Oppenheimer

My plan of a week ago was to post today on SanDisk SSDs. The idea was to go over the last 9 months or so of cc’s/ presentations and track SSD discussions.

The first thing I noticed was that one of the punch lines has never been delivered. The mystery technology that was supposed to enable x3 for SSDs when coupled with ExtremeFFS, has never been announced.

CES came and went with nary a peep and no word since. Probably an indication that whatever SanDisk had/has up its sleeve isn’t ready for prime time.

That story line is going to have to wait.

First I was distracted by those interesting SanDisk slides from the 2009 Flash Memory Summit and then the Oppenheimer Communications, Technology & Internet Conference (OPCO) turned out to be surprisingly interesting.

The OPCO audio and slides are available on SanDisk’s Investor’s Relations page. Highly recommended.

I am posting a selective transcription from the Q&A at the bottom of this post. If I have the time, I will finish it off and post on the pages section of this blog, but no promises.

First, I’m behind on responding to comments, so I’m going to throw a couple of those in here.

Comments

hi savo,

one more clue to the SSSS LLC mystery.
“If we were to be in that market, it would be through partnership with other partners that are entrenched in the enterprise space”.
IBM

The SSSS LLC mystery aside, something does seem to be up in the SSD enterprise space.

As you point out from the SNDK Q2 cc:

“Eli Harari: Yeah, we are currently not in that market. And you cannot be in that market kind of like casually. You either are in it or not. So today we’re not in this market, as I said, if we were to be in that market, it would be through partnership with other partners that are entrenched in the enterprise space, not so much in the industrial space. The industrial space, we have been in – msystems has been in, and it’s just too small a market.”

And yes I agree, IBM should be on the short list as a potential enterprise SSD partner.

At OPCO Eli expanded on SanDisk’s emerging enterprise SSD strategy:

“Now, the play for us I believe in enterprise is to deliver very high quality NAND flash, managed NAND, and let the STECs of the world and a hundred other guys out there that want to explore the play in the enterprise, use our supply- supply of very high quality, very well tested, and very high performance flash memory.

Because frankly everybody that is in the enterprise space that wants to adopt flash will want to have in the supply chain a very good, reliable, captive supply, and there’s not too many of those around.

That’s really the direction we are going. We’re not ignoring the enterprise. But today, clearly we’re not there.”

hi,
pls. look at this :

http://www.eetimes.com/showArticle.jhtml;jsessionid=IS5CZKHS3XK2LQE1GHPSKH4ATMY32JVN?articleID=219200467

I find it hard to believe this is what eli said. he must have said something, do you know what it was? It looks like he is warning from the same situation we just experienced – over supply. is this going to happen after all the talking about the huge demand.
thanks.

I think Eli is warning that the return-on-investment (ROI) model  is broken. The massive capex outlays needed for new fabs currently can’t be justified. However this does not necessarily mean the sky is falling.

None of the NAND companies, including SanDisk, have to play this game along the lines of expectations built up over the last few years.

The next few years don’t have to be a replay of the last few.

Reading between the lines, Eli seems to be saying : “The days of our selling NAND below cost are over. We’re not going to subsidize tomorrow’s markets today.”

Kind of like cheap oil, cheap, cheap NAND was a blessing for many, but not for the suppliers. Given today’s market conditions, NAND manufacturers, including SanDisk, finally appear willing to be patient to the point of healthy profitability. We shall see.

Patience will allow cost reduction to work its magic. As Eli said at OPCO:

“Pricing has got to come down at a much slower rate than what we have experienced in the past for profitability to return and for the margins to approach the 20 to 30% net GMs, not including any kind of inventory reversals of that nature. And I believe that that is possible, because of the inherent growth [of end markets].”

A lot of folks hooked on cheap NAND [-50% to -60% ASP/GB decline per year] aren’t going to like this new market reality. But that’s kind of just too bad for them.

Selective OPCO transcript

11 August Oppenheimer
Eli Harari
[ See accompanying slides]

Selective transcript

Q&A

Eli: … On the supply side there is no question that the supply is limited to what’s in place right now. And the profitability is still not there to warrant going out on a Capex spree and building the next fab.  I don’t think that that is in the cards anytime in the next several quarters.

I can tell you for ourselves we certainly don’t feel that today the ROI is there to build the next fab. This will take several good quarters of improved corporate profitability beyond what it is today before we would be even thinking about that.

So I think that the environment is stable and very very much moving in the direction of a much more healthy balance than we have seen in 2008.

****
Q: inaudible:

The question is on SSD and where we are in that market and how we see it.

I believe the SSD eventually will be, eventually let’s say 5 years out, will be between a third to a half of the total consumption of NAND flash. NAND or maybe at that time, 3D.

In other words, its going to grow from nothing to a very very substantial part of the market. And as far as technical difficulties, of mastering the performance requirements- endurance and so on – the industry and us will obviously master that.

There is no gotchas, no .. [inaudible] to get it right, we have gotten it right in some parts, but not on other parts.  But where we haven’t gotten it right, we will get it right.

Again its not rocket science. And we do have the know-how in the company. We just need to make sure that we get it right.

So the real issue is the economics of SSD. In the enterprise space, people are prepared to pay for the value, for the performance, the crash resistance, the very high IOPs, the low power and that is why the enterprise space looks very promising.

