The Elephant in the Room

In many respects this is a follow-up to my last post: A Billion Dollars.  The original title of this post was going to be “Consolidation and Strategic Partnering.”

I decided to change it after Mr. Market’s non-reaction to SanDisk’s stellar Q3 results.

It’s becoming increasingly clear that SSDs, both in the consumer and enterprise markets, are going to be far bigger than we all think.

Even us optimists.

Adding an extra twist, the post-NAND world looms.

The SSD market, in all its permutations, is the elephant. Mr. Market may not  see the pachyderm yet, but he’s in the room.

This is not news to SanDisk.

The $16 billion question is what SanDisk is planning to do about it.

Some think SanDisk is ready to cash out- to highest bidder. Some think SanDisk management is ready to cash in- via LBO.  Some think SanDisk will be a buyer. Some think SanDisk will stand pat.

Lots of options. Options are good to have.

SanDisk has them, because it is wonderfully positioned. Whether its shareholders profit accordingly, remains to be seen.

The Billion Dollar Convert

The recent SanDisk billion dollar convert may or may not have a part to play, but it’s as good a place to start as any.

SanDisk has said that the key rationale for the recent financing is to pre-fund its existing 2013 convertible maturity. This new convert has a 7 year maturity – 2017. Effectively SanDisk rolled over the maturity of the 2013 convert to the 2017 timeframe.

SanDisk took the opportunity to strengthen its balance sheet in a strong convertible market. Hard to fault that.

On announcement, I didn’t appreciate the tax benefits. In an interesting and clever twist, SanDisk minimized dilution by entering into a bond hedge that increases the strike premium 35% to slightly above $73. And, the cost of the bond hedge is offset by tax benefits.

This cash affords SanDisk flexibility to fund fab 5, NAND and 3D pilot production. As I pointed out in my last post, this billion dollars also gives SanDisk enough pocket change to pursue an acquisition, if it so chooses.

Before getting to that, some think that Apple could be interesting in acquiring SanDisk.


The fit between the two companies is remarkably good, maybe better than Intel, but I just don’t see Apple doing the deal.

Apple has the cash- $51 billion and counting. Steve Jobs is on record recently, that Apple could be shopping:

“We strongly believe that one or more very strategic opportunities may come along that we’re in a unique position to take advantage of because of our strong cash position.”

The problem to my mind is that Apple doesn’t do this kind of acquisition. It typically acquires small companies that can be easily integrated into existing company projects.

That said, the evolving relationship between SanDisk and Apple bears watching. Steve Jobs loves flash memory. Eli and Steve Jobs go way back. SanDisk has gone out its way to make nice recently. Both are smart companies.

As the graphic above from a teardown of the sixth generation iPod indicates, 
SanDisk is selling to Apple. There have been no announcements and few sightings.

Daniel Amir at Lazard made waves recently,  when he noted in a note on 10.18.2010  that SanDisk is one of the SSD suppliers for Apple’s new MacBook Air with its iSSD product.

Uche Orji, with UBS, tried to pry some detail out of Eli on the recent SanDisk Q3 conference call:

“Uche Orji, UBS: Thank you very much. Eli, let me just start of with asking you about the impact you would expect your SSD products will have. I mean yesterday Apple talked about this is not the future of notebook market. I just kind of wanted to get a sense of what engagements you think you’re having right now and specifically, we can talk about tablet market as well, whether these NAND products you have is something that should lead to high engagements in those markets?

Eli Harari: The announcement this week, the MacBook Air having SSD as standard, is I believe very, very important, not so much because of MacBook Air itself, but because it’s really an industry signal I believe. Apple has done so in the past.

Apple was a first company to introduce PCs without a floppy disk at a time where everybody thought you’ve got to have floppies and I think that this going with a standard notebook PC that has nothing but flash memory, I think is going to force competitors to much more seriously go in that direction, but we all know that the real driver for mass adoption of flash memory, SSD in this type of notebook PCs, is very much, we need to get to a lower cost and that will happen I believe.

Tablets are, it’s really in different manner. This is really a product category that came out  of nowhere, it never was expected to be where it is today, even just six months ago and the nice thing about tablets almost by definition, 10 hour operations, very thin, light weight, none of the tablets anymore actually, none of the tablets are designed to use hard disk drive that was not the case for netbook PCs, where we all expected netbook PCs to be with primarily with flash memory SSD but pSSD but, in fact, turned out to be hard disk drive based.

