. 28 29 30
Asia . . . .................................. 36 33 29
Revenues by Channel (%)
OEM .................................... 54% 58% 51%
Distributors................................ 39 36 42
Branded products ............................ 7 6 7
Revenues by Product (%)
Desktop computers .......................... 71% 79% 86%
Non-desktop sources ......................... 29 21 14
Fiscal Year 2006 Compared to Fiscal Year 2005
Net Revenue. Net revenue was $4.3 billion for 2006, an increase of 19.3% from 2005. Total unit shipments
increased to 73.3 million as compared to 61.4 million for the prior year. This unit increase resulted from an increase in our
desktop market share, stronger overall demand for hard drives in the desktop market and our increasing focus on the non-
desktop market, including mobile, CE and branded products. For example, we shipped 5.4 million drives to the mobile
market in 2006 as compared to 1.0 million units in 2005. Additionally, we shipped 6.7 million units to the DVR market
in 2006 as compared to 3.6 million units in 2005. ASP remained at a relatively constant level of $59 due to an increase in
the average storage capacity of hard drives sold offset by moderate price declines. Revenue contribution by geographic
region for 2006 as compared to 2005 reflects our continued focus on revenue growth in emerging geographic markets,
primarily in Asia. Changes in revenue by geography and by channel generally reflect overall market demand fluctuations
for hard drives.
Gross Margin. Gross margin for 2006 was $829 million, an increase of $239 million, or 40.5% over the prior year.
Gross margin percentage increased to 19.1% in 2006 from 16.2% in 2005. Gross margin was favorably impacted in 2006
by the following factors: 1) manufacturing efficiencies, 2) lower customer returns resulting from ongoing quality
improvements that favorably impacted warranty obligations, and 3) an increase in the average storage capacity of hard
drives sold. Moderate price declines somewhat offset the favorable impact of the aforementioned factors. During 2006
and 2005, our warranty accrual for prior quarters’ shipments was favorably adjusted by approximately $30 million and
$1 million, respectively, as a result of improvements in quality and customer return rates and their expected impact on
future levels of customer returns under warranty.
Operating Expenses. Total operating expenses, consisting of research and development (“R&D”) and selling, general
and administrative (“SG&A”) expenses, were 10.7% of net revenue in 2006, as compared to 10.9% of net revenue in
2005. R&D expense was $297 million in 2006, an increase of $57 million, or 23.8% over the prior year. The increase in
R&D expense was primarily related to the development of new product platforms in support of our entry into new
markets, expenditures for advanced head technologies and an increase of $18 million in employee incentive compensation
programs, of which $12 million related to the adoption of Statement of Financial Accounting Standard (“SFAS”)
No. 123-R.
SG&A expense was $166 million in 2006, an increase of $11 million, or 7.1% as compared to 2005. This increase in
SG&A expense was primarily due to an expansion of sales resources to support increasing desktop computer demand in
certain geographic regions, the growing mobile and CE markets, and an increase of $15 million in employee incentive
35