This week I thought it would be interesting to revisit SanDisk’s IP revenue breakdown in light of the new SanDisk/Samsung cross license agreement.
As discussed in 2008 Sandisk collected $508M in license and royalty revenues, for about 15% of total revenues.
To my knowledge, SanDisk has never publicly commented on size of its individual IP royalty streams- at least until now. In the Samsung agreement analyst call [transcription] SanDisk stated that for the last several years Samsung contributed approximately two-thirds of of SanDisk’s royalty revenue.
This means that in 2008, Samsung paid SanDisk approximately $335M. About $63M less than citi’s estimate of $398M. So now there is $63M to redistribute for 2008.
SanDisk’s IP revenue streams can be broken into: Samsung, Hynix, Other Manufacturing Licenses, and SD/ microSD/ CF/ USB Drive Licensing.
$60M for Hynix still seems about right, so I am choosing to allocate the “extra” $63M ± between Other Manufacturing Licenses and SD/ microSD/ CF/ USB Drive Licensing.
My updated working breakdown for 2008 SanDisk license and royalty revenues now looks like this: Samsung- $335M or 66%; Hynix- $60M or 12%; Other Manufacturing Licenses- $20M + $33M = $53M or 10%; and SD/ microSD/ CF/ USB Drive Licensing- $25M + $30M= $60M or 12%.
Say what you will about the new Samsung agreement, but its done now and that alone is a relief. In the big picture, it feels like a win-win for both SanDisk and Samsung. Compromises all around, but such is life.
Several things about the agreement were learned from the conference call.
First it is two agreements. There is a new patent cross-license agreement which contains both running royalties as well as certain fixed payments to SanDisk. There is also a flash memory supply agreement under which Samsung will continue to make available to SanDisk a guaranteed portion of its flash memory production output.
The new agreements become effective when the current cross license and supply agreement expires on August 14, 2009, and will run for seven years.
A key sentence from the the press release:
“Over the life of the new license, the estimated effective rate of the fixed payments and royalties is expected to be approximately half of the effective rate in recent years under the current license.”
This drop is in line with expectations. Eli has been saying as much for a while now.
The new patent cross-license agreement covers MLC and flash storage systems, but not 3-D memory technology. MLC includes any number of bits including X4.
Whether X4 controllers are covered and whether X4 rates are the same as X2 and X3 remains to be seen. To my mind the conference call left these questions open.
Time will tell how important the flash memory supply agreement will be. I found the following discussion from the conference call very interesting:
“Scott Hurlman, Robert W. Baird: Okay, and then, does this have any impact on future CapEx plans for this year or next?
Eli Harari: To the extent that we take advantage of that guaranteed capacity that it is competitive then it definitely should have quite substantial reduction in the requirements of our CapEx that’s – that’s what I’m talking about in terms of giving up that flexibility to move to our captive/non-captive mix.
Scott Hurlman, Robert W. Baird: Right.
Judy Bruner: But I would add as Eli said we are not currently in need of non-captive, and our CapEx budget for this year is not impacted.
Eli Harari: Is not impacted. And basically the whole point with these guaranteed capacities is that when you have excess supply you don’t need that capacity. When you have – where you have allocation when we have shortage that’s when you need it, and it’s very important to have that capacity guaranteed to you. However, you can have it guaranteed, but if you are not actually exercising it, if you are not qualified to use it I mean, internally qualified and with your own customers, then there is a significant lag time before we can bring it on board.”
A couple of years from now, this supply agreement could prove most valuable in the NAND endgame.
As Eli put it recently, in five years the NAND business is going to hit a brick wall.
I keep wondering what the CapEx dynamics will be when the technological dead end is in sight. Supply agreements might give Sandisk a prudent alternative to big dollars for a last gasp. Better to spend the money on putting the finishing touches on the successor technology.
I still believe Hynix, accounted for something like $60M in 2008.
My thinking is that the new Samsung agreement is now in line with SanDisk’s Hynix agreement.
The new Samsung agreement is half of what it was- which would mean that in 2008 Hynix paid at about half the rate of Samsung.
This checks with market share by revenue.
According to the DRAMeXchange, in 2008 Samsung had about 40% of the NAND market, while Hynix had about 15%. The total NAND market was $11.4B or so. Samsung’s share was about $4.56B, while Hynix accounted for about $1.71 B.
In 2008, we now know Samsung paid SanDisk approximately $335M or about 7.5% of its NAND revenues. If Hynix only paid at half that rate, say 3.25% on $1.71 B, Hynix would have paid SanDisk $56M. Close enough so I’m still going with $60M.
Toshiba Manufacturing Licenses
Last time around I guestimated Other Manufacturing Licenses (Toshiba) at $20M. This was probably low. I’m now going with $53M or about 10% of IP revenues.
This $53M is likely made up of deals cut for X4 and 3D.
I’m not sure we’ll ever know what sort of deal SanDisk cut with Toshiba for x4, but something happened and that something probably involved $. 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.
Moving on to 3D R/W, SanDisk SEC filings show that Toshiba and SanDisk have an agreement based on milestones. Toshiba will pay license fees based on specific milestones until production, and then royalties on future shipments.
Last time around DanR thought I was low in my estimate of $20M. I think he was right.
As he put it:
“My guess is $55M. $5M for M-systems cross license agreement with Toshiba and $50M for 3D. I’m basing my 3D estimate on Toshiba ‘Other receivables’ balances prior and after the 3D agreement. I currently believe that Toshiba is paying $25M in Q2 and Q4 for 3D license and around $2.5M in Q3 and Q1 for M-sys embedded patents. Check for 3D: Royalties increased from $129M in Q2-08 to $132M in Q3-08, while Judi at the CC said that the increase was for a new licensee which more than offset decrease in the component based royalties. This fits well for a $12.5M a quarter for 3D license.”
SD/ microSD/ CF/ USB Drive Licensing
I’m also upping the estimated revenues from this segment to $60M or 12% of IP revenues for 2008. $60M feels high, but I believe I have been underestimating microSD.
I finally tracked down some reliable numbers for microSD in 2008: 397M microSD cards shipped according to a recent Garner report. In the Q4 2008 conference call, Eli noted that SanDisk sold 175 mobile cards. Some of these were M2 for Sony.
I wasn’t able to obtain microSD market or market share by revenue. If anyone out there has these numbers, they would be most appreciated.
In any case, it looks to me like SanDisk had roughly 40% of the 2008 microSD market- at least by units shipped.
The other 60% of the market should have been paying royalties at a likely rate of 6%. I have no idea of what percentage of this 6% was SanDisk’s. Some feel SanDisk gets it all. This could very well be true. After all SanDisk developed the format.
The microSD story deserves its own post. It is becoming a very interesting and potentially significant story. A de facto standard in a booming market.
Gartner is estimating the microSD market for 2009 to be 435M units- a 10% increase over 2008.
Now that SanDisk has signed Samsung, the question is whether it will go after Micron.
SanDisk has said that it feels Micron needs a license. Micron feels otherwise.
Micron’s NAND business is part of a joint venture with Intel known as IMFT. Intel is covered by it’s cross-license agreement with SanDisk. The $29M question is whether Intel’s presence in the JV gives Micron the necessary IP cover.
This is clearly a lawyerly question and one that only the courts can answer.
It just so happens that Jim Brelsford, SanDisk’s General Counsel, has a background in just such JV IP issues. Read into that what you may.