Tablet PCs to the extent that they cannibalize notebook PCs, that’s good news for us and for the industry because notebook PCs really are not today using SSD to any large extent, whereas tablet PCs to the extent that they cannibalize notebook PCs, that’s good news for flash, for all the industry, and certainly for ourselves.”

As is often the case, Eli’s comments seem both obvious and true- in hindsight.

I’m going to miss him.

Steve Jobs, another with the gift, put it another way, when he took the stage to talk about the new MacBook Air with its flash storage built into the motherboard:

“We think all notebooks will look like these one day.”

“We think it’s the future of notebooks.”

24 nanometer

The future is fast approaching. It should be here next year or soon thereafter.

Again from the Q3 conference call:

“Craig Ellis, Caris & Co: Great. Thanks for taking the question. Eli, you touched on PC adoption for SSDs, I was wondering if you might just look out into the future and give us some idea of when you think PC SSD adoption might get to some benchmark level of say around 20%?

Eli Harari: It all hinges on really the 24 nanometer and let’s say, the 20 nanometer node. At 24 nanometer, the cost structure is very attractive, I believe, for SSD, particularly if one can deliver SSD with reasonable performance with 3 bits per cell, but even with 2 bits, it gets a lot closer to where the mass market develops. At 20 nanometer, I think, the mass markets really begin to take off.

So, we are within one to two generations I believe of having the right cost structure for end performance, I believe, because performance is constantly improving actually at a very nice rate and reliability problems are being addressed very nicely throughout the industry, that I believe within the next one to two generations you’re going to see a significant move on the upside for SSD and I don’t mean the enterprise SSD because as we know that’s already taking place because they can tolerate SLC pricing which is, of course, significantly higher per gigabyte.”

There were several important 24 nanometer discussions in the 3Q conference call. 24 nanometer is on track to begin production in Q4 2010 in both X2 and X3 memory architectures. System expertise requiring sophisticated controllers is becoming increasingly critical for delivering reliable performance. SanDisk is shipping X3-based iNAND to certain handsets now starting production.

SanDisk also expects NAND to scale down to below 20 nanometers in the next few years with existing lithography tools.

Reading between the lines, SanDisk is becoming increasingly confident that it will be able to deliver an X3 SSD using 24 nanometer.

Going Private

A few weeks ago, I almost put this post up entirely dedicated to going private.

As it turns out Shlomi Cohen, laid out the scenario most ably in “A (going) private matter”.

“I personally believe that behind the surprising resignation of SanDisk Corporation (Nasdaq:SNDK) founder and CEO Dr. Eli Harari lies an orderly plan to de-list the company during the next year.

SanDisk president and COO Sanjay Mehrotra will replace Harari as CEO on January 1, 2011, and director Michael Marks will replace him as chairman. Marks is, among other things, a past expert on delisting companies for KKR.

At SanDisk, they apparently already know that the frustrating gap between SanDisk’s market valuation and its results, huge future demand for its products, and technological developments that it is working on, will only widen with time, and frustrate investors, employees, and management.

Therefore, de-listing is preferable, even at a price double its current market price.”

Shlomi followed up last week with, “The brilliant private future of SanDisk- Most analysts are totally missing the potential at SanDisk

Shlomi thinks SanDisk management is going to take the company private next year about where the bonds were hedged- around $73 – as a preemptive move against an anticipated hostile bid from Samsung.

Shlomi thinks 3D R/W is right on schedule and may be even further along than SanDisk is letting on.

Personally, my guess is that 3D R/W- high volume production- is still a ways off, because it it going to be dependent on EUV.

3D R/W

A lot is riding on 3D R/W. My last summary, FWIW.

The next 3D milestone will be 3D pilot production, which looks like a fab 5 event.

My ears perked up, when Sanjay seemed to imply at BoA, 14 September, that both pilot production and low volume production of 3D R/W could be a focus in the next few years. Sometimes interesting info is revealed, after pauses, and in corrections to what is not said.

