SanDisk 2000 Annual Report Download - page 15

13 . Sa n D is k C o r p o ra t io n . 2 0 0 0 A n n ua l Re p o r t
c ap acity ship p ed . In 20 0 0, the ave rag e m eg ab yte
c ap acity p e r u nit shipped inc re ased 17% w hile the
averag e selling p ric e p e r m e g ab yte o f flash m em o ry
ship ped d eclined 2 2% c o m p are d to the p rio r ye ar. The
m ix o f p ro d uc ts sold varie s fro m q uarter to q uarter and
m ay vary in the future , affe c ting o ur o verall ave rag e
se lling p ric es and g ro ss m arg ins.
In 1999 , o ur p ro d uc t revenues w ere $ 205 .8 m illio n,
an inc re ase o f 99% fro m $103 .2 m illio n in 19 98. In 19 9 9
the larg est inc rease in unit vo lum e c am e fro m sales o f
Co m p actFlash w hic h repre se nted 61% o f p ro d uct re v-
enue s, an d M u ltiM e d iaCard p ro d ucts w hic h re p resen t-
ed 7% o f p ro d uc t reve nues. A shift in p ro d uc t m ix to
hig her cap ac ity c ard s in 19 99 p artially o ffset a d ecline
in the average se lling p ric e p er m e g ab yte o f c ap acity
ship ped . In 19 9 9, the averag e m egab yte c apac ity p er
unit ship p ed incre ased 65% w hile the ave rag e selling
p ric e p e r m e g ab yte o f flash m em o ry sh ip p ed d e c line d
52% c om pared to the p rior ye ar.
Our b ac klog as o f De c em b er 31, 200 0 w as $6 3.3
m illio n c o m p are d to $ 15 7.2 m illio n in 19 99 and $13.4
m illio n in 1998 . Se e “ Fac to rs That M ay Affec t Future
Results – Our Operating Results M ay Fluctuate
Sig nific antly” and “ – There is Se asonality in Our
Busine ss.” B o o kings visibility d e c line d sig nific antly late
in the fo urth q uarte r o f 2 0 00, and w e exp erie nc e d
m aterial o rd er c anc ellatio ns and re sc hed uling of exist-
ing p urc hase o rd e rs fro m so m e o f o ur c usto m e rs.
Visibility re m ains low in the first q uarte r o f 2 0 01 d ue to
the current ec ono m ic u nc e rtainty in o ur m arkets. Sinc e
o rd ers c o nstituting o ur c urrent b ac klog are sub je c t to
c hang es in d e livery sc hed ules o r canc e llations, b ack-
lo g is not nec e ssarily an ind ic atio n o f future reve nue.
Retail sale s are typ ically b o o ked and shipp ed in the
sam e q uarter.
In the first q uarter o f 200 1, dem and fro m our m ajo r
OEM c usto m ers has b een sub stantially b e lo w fo recast,
as these c usto m ers c o n tinue to try to re d uc e their
invento rie s. In ad ditio n, retail c hanne l o rd e rs have
b een lo w e r than the leve ls w e e xp e rienc ed in the
fo urth q uarter of 200 0. Due to this c o ntinuing w eak-
ne ss o f ec o no m ic c o nd itions and o ng o in g c usto m e r
invento ry c o rrec tio ns, w e exp ect first q uarter 200 1 rev-
enue s to be sig nific antly b e lo w o ur reve nue s in the
fo urth q uarter of 200 0.
Lic e nse a nd Royalty Re ve nue s. W e c urre ntly
earn pate nt lic ense fees and ro yalties und er nine
c ro ss- lic ense ag ree m e nts w ith Hitac hi, Inte l, Lexar,
Sharp , Sam sung , Sm artDisk, SST, TDK and Toshib a.
Lic ense and ro yalty re venue s fro m p ate nt c ro ss-
lic ense agree m e nts w as $ 75 .5 m illio n in 20 00, up fro m
$41.2 m illion in 19 9 9 and $ 32.6 m illio n in 19 98. The
inc re ase in lic ense and ro yalty revenues in 2 000 w as
p rim arily due to p atent ro yalties from increased sales
b y c e rtain o f o ur lic e nsee s, and the re venue o f $ 4.7
m illio n rec ognize d in c o njunc tion w ith the s ettlem ent of
the Lexar litigatio n. The inc re ase in license and ro yalty
reve nues in 19 99, as com p are d to 19 9 8, w as p rim arily
d ue to an increase in p atent ro yalty re venues.
Revenues fro m lic enses and ro yalties w e re 13% of to tal
reve nues in 200 0 , 17% in 199 9 and 2 4 % in 19 98.
