Western Digital 2008 Annual Report Download - page 43

Fiscal Year 2007 Compared to Fiscal Year 2006
Net Revenue. Net revenue was $5.5 billion for 2007, an increase of 26% from 2006. Total unit shipments increased
to 97 million as compared to 73 million for the prior year. This unit increase resulted from an increase in our desktop PC
market share, stronger overall demand for hard drives in the desktop PC market and our increasing focus on the non-
desktop market, including mobile, CE, enterprise and branded products. For example, we shipped 12 million drives to
the mobile market in 2007 as compared to 5 million units in 2006. Additionally, we shipped 10 million units to the
DVR market in 2007 as compared to 7 million units in 2006. ASPs declined to $57 due to normal technology price
declines and a more competitive pricing environment in the notebook, desktop, and consumer electronics markets.
Changes in revenue by geography generally reflect overall market demand fluctuations for hard drives. Changes in
revenue by channel are a result of increases in sales of branded products due to the growing worldwide acceptance of our
My Passport»and My Book»external digital storage appliances.
Gross Margin. Gross margin for 2007 was $900 million, an increase of $71 million, or 9% over the prior year.
Gross margin percentage decreased to 16.5% in 2007 from 19.1% in 2006. The factors contributing to this decrease
include normal technology price declines and a more competitive pricing environment in the notebook, desktop, and
consumer electronics markets. In addition, gross margin in 2006 benefited from a more favorable supply/demand
balance.
Operating Expenses. Total operating expenses, consisting of research and development (“R&D”) and selling, general
and administrative (“SG&A”) expenses, decreased to 8.9% of net revenue in 2007 compared to 10.7% in 2006. R&D
expense was $306 million in 2007, an increase of $9 million, or 3% 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 and expenditures
for advanced head technologies, partially offset by a decrease of $2 million in variable incentive compensation programs.
SG&A expense was $179 million in 2007, an increase of $13 million, or 8% as compared to 2006. The increase in SG&A
expense was primarily due to an increase of $19 million in stock based compensation expense and other long-term
employee incentive programs, offset by a $5 million decrease in software write-offs that occurred in 2006.
Interest and Other Income. Net interest and other income was $28 million and $16 million in 2007 and 2006,
respectively. This increase in net interest income was primarily due to higher average invested cash and short-term
investment balances.
Income Tax Benefit. Income tax benefit was $121 million and $13 million in 2007 and 2006, respectively. Tax
benefit as a percentage of income before taxes was 27% and 3% for 2007 and 2006, respectively. Differences between the
effective tax rates and the U.S. Federal statutory rate are primarily due to tax holidays and incentive programs and
reductions to our valuation allowance for deferred tax assets. We have tax holidays in Malaysia and Thailand that expire at
various times through 2022. In addition to the tax holidays, the tax provision was impacted by favorable adjustments to
the company’s valuation allowance for deferred tax assets of $126 and $22 million in 2007 and 2006, respectively. These
adjustments were based upon a determination that it was more likely than not that all or a portion of our deferred tax
assets will be realized. In the fourth quarter of 2007, we reversed the remaining valuation allowance for our deferred tax
assets based on the weight of available evidence including our history of cumulative pretax income and the increased
likelihood of our ability to generate profits in the future. In 2006, we released a portion of the valuation allowance on
deferred tax assets due to the difficulty at the time in accurately projecting income for periods of longer than two years
given the cyclical nature of our industry. The realization of the deferred tax assets is primarily dependent on our ability to
generate sufficient earnings in certain jurisdictions in future years. The amount of deferred tax assets considered realizable
may increase or decrease in subsequent periods based on fluctuating industry or company conditions.
Liquidity and Capital Resources
We ended 2008 with total cash, cash equivalents and short-term investments of $1.1 billion, an increase of
$200 million from June 29, 2007. Our investment policy is to manage our investment portfolio to preserve principal and
37