SanDisk 2005 Annual Report Download - page 111

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Gross Margins.
FY 2005
Percent
Change FY 2004
Percent
Change FY 2003
(In millions, except percentages)
Product gross margins ..................... $733.3 43% $511.5 50% $341.2
Product gross margins (as a percent of product
revenue) ............................. 35.5% 31.9% 34.7%
Total gross margins (as a percent of total
revenue) ............................. 42.2% 38.6% 40.6%
The largest driver of the 2005 increase in product gross margins was the reduction in our cost per megabyte due
to the transition to 90-nanometer technology partially offset by decreases in our average selling price per megabyte.
Fiscal 2005 gross margins were also benefited due to more production supply coming from captive sources which
have lower costs.
The largest driver of the 2004 decline in product gross margins was an increased reliance on non-captive
memory sources. We earn significantly lower gross margins on non-captive memory than on captive memory
supply, and non-captive memory accounted for approximately 35% and 24% of our memory sourcing in 2004 and
2003, respectively. Our captive gross margin improved by approximately two percentage points as our cost
reductions were greater than the decline in average selling price per megabyte. This partially offset the impact of our
higher non-captive mix.
Research and Development.
FY 2005
Percent
Change FY 2004
Percent
Change FY 2003
(In millions, except percentages)
Research and development.................. $194.8 56% $125.0 48% $84.2
Percent of revenue........................ 8.4% 7.0% 7.8%
Our 2005 research and development expense growth was primarily due to higher vendor engineering costs and
costs associated with the initial design and development of manufacturing process technology related to Flash
Partners’ 300-millimeter production line of $42.4 million, and payroll and payroll-related expenses of $15.6 million
associated with headcount increases related to developing new products.
Our 2004 research and development expense growth was primarily due to increased payroll and payroll-related
expenses associated with higher headcount in support of our broadening product portfolio, higher vendor
engineering costs and costs associated with the initial design and development of manufacturing process technology
related to Flash Partners’ 300-millimeter production line. We grew our research and development headcount to 340
at the end of 2004 from 272 at the end of 2003.
Sales and Marketing.
FY 2005
Percent
Change FY 2004
Percent
Change FY 2003
(In millions, except percentages)
Sales and marketing ...................... $122.2 34% $91.3 38% $66.3
Percent of revenue........................ 5.3% 5.1% 6.1%
Our 2005 sales and marketing expense growth was primarily related to increased tradeshow, advertising and
branding on a worldwide basis of $15.5 million, and payroll and payroll-related expenses of $7.3 million, all in
support of our higher revenue base. In 2006, we plan to capitalize on the growing consumer awareness of the
SanDisk brand by increasing our investments in building and promoting the SanDisk brand globally.
Our 2004 sales and marketing expenses were primarily related to increased tradeshow, advertising and
branding, and payroll and payroll-related expenses, all in support of our higher revenue base. In 2004, advertising
and branding activities included television advertising in the United States, increased North American and Asia
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