Here is Sanjay. Make of it what you may:

“Beyond NAND in terms of post-NAND we have talked about other technologies that we are looking at such as 3D technology, but those are in the early stages of development and the primary focus for the next few years, in terms of production, will be, [pause] in terms of – high-volume- production-, will be around NAND.”

The party line is that SanDisk expects NAND and 3D R/W to “happily coexist over the next decade.”

This could mean many things. The obvious is that 3D R/W in high volume production is waiting on production tools – such as EUV- which have yet to see the light of day and in the meantime, SanDisk/Toshiba will continue development work using available production options.

Eli’s comments on EUV from the Q3 conference call:

“ We now expect NAND to scale down to below 20 nanometers in the next few years. This will likely be achieved with existing lithography tools running in existing and new advanced NAND fabs, and this bodes well for our Yokkaichi fabs as they become more fully depreciated in the coming years. As we push the roadmap even further, Extreme Ultra Violet (EUV) lithography tools will become indispensable, and I expect the transition to EUV to be spread over a number of years and to be quite challenging for the industry.”

So how big is the upside in the best case scenario?

The Second Wave

If the elephant in the room is SSDs, his bigger, barely visible, far far larger, brother, is the second wave.

At Investor Day 2010, Eli pointed out that SNDK 3D R/W, if successful, would trigger a second wave of SSDs:

“Now, if we are successful with 3D R/W, and by all means I say if, because until we do it, we haven’t done it. If we can succeed in that then 3D R/W would with the projected cost structure, will definitely give a second wave on the SSD.

Basically it has the economic [pause] you can kind of see it, if you take either the 3D optimistic or conservative, you can see that the cost, this is an exponential cost curve, is substantially lower than what can be done with NAND, and we also believe that issues like endurance will be far less, frankly, will not be an issue.”

Substantially lower costs without “issues” such as endurance, works for me.

If SanDisk/Toshiba can deliver this would be a disruptively huge deal.

For anyone interested here is a transcription of most of Eli’s Investor Day 2010 comments.

Profile for an Acquisition Target

As mentioned in the last post, there are reasons to think that SanDisk could be working on an acquisition.

To my mind the focus would likely be MLC/TLC SSDs, maybe for the enterprise.

FWIW, I don’t see STEC as a SNDK target.

If SanDisk does go shopping the likely key will be complementary IP and expertise for the next level.

STEC is looking a bit last generation.

Just as consumer SSDs are evolving beyond simple HDD drop in replacements, enterprise SSDs are evolving even faster. Where this ends up is anyone’s guess, but the sector is moving and moving fast.

Stakes are high.

One company that would seem to fit the profile of a potential SanDisk target, is Anobit. Anobit is private, Israeli, and seem smart.

I have no idea whether their so-called memory signal processing technology would be complementary to SNDK’s. It does sound like the real deal though.

Purportedly Anobit has more than 60 patent applications.

Anobit’s Enterprise MLC SSD won best of show at the 2010 Flash Memory Summit.

Last but not not least, Samsung has turned to Anobit to deliver performance for its TLC, or 3-bit, NAND.

There have been rumors that EMC is qualifying Anobit’s SSDs. This would be a blow to STEC, currently EMC’s sole supplier.

As a reality check, I ran the idea of an Anobit acquisition by a most knowledgeable Israeli friend. He dismissed the notion.

I’m going to stop here.

I had hoped to get to relationships between flash fabs, data storage players and HDD manufacturers. That’s going to have to wait for another day.

Suffice it to say that a lot’s going on.

Samsung has a stake in Fusion-io. Toshiba has invested in Violin Memory. SandForce seems to have lots of friends. Seagate and Samsung recently announced they will jointly develop and cross-license controller technologies for enterprise SSDs.

Western Digital with its in-house SSD capability -with SanDisk connections- has not announced a flash fab partnership.

SanDisk has been mum, though Eli did say at its 2010 Investor Day in the Q&A that, “There is nothing to stop us from in the future, either being directly in the enterprise through a partnership or supplying components to the enterprise space…”

Where all this is heading is anyone’s guess, but it’s becoming increasingly clear that the old models for SSD architecture will be going the way of the dodo for both consumer products and the enterprise.

This is going to drive consolidation and strategic partnering- across the data storage industry, the emerging SSD market and the NAND business.