In both the netbook and the notebook there is this perception that NAND flash has got to match more or less cost of hard disk drives even though at a lower density. And to achieve that in the next two years or so requires selling SSD at a loss and we are not prepared to do so. SanDisk is not prepared to subsidize that market.

That is because we have other opportunities. We don’t have to do that. We will prioritize those opportunities. Particularly in mobile where we are very very strong. We do see tremendous demand and where we don’t have to compete with the cost structure of HDDs.

There is no HDD that can go into a mobile phone.

For the SSD business to really take off, outside of enterprise. Enterprise as I’ve said is a profitable, but niche market. It will not move a lot of GBs, relatively speaking. Where a lot of GBs are going to move in SSD in the future is going to be in notebooks, desktops, and netbooks.

And there flash memory offers 10X the performance, far lower power dissipation (?), far smaller form factor, very reliable and I believe that once consumers start using it they will not want to go back to disk drives- ever.

But its the chicken and the egg…

Question [inaudible]

Niche does not necessarily mean small. It will be neither small nor unprofitable. But all I’m saying is that it will not need a lot of capacity. It will not move a lot of GBs.

I think that STEC has done a very good job- several years back basically recognizing that market. They have been totally focussed on that.

[29:00] Our focus frankly is on mobile. We are very very focussed on mobile. I’m not saying that SSD is not important. But you’ve got to pick your front runners.

SSD will eventually be important enough for us, but today mobile is where we see the greatest opportunity for us.

Now, the play for us I believe in enterprise is to deliver very high quality NAND flash, managed NAND, and let the STECs of the world and a hundred other guys out there that want to explore the play in the enterprise, use our supply- supply of very high quality, very well tested, and very high performance flash memory.

Because frankly everybody that is in the enterprise space that wants to adopt flash will want to have in the supply chain a very good, reliable, captive supply, and there’s not too many of those around.

That’s really the direction we are going. We’re not ignoring the enterprise. But today, clearly we’re not there.

….

Question [inaudible]

Today, the vast majority of our mobile shipments are in cards. And in cards, the direction is to move from basically regular cards to cards that use the intelligence of the controller to provide launchable applications. The card itself uses its intelligence.

The SDC, service delivery card. it is a highly differentiated card, even though it looks like a microSD.

In the embedded, the main thing now is that the industry is kind of now settling on an embedded format, eMMC 4.3, 4.4, JEDEC and the flash industry has worked on this eMMC.

Our claim to fame if you will in that is that we have been the first to drive for bootability from that device given an MLC flash memory. This is part of the msystems’ legacy. MDOC was a bootable device.

And that is catching on for high capacity. Multi chip packages were used, mobile DRAM, is usually for very low storage capacities, 128 MB, 256 MB and so on. When you are looking at embedded 8GB, 16, 32 GB, eMMC I believe is the right way to go.

The industry is kind of adopting that. And we are doing very well in that, in terms of design wins and I believe it will become a substantial business for us.

****

Q: I think you guys mentioned that the gross margin number [in the long term] you’d like to reach was somewhere around 20%.

Eli: No, 20 to 30%.

Q: OK in the 20% range.

Eli: I’d like to get it higher of course.

Q: You are somewhere around 8% right now. What needs to happen from today through 2010 that would get you there?

Eli: First of all the markets [we are in] are growing. We need to have differentiated products, like SDC for example.

Q: Does the market need to grow 100% per year?

Eli: No you need to have good demand/ supply balance. This is very sensitive. I mean the things that drove pricing up by a factor of 100% was a 5% imbalance in favor of demand. The demand was 5% higher than supply. The prices doubled.

Likewise last year there was 5% excess supply and prices plunged. So there really needs to be a good balance between demand and supply.

And we continue our cost reduction. That is the one thing that is under our control and we expect to continue to do well.

However, flash is slowing down and flash cost reductions are not going to continue at the rate that we have seen in the last 3 to 4 years. The last 3 to 4 year’s cost reductions annually have been 50 to 55% annually. That will slow down quite substantially over the next 3 to 4 years, because of Moore’s Law.

Pricing has got to come down at a much slower rate than what we have experienced in the past for profitability to return and for the margins to approach the 20 to 30% net GMs, not including any kind of inventory reversals of that nature. And I believe that that is possible, because of the inherent growth.

****
[inaudible question]

Eli: We have said that for this year we expect our total bit growth, 2009, to be under 50%. And that is through technology transitions. 43nm and going to three bits per cell. The next technology transition will be 32nm both two and three bits per cell.

Typically in a technology transition you can expect between 30 and 50% more bits. You cannot expect 100%. You have to put in place new capacity for new wafers if you want to go above 50%. That’s true not just for SanDisk, its true for any other supplier.

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2 Responses to Oppenheimer

  1. Justin Davis says:

    This is really interesting… I’m not sure I’d agree completely on the expected outcome. The 20% range seems more realistic.

    Thanks for posting…

    Justin Davis

    Freight Quote

  2. bob77977 says:

    hi, thanks,
    indeed, “surprisingly interesting”. “cautiously optimistic” for the next 2 Qs but very optimistic generally.
    “use our supply- supply of very high
    quality, very well tested, and very high performance
    flash memory. ”
    SSSS LLC could be selling controllers rather than licence? or, buy the chips from sumsung add the controller and sell to the STECs (our supply)?

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