SanDisk 2003 Annual Report Download - page 31

revenues between 2003 and 2002 was primarily the result of increased royalty bearing sales during the year.
The decrease in license and royalty revenues between 2002 and 2001 was primarily due to lower patent
royalties from lower royalty bearing sales by some of our licensees resulting in decreased patent license
revenues recognized. Revenues from licenses and royalties were 9% of total revenues in 2003 and 2002, and
13% in 2001. Our revenue from patent licenses and royalties can Öuctuate signiÑcantly from quarter to quarter.
A substantial portion of this revenue comes from royalties based on the actual sales by our licensees.
Gross ProÑts (Losses). In Ñscal 2003, gross proÑts increased $249.8 million or 132% representing an
overall gross margin of 41% for the year. Product gross margins were 35% in 2003 up from 29% in Ñscal 2002.
The increase in product gross margins and product gross proÑts was the result of the fairly stable pricing
environment particularly in the second half of 2003 resulting from constrained supply and lower manufactur-
ing costs, coupled with higher unit sales volumes which were partially oÅset by FlashVision start-up and tool
relocation costs. In addition, margins and proÑts were favorably impacted by the increase in units and
megabytes sold in 2003 resulting in improved economies of scale. Our higher mix of more cost eÅective multi
level cell, or MLC, chips along with our transition to .13 micron technology in the second half of 2003 also
favorably impacted our margins and gross proÑts. In addition, during Ñscal 2003, we sold approximately
$16.2 million of inventory that had been fully written oÅ in prior periods, which favorably impacted gross
margins by less than 2% for Ñscal 2003.
In Ñscal 2002, gross proÑts were $188.8 million, or 35% of total revenues compared to negative
$26.0 million, or negative 7% of total revenues in 2001. Product gross margins were 29% in 2002 compared to a
negative 24% in 2001. The increase in product gross margin and gross proÑts in 2002 was due to a combination
of factors, including relatively more stable pricing conditions within our industry in 2002 than in 2001, lower
production costs due to a higher mix of more cost eÅective MLC chips, signiÑcantly lower overhead expenses
due to our restructuring activities in 2001 and improved economies of scale due to the growth in unit volumes
across our major product lines. In addition, we sold approximately $11.9 million worth of NOR inventory that
had been fully written oÅ as excess or obsolete in previous periods.
Research and Development. Research and development expenses consist principally of salaries and
payroll-related expenses for design and development engineers, prototype supplies and contract services.
Research and development expenses increased to $84.2 million in 2003 up from $63.2 million in 2002 and up
from $58.9 million in 2001. As a percentage of revenues, research and development expenses were 8% in 2003,
12% in 2002 and 16% in 2001. In 2003, our absolute dollar increase in research and development was primarily
due to $12.0 million increase in salaries and payroll related expenses as overall headcount in this area
increased from 204 to 283 for continuing product introductions and enhancements. In 2002, the absolute
dollar increase in research and development expenses was primarily due to a $2.7 million increase in salaries
and payroll-related expenses associated with increased personnel.
Sales and Marketing. Sales and marketing expenses include salaries, sales commissions, beneÑts and
travel expenses for our sales, marketing, customer service and applications engineering personnel. These
expenses also include other selling and marketing expenses such as independent manufacturer's representative
commissions, advertising and tradeshow expenses. Sales and marketing expenses increased to $66.3 million in
2003 from $40.4 million and $42.6 million in 2002 and 2001, respectively. The increase in sales and marketing
expenses for 2003 was primarily due to increased salary and commission expenses as a result of increased
revenues during the year. The decrease in sales and marketing expenses in 2002 from 2001, was due primarily
to decreased co-op advertising expenses of $7.0 million, which as of the beginning of Ñscal 2002 were oÅset
against revenue per applicable accounting literature, partially oÅset by an increase in commissions of
$4.3 million related to higher product revenues. If we had been required to retroactively apply the same
accounting treatment of recording these co-op advertising expenses as oÅsets to revenue per new accounting
literature prior to our Ñscal year 2002, we estimate that selling and marketing expenses would have been
reduced by approximately $5.2 million for 2001. We expect sales and marketing expenses to increase in
absolute dollars as sales of our products grow and as we continue to develop the retail channel and brand
awareness for our products.
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