This week I thought it would be interesting to look at SanDisk’s IP revenue breakdown. In 2008 Sandisk collected $508M in license and royalty revenues, accounting for about 15% of total revenues.
Long term, SanDisk has said that it is targeting license and royalty revenues to be 8 to 10% of sales.
SanDisk won’t comment on the pieces of its IP-related revenue, but the breakdown is probably still in line with the percentages outlined in Citi’s report from back in February of 2008.
After all, Citi’s 2008 estimate of $503M total came mighty close to the actual $508M. Citi’s 12 February 2008 SNDK royalty revenue estimates are shown below:
Citi breaks license and royalty revenues into 5 catagories: Samsung, Hynix, Other Manufacturing Licenses, SD/ Micro SD Card Licensing, and CF/ USB Drive Licensing.
It is unclear, at least to me, what Citi included in Other Manufacturing Licenses. They never said. Toshiba for 3D R/W needs to be accounted for somewhere. This would seem as good a category as any.
Uncertainty over a Samsung re-sign has been a drag on SanDisk’s share price for well over a year, and rightly so.
Samsung represents by far and away the largest piece of SanDisk’s IP revenue. In 2008 this was likely between $350M and $400M, or between 70% and 80% of royalty revenue.
I still believe that Samsung will re-sign, though at lower than current rates, before the current deal expires in August.
The turning point likely came in May 2008 when Samsung lost its rights to msystems IP beyond 2009. SanDisk now owns this IP and continued use by Samsung will require a re-sign.
In the arbitration Samsung argued that if it were to lose (which it did), it would have to license this IP from SanDisk. Apparently Samsung said this could cost “billions of dollars.” From the final arbitration award:
“According to the testimony at the hearings, an early termination of the license caused by a termination of the Strategic Agreement will have serious financial consequences. This is due to M-Systems announcement in the second quarter of 2006 of a technological breakthrough called x4 technology, which enables, for the first time, the use of 4 bits per cell NAND. This effectively doubles the capacity of the 2 bits per cell NAND technology now utilized in flash memory products. According to the testimony, this new technology has significant implications for personal computers and all entertainment devices. The timing of M-Systems Notice of Termination did not escape Samsung who argues strenuously that, without the license granted under the Strategic Agreement, it will only be able to acquire the rights to the new x4 technology through a renewal or extension of its existing technology cross-license with SanDisk. According to Samsung, SanDisk will use the leverage gained from a victory in this arbitration to force additional royalties that could potentially cost Samsung billions of dollars.”
Shortly after Samsung lost, it tried to acquire SanDisk. Personally I doubt this timing a coincidence.
The second largest largest royalty contributer is Hynix, accounting for something like $60M in 2008, up from $30M in 2007.
Hynix and SanDisk signed a patent cross license agreement in March of 2007 which apparently included license and royalty payments. Interestingly, at the time, the centerpiece of the agreement seemed to be x4. There was talk of a joint venture with SanDisk including fab investment from SanDisk in exchange for dedicated capacity.
My guess is that behind the scenes, SanDisk used the Hynix card to pressure Toshiba into an x4 agreement.
As far as I am aware, no Hynix fab investment was ever made by SanDisk. In the Q3 2007 cc Eli wouldn’t even acknowledge a formal fab-investment agreement with Hynix. Eli characterized ongoing discussions only as a “a potential minority investment in one of their (Hynix) 300mm Flash fabs.”
Other Manufacturing Licenses (Toshiba)
I’m not sure we’ll ever know what sort of deal SanDisk cut with Toshiba for x4. I’ve gone over my notes several times. Obviously some meeting of the minds occurred, but I haven’t been able to pin it down.
September 2007 Toshiba was on the outside looking in. At the 5 Sept 2007 CITI conference Judy discussed the x4 IP issues in regards to Toshiba:
“We would expect to produce our 3x technology in our Toshiba joint ventures. And we have talked about commercializing x4 technology in a joint venture with Hynix. We have significant IP in both of these areas. We haven’t been specific about the nature of any licenses in those areas.
If possible we could chose to keep some particular new technology to ourselves.”
In October 2008, Toshiba and SanDisk appear joined at the hip for x4. In the Q3 2008 cc, Eli mentions in passing, working with Toshiba for x4. After that comes the joint SanDisk/ Toshiba x4 headline act at the February 2009 International Solid-State Circuits Conference.
Clearly some x4 SanDisk/Toshiba deal has been cut. What exactly, we may never know. I suspect the answer lies buried in the confidential fab agreements. That said, I’m most curious to see whether SanDisk has decided to keep the x4 controllers to itself.
This was msystems’ original strategy- license the x4 chip IP, and then, to keep the game honest, withhold the controller IP. Controllers would then only be available from the mother ship.
The x4 controller then becomes the name of the game. Without the controller, the x4 chips are essentially unusable.
Moving on to 3D R/W, SanDisk SEC filings show that Toshiba and SanDisk have an agreement based on milestones. Toshiba license fees will be based on specific milestones until production, and then royalties on future shipments.
Whether this Toshiba 3D R/W agreement will equal Citi’s $20M/year royalty revenue estimates for “Other Manufacturing Licenses”, I have no idea, but the magnitude feels about right for now. Time will tell.
In the longer run, $20M/year could escalate quickly if SanDisk’s approach to 3D R/W proves itself.
SD/MicroSD Card Licensing and CF/USB Drive Licensing
According to Citi, SanDisk’s SD/MicroSD Card licensing revenues were likely about $25M in 2008. Riding the strength of cards in mobile, this segment was seen as likely to grow to $40M in 2009. Given the recession this $40M is likely to be lower.
CF/USB Drive Licensing was thought by Citi to likely hit $32M in 2009- up from nothing in 2008. Then in 2010, this $32M was expected to double to $64M.
For better or worse, 2010 is not going to happen. 2009 looks dodgy at best.
The problem- SanDisk just lost its ITC case.
When I first heard the news, I was very, very disappointed. Upon further reflection, I’m not sure what more could have been expected.
The deal might have been done when SanDisk withdrew US patent number 5719808 (patent 808) from its infringement complaints in late 2007.
“Among the patents involved in the dispute, the 808 patent is said to be the most complicated and important one. Whether or not SanDisk can show that the companies being sued have infringed on this patent will have a fundamental impact on about 25 related patents, the sources noted.” [Digitimes link no longer available]
That’s going to have to have to do it for now.
One of the curious things about SanDisk is that its IP is valued more by the industry than by Wall Street. Toshiba is taking money that they really don’t have and giving SanDisk cash and forgiving off balance sheet lease obligations because they need SanDisk’s IP.
Last fall, Samsung tried to buy SanDisk for nearly $6 billion ($5.85B) or $26/ share – largely for SanDisk’s IP.
In March of this year, Goldman Sachs estimated that SanDisk’s royalty stream alone is worth $16/ share:
“However, what we have always found appealing about the SanDisk story was not the company’s product business, but its NAND IP. We believe that SanDisk retains the key NAND patents for both the current and next generation NAND technology (i.e. x3, x4, and 3D), which should enable the company to continue to collect royalty payments from the current and potentially new industry players. We estimate that SanDisk’s royalty stream alone is worth $16/share, significantly above the company’s current stock price [$11.05 on that date].”
Personally I think SanDisk’s IP is worth more than $16 (with a Samsung re-sign) and could be worth much, much more if x3, x4 and 3D prove themselves- along the lines of SanDisk’s patents.
Time will tell.