SanDisk 2007 Annual Report Download - page 87

Download and view the complete annual report

Please find page 87 of the 2007 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 157

  • 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

License and Royalty Revenues.
FY 2007
Percent
Change FY 2006
Percent
Change FY 2005
(In millions, except percentages)
License and royalty revenues ................ $450.2 36% $331.1 38% $239.5
The increase in our fiscal year 2007 license and royalty revenues was primarily due to new license agreements
as well as increased royalty-bearing sales by our existing licensees.
The increase in our fiscal year 2006 license and royalty revenues was primarily due to increased royalty-
bearing sales by our licensees.
Gross Margins.
FY 2007
Percent
Change FY 2006
Percent
Change FY 2005
(In millions, except percentages)
Product gross profit ....................... $752.5 (17)% $908.4 24% $733.3
Product gross margins (as a percent of product
revenue) ............................. 21.8% 31.0% 35.5%
Total gross margins (as a percent of total
revenue) ............................. 30.9% 38.0% 42.2%
Product gross margins in fiscal year 2007 decreased 9.2 percentage points compared to fiscal year 2006 due to
excess industry supply which led to price per megabyte declining faster than cost per megabyte and also led to
lower-of-cost-or-market inventory charges. Gross margin was also negatively impacted by charges for excess
inventory of certain products and Flash Alliance venture costs, partially offset by insurance proceeds related to
claims on a fab power outage that occurred in the first quarter of fiscal year 2006. In addition, cost of product
increased due to amortization of acquisition-related intangible assets of $65 million, which accounted for
approximately 1.4 percentage points.
The fiscal year 2006 product gross margin decreased from fiscal year 2005 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
$28 million and share-based compensation expense related to implementation of SFAS 123(R) of $8 million, which
combined accounted for approximately 0.8% of the decrease in the product gross margins over fiscal year 2005.
Research and Development.
FY 2007
Percent
Change FY 2006
Percent
Change FY 2005
(In millions, except percentages)
Research and development.................. $418.1 36% $306.9 58% $194.8
Percent of revenue........................ 10.7% 9.4% 8.5%
Our fiscal year 2007 research and development expense growth was primarily due to an increase in payroll and
payroll-related expenses of $43 million associated with headcount growth and our acquisition of msystems, higher
consultant and outside service costs of $17 million, higher non-recurring engineering and material costs of
$11 million and share-based compensation expense of $8 million related to increased headcount. In addition, in
fiscal year 2007, we recognized Flash Alliance start-up costs of $18 million.
Our fiscal year 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 SFAS 123(R) accounted for $41 million of
the research and development expense growth. In addition, research and development expense growth included
initial design and development of 56-nanometer technology.
41