Western Digital 2005 Annual Report Download - page 25

Net Revenue
Net revenue was $3.6 billion for 2005, an increase of 19% or $592 million from 2004. Total unit shipments
increased to 61.4 million for the year as compared to 48.3 million for the prior year. This unit increase resulted from the
Company's higher desktop market share, stronger overall demand for hard disk drives in the desktop PC market and
WD's increasing focus on the non-desktop PC market. For example, WD shipped 6.6 million units to the CE market in
2005 as compared to 2.8 million units in 2004. The growth in total unit shipments was partially offset by a $4 per unit
decline in average selling prices (""ASPs'') to $59 per unit for 2005.
Revenue contribution by geographic region for 2005 was 38% from the Americas, 29% from Europe and 33% from
Asia compared to 41%, 30% and 29%, respectively, for 2004 and 48%, 30% and 22%, respectively, for 2003. These
changes reflect the Company's continued focus on revenue growth in emerging geographic markets, primarily in Asia.
Revenue contribution by sales channel for 2005 was 58% from OEMs, 36% from distributors and 6% from the
retail channel, compared to 51%, 42% and 7%, respectively, for 2004 and 52%, 40% and 8%, respectively for 2003.
WD's revenue contribution from OEM's increased in 2005 due to higher sales to the non-desktop PC markets, which are
serviced primarily by OEM's.
Net revenue increased $328 million, or 12%, in 2004 from 2003. This increase in net revenue was primarily due to
the Company's improved market share as well as an increase in demand for hard disk drives in the PC market. Unit
shipments increased to 48.3 million in 2004 from 39.7 million in 2003, while ASPs decreased to $63 per unit in 2004
from $68 per unit in 2003.
Gross Margin
Gross margin percentage increased to 16.2% for 2005 from 15.2% for 2004. The Company's 2004 gross margin
was impacted by start-up expenses and other charges totaling $18 million relating to the Company's head manufacturing
operations acquired in July 2003. The increase in gross margin percentage over the prior year was also impacted by
continuing improvements in quality, manufacturing cost efficiencies and product mix, partially offset by unit price
declines. The gross margin percentage for 2003 was 16.3%, which included the impact of a $19 million charge for the
settlement of litigation. The decrease in gross margin percentage from 2003 to 2004 was primarily a result of the
$18 million of start-up expenses incurred in 2004 relating to the acquisition of the Company's head manufacturing
operations as well as aggressive pricing pressures. WD was able to partially offset the 2004 impact of these pricing
conditions and start-up related costs with the ongoing accretive benefit of its head manufacturing operations.
Operating Expenses
Total operating expenses, consisting of research and development (""R&D'') and selling, general and administrative
(""SG&A''), were 10.8% of net revenue in 2005, as compared to 10.1% of net revenue in 2004 and 9.4% of net revenue
in 2003. Operating expenses are expected to increase slightly for the first fiscal quarter of 2006 as a result of the
Company's continued investment in the expansion of its product and technology portfolio and the costs associated with
expensing stock options.
R&D expense was $239 million, $201 million and $135 million for 2005, 2004 and 2003, respectively. The
increase of $38 million in R&D expense in 2005 over 2004 was primarily related to development of new product
platforms in support of WD's entry into new markets, expenditures for advanced head technologies and an increase of
$26 million in employee incentive compensation programs. The increase of $66 million in R&D in 2004 over 2003 was
due to head-design, mobile and enterprise platform development, as well as a $26 million charge for acquired in-process
research and development related to the Read-Rite asset acquisition.
SG&A expense was $154 million, $106 million and $121 million for 2005, 2004 and 2003, respectively. The
$48 million increase in SG&A expense in 2005 from 2004 was primarily due to an expansion of sales resources to
support increasing PC demand in certain geographic regions and the growing mobile and CE markets, an increase of
$15 million in employee incentive compensation programs and a $19 million charge for the settlement of a patent
infringement lawsuit. The $15 million decrease in SG&A expense in 2004 from 2003 was primarily related to a
reduction in employee incentive compensation programs and continuing cost reductions.
19