SanDisk 2004 Annual Report Download - page 22

Table of Contents
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview Years Ended
January 2, % of December 28, % of December 29, % of
2005 Revenue 2003 Revenue 2002 Revenue
(Dollars, in thousands)
Product revenues $ 1,602,836 90.2% $ 982,341 91.0% $ 492,900 91.1%
License and royalty revenues 174,219 9.8% 97,460 9.0% 48,373 8.9%
Total revenues 1,777,055 100.0% 1,079,801 100.0% 541,273 100.0%
Cost of product revenues 1,091,350 61.4% 641,189 59.4% 352,452 65.1%
Gross profit 685,705 38.6% 438,612 40.6% 188,821 34.9%
Operating expenses
Research and development 124,994 7.0% 84,200 7.8% 63,177 11.7%
Sales and marketing 91,296 5.1% 66,317 6.1% 40,407 7.5%
General and administrative 50,824 2.9% 31,057 2.9% 27,086 5.0%
Total operating
expenses 267,114 15.0% 181,574 16.8% 130,670 24.1%
Operating income 418,591 23.6% 257,038 23.8% 58,151 10.7%
Non−operating income (loss),
net 4,609 0.3% (15,157) (1.4)% (18,172) (3.4)%
Income before taxes 423,200 23.8% 241,881 22.4% 39,979 7.4%
Provision for income taxes 156,584 8.8% 73,022 6.8% 3,739 0.7%
Net income $ 266,616 15.0% $ 168,859 15.6% $ 36,240 6.7%
General. Our flash data storage cards are marketed and sold primarily in the consumer electronics market. We expect that as we
reduce the price of our flash cards, consumers will demand an increasing number of megabytes of memory. In order to profitably
capitalize on price elasticity in the market for flash data storage cards, we must reduce our cost per megabyte at a rate similar to the
change in selling price per megabyte to the consumer.
Our operating results are affected by a number of factors including, among others, the unit volume of product sales, the flash
memory density of the products sold, competitive pricing pressures, availability of foundry capacity from both captive and
non−captive sources, the timing and volume of sell−through by our distributors and retail customers to their customers, variations in
manufacturing cycle times, fluctuations in manufacturing yields and manufacturing capacity utilization, the timing of significant
orders, our ability to accurately forecast demand and obtain sufficient supply, changes in product and customer mix, market
acceptance of new or enhanced versions of our products, changes in the channels through which our products are distributed, timing of
new product announcements and introductions by us and our competitors, the timing of license and royalty revenues, fluctuations in
product costs, increased research and development expenses, and exchange rate fluctuations. See “Factors That May Affect Future
Results.”
We operate in one business segment, flash memory products. Our chief decision−maker, our President and Chief Executive
Officer, evaluates our performance based on company−wide, consolidated results. Revenue is evaluated based on geographic region
and by product category. Separate financial information is not available by product category with respect to asset allocation, expense
allocation or profitability.
Memory Sourcing. NAND memory is the largest component of the cost of our products. We preferentially source NAND memory
from ventures with Toshiba and our Toshiba foundry arrangement. We also purchase flash memory products from non−captive
sources, to supplement our captive supply, allowing us to flexibly capture more market share. This non−captive supply enabled us to
generate additional sales and profits even though the gross margin on our non−captive supply is significantly lower
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