Western Digital 2009 Annual Report Download - page 47

demand for hard drives and our continuing diversification into non-desktop markets, including mobile, consumer
electronics, enterprise and branded products. For example, we shipped 37 million 2.5 inch drives to the mobile and
branded markets in 2008 as compared to 12 million units in 2007. Additionally, we shipped 15 million units to the DVR
market in 2008 as compared to 10 million units in 2007. ASPs increased to $59 due to an improved mix of revenues by
market category, improved product mix and more favorable demand/supply conditions. Changes in revenue by
geography generally reflect normal fluctuations in market demand and competitive dynamics as well as an increase
in mobile drives sold to Asia. Changes in revenue by channel are a result of increases in sales of mobile hard drives to
OEMs and an increase in sales of branded products due to the growing worldwide acceptance of our My Passport»and My
Book»external digital storage appliances.
We have sales incentive and marketing programs that provide customers with price protection and other incentives
or reimbursements that are recorded as a reduction to gross revenue. For the year ended June 27, 2008, these programs
represented 10% in 2008 compared to 7% in 2007. These amounts generally vary according to several factors including
industry conditions, seasonal demand, competitor actions, channel mix and overall availability of product.
Gross Margin. Gross margin for 2008 was $1.7 billion, an increase of $839 million, or 93% over 2007. Gross
margin percentage increased to 21.5% in 2008 from 16.5% in 2007. The factors contributing to this increase were an
improved mix of revenues by market category, improved product mix and more favorable demand/supply conditions.
Our manufacturing throughput and costs also improved through operational efficiencies, higher utilization and a higher
mix of products based on newer, more cost-effective technologies and the contribution of media operations.
Operating Expenses. Total operating expenses, consisting of research and development (“R&D”) and selling, general
and administrative (“SG&A”), decreased to 8.5% of net revenue in 2008 compared to 8.9% in 2007. R&D expense was
$464 million in 2008, an increase of $158 million, or 52% over the prior year. This increase in R&D expense includes
$75 million relating to the acquired media operations, $52 million related to product development to support new
programs and $31 million in incentive and equity compensation. As a percentage of net revenue, R&D expense remained
consistent at 5.7% in 2008 compared to 5.6% in 2007. SG&A expense was $220 million in 2008, an increase of
$41 million, or 23%, as compared to 2007. This increase in SG&A expense includes $28 million for the expansion of sales
and marketing to support new products and $13 million in higher incentive and equity compensation. As a percentage of
net revenue, SG&A expense decreased to 2.7% in 2008 from 3.3% in 2007 primarily due to an increase in net revenue in
2008 compared to 2007.
During 2008, we recorded a $49 million charge to operating expense related to an in-process research and
development project acquired from Komag involving technology for higher recording densities on advanced perpen-
dicular recording magnetic media. As these advanced products were not ready for commercial production and had no
alternative future use, the fair value of the development effort did not qualify for capitalization and was immediately
expensed.
Other Income (Expense). Net interest and other expense was $25 million in 2008 compared to net interest and other
income of $28 million in 2007. This decrease is a result of higher debt balances and realized and recognized losses on
investments of $13 million.
Income Tax Provision. Income tax expense was $114 million in 2008 compared to an income tax benefit of
$121 million in 2007. Tax provision as a percentage of income before taxes was 12% in 2008 compared to tax benefit as a
percentage of income of 27% for 2007. Differences between the effective tax rates and the U.S. Federal statutory rate are
primarily due to tax holidays and incentive programs and the current year generation of income tax credits. We have tax
holidays in Malaysia and Thailand that expire at various times through 2022. In 2008, income tax expense also includes
net charges of $60 million for taxes incurred upon the license of certain intellectual property to a foreign subsidiary in our
first fiscal quarter. In 2007, the tax provision was impacted by a favorable adjustment to the company’s valuation
allowance for deferred tax assets of $126 million. In the fourth quarter of 2007, we reversed the remaining valuation
allowance for our deferred tax assets based upon a determination that it was more likely than not that our deferred tax
assets will be realized. The realization of the deferred tax assets is primarily dependent on our ability to generate sufficient
earnings in certain jurisdictions in future years. The amount of deferred tax assets considered realizable may increase or
decrease in subsequent periods based on fluctuating industry or company conditions.
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