SanDisk 2006 Annual Report Download - page 89

Download and view the complete annual report

Please find page 89 of the 2006 SanDisk annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 160

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160

In 2005, our revenue from Japan primarily reflects the reduction in the sales of flash memory cards to digital
camera OEMs based in Japan to the transition of after market sales of flash memory cards primarily in North
America and EMEA.
License and Royalty Revenues.
FY 2006
Percent
Change FY 2005
Percent
Change FY 2004
(In millions, except percentages)
License and royalty revenues ................ $331.1 38% $239.5 37% $174.2
The increase in our 2006 license and royalty revenues was primarily due to increased royalty-bearing sales by
our licensees.
The increase in our 2005 license and royalty revenues was primarily due to increased royalty-bearing sales by
our licensees.
Gross Margins.
FY 2006
Percent
Change FY 2005
Percent
Change FY 2004
(In millions, except percentages)
Product gross margins ..................... $908.4 24% $733.3 43% $511.5
Product gross margins (as a percent of product
revenue) ............................. 31.0% 35.5% 31.9%
Total gross margins (as a percent of total
revenue) ............................. 38.0% 42.2% 38.6%
The 2006 product gross margin decreased from 2005 to 2006 by 4.5 percentage points. Approximately
2.9 percentage points of the gross margin decline was due to average selling prices declining at a faster rate than our
product cost. In addition, our margins were negatively impacted by approximately 0.8% due to the acquisition of
msystems, whose business in the fourth quarter was primarily based on non-captive memory supply. In addition,
cost of product increased due to amortization of acquisition-related intangible assets of $27.8 million and share-
based compensation expense related to implementation of FAS 123(R) of $8.0 million, which combined accounted
for approximately 0.8% of the decrease in the product gross margins over 2005. 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.
Research and Development.
FY 2006
Percent
Change FY 2005
Percent
Change FY 2004
(In millions, except percentages)
Research and development.................. $306.9 58% $194.8 56% $125.0
Percent of revenue........................ 9.4% 8.4% 7.0%
Our 2006 research and development expense growth was primarily due to an increase in payroll, payroll-
related expenses and facility related expenses of approximately $57 million associated with headcount growth.
Share-based compensation expense related to implementation of FAS 123(R) accounted for $41.0 million of the
research and development expense growth. In addition, research and development expense growth included initial
design and development of 56-nanometer technology.
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.
40