Our inc o m e fro m p ate nt lic e nses and ro yalties c an
fluctuate sig nific antly fro m q uarter to quarter. A sub-
stantial p o rtio n o f this inc o m e com es from ro yalties
b ased o n the ac tual sales b y o ur licensees. Given the
c urrent m arket o utlook fo r 20 01, sales o f lic e nsed flash
p ro d uc ts b y o ur lic ensees m ay b e sub stantially lo w e r
than the c o rre sp o nding sale s in rec e nt q uarters, w hic h
m ay c ause a sub stantial d ro p in o ur ro yalty reve nues.
Gro ss Pro fits . In fisc al 200 0 , g ro ss p ro fits
inc re ase d to $2 44.8 m illio n, or 4 1% o f total reve nues
fro m $94 .8 m illio n, o r 38% o f total reve nues in 19 99
and $55 .5 m illio n, o r 41% o f to tal re venue s in 1998 .
Pro d uct gro ss m arg ins inc re ased to 32 % in 2 000 fro m
26% in 199 9 and 2 2 % in 19 98. The inc re ases in 200 0
w ere p rim arily due to the lo w er c o st p e r m eg abyte o f
o ur 25 6 m e g ab it flash m e m o ry pro du c ts, w hic h repre -
se nte d the m ajo rity of our pro du c t sale s in 20 0 0. The
inc re ase s in 19 99 w ere due to the lo w er c o st p e r
m egab yte o f our 2 56 m eg ab it and 12 8 m e g abit flash
m em o ry p ro d ucts, w hich beg an ship p ing in vo lum e in
the second half o f 1999 .
Due to w e ak ec o no m ic c o nd itions, e xc e ss sup p ly
in the m arke ts fo r o ur p rod uc ts, and lo w e r d e m and
fro m c usto m ers as the y c o ntinue to red uc e their
invento rie s, w e are exp e rienc ing inte nse p ric ing p res-
sure s. Due to the se fac tors, w e e xp e c t o ur averag e
se lling p ric es p e r m eg abyte to d ecline sig nific antly in
the first q uarter o f 2 001. Our averag e selling p ric es w ill
c o ntinue to b e neg atively im p acted in future q uarte rs
thro ugho ut 2 001 and p o ssib ly beyo nd, until m arket
sup ply and d e m and for o ur p ro d uc ts re turns to e q uilib-
rium . Altho ug h w e are taking sig nific ant steps to lo w er
o ur produc t c o sts, g iven the c urre nt m ark et c o ndi-
tio ns , w e e xp e c t o ur selling p ric e s to d ecline m o re
q uic kly than o ur produc t c o st, re sulting in a dec lin e in
o ur produc t g ro ss m arg ins in 2 0 01.
Re se arch and Develo pm ent. Researc h and
d eve lo p m e nt e xp e nse s c o nsist p rinc ip ally o f salaries
and p ayro ll- re lated exp ense s fo r d esig n and d evelo p -
m ent eng ine ers, p roto typ e sup p lie s and c o ntrac t serv-
ic es. Researc h and d evelo p m ent e xp e nses inc re ased
to $4 6 .1 m illio n in 200 0 fro m $ 2 6.9 m illio n in 19 99 and
$18.2 m illio n in 19 98. As a p e rc e ntage o f revenues,
research and d eve lo p m e nt exp e nse s w ere 8% in
200 0, 11% in 199 9 and 13% in 1998 . In 200 0 and 1999 ,
the inc rease in re se arc h and d e velo pm ent e xp e nses
w as p rim arily d ue to an increase in salaries and p ay-
ro ll- re late d expenses associate d w ith ad d itio nal per-
so nnel and hig her p ro ject re lated exp ense s. Increased
d eprec iatio n d ue to c apital eq uipm ent ad d itio ns also
c o ntrib uted to the g ro w th in researc h and d evelo p -
m ent exp ense s in both years. The ad d itio nal p ro je c t
exp ense s in 20 00 w ere to sup p ort the d evelo p m ent o f
ne w g ene rations o f flash d ata sto rag e p ro d ucts inc lud-
ing the 512 m e g ab it and 1 g ig ab it flash m e m o ry co-
d eve lo p m e nt w ith Toshib a. We exp ect our re se arc h
and d evelo p m e nt e xp e nses to c o ntinue to increase in
future q uarte rs to s up p o rt the d eve lo p m e nt and intro -
d uc tion o f new g e ne ratio ns o f flash d ata sto rage p ro d -
uc ts, inc luding the jo int ve nture w ith Toshib a and the
d eve lo p m e nt o f ad vanc ed c o ntro ller c hip s.