Whether SanDisk will still be trading publicly when 2012 dawns is anyone’s guess. I am guessing yes, but then again I didn’t think FLSH would go the way it did.

Time to go cut up a couple of pumpkins.

Happy Halloween all.


8 Responses to The Elephant in the Room

  1. Leon says:

    au contraire to your remark that you did not think FLSH would go the way it did, since the days of cencomco and his brilliant analysis of the disc on a chip you did indeed predict the buy out of FLSH by SNDK some 6-12 months before the announcement, your clairvoyant abilities continue to amaze me as well as your other fans, Your pearls of wisdom is always savored with a fine bottle of pinot noir with each of your writings. As Mr Spock once said “Live long and prosper”

    • savolainen says:

      Hey Leon,

      Interesting that you should mention “Live long and prosper.”

      My favorite toast.

      Though I do it in Spanish:

      “¡Larga Vida y Prosperidad!”

      On opening a special bottle, the cubana wife and I do the Vulcan hand salute and recite the line in unison.

      Next, we add, “Brindemos por nuestra familia”

      “We toast to our family.”

      I suspect that many of our friends/family are not entirely sure what to make our eccentricities.

      FLSH had a great run. Dov did great.

      Best to you and yours,

  2. Poofypuppy says:

    Thanks, Savo. It’s interesting that SanDisk’s stock price has remained in the cellar despite extremely solid and even stellar financial results. It’s not like SanDisk is a no-name penny stock company that no one has ever heard of. I keep thinking, what do the analysts, market makers and/or big investors know that accounts for SNDK’s laggard performance?

    • savolainen says:

      Hey Poofy,

      Right now I’m inclined to think that SanDisk is trading where it is because for many it is seen simply as a commodity chip stock- potentially heading into a year of over-supply.

      The average analyst still has SanDisk earning less in 2011 than this year. Not much to get excited about there.

      Q1 2011 will be important as it should telegraph how 2011 will go.

      My guess is that in the next couple of months, we will see something of a repeat of last year. As it becomes clear that Q1 will be OK, the smart and fast money will roll back into the stock.

      The other explanation is that those in the know are playing dumb with a cunning lack of enthusiasm. They want to keep the stock down in preparation for a buyout- by management or others.

      Or maybe these folks know something we don’t.

      Personally I think this is giving these folks far too much credit.

      I also suspect that there is a contingent of deep-pocketed traders who have learned to profit from SanDisk’s volatility and play the game accordingly. These folks could care less about fundamentals.

      For whatever reason SanDisk sitting right where it is suits their purposes for the moment.

      But we shall see.


  3. Dahotruth says:

    Hey Savo, nice post, Halloween and the “elephant in the room” nice, very nice keep up the great work

  4. Marty says:

    Hi Savo, we thought the Glacier bears had gotten you. Hope your backpacking trip was great. I love Glacier and Flathead Lake too.

    I wanted to point out the upbeat Q3 SNDK conference call. How many times do you hear a senior management team end their call with a company cheer? Pretty happy for folks holding undervalued stock and options, don’t you think?

    • savolainen says:

      Hey Marty,

      Nah the bears didn’t get us- but we were careful and loud on the trails.

      On our two longest hikes: Highline/Swiftcurrent to Many Glacier and Piegan Pass to Many Glacier, there was a lot of very recent Grizzly sign.

      I was prepared for Glacier to be big, I wasn’t expecting it to feel so wild. A good thing to my mind- as long as you and yours don’t end up as snacks.

      We flew into Kalispell, but that’s as close as we got to Flathead Lake. Flathead is big.

      We picked up some bear spray at Snappys Sport Senter and headed off to the park.

      My wife humors me with the hiking, but the rule is – no camping. It has got to be sheets and good food every night. She might be on to something.

      Montana was great. Some think the Glacier area looks like Switzerland. If all goes well, I’ll be able to make up my own mind on that next year.


      Yep the company cheer on the conference call was both amusing and curious- as you point out- the group sounded both confident and light-hearted. In rather stark contrast to the gloom of a certain segment of the investment community.

      Our FLSH afforded us a most enjoyable trip to Jerusalem/Israel.

      My hope is that our SNDK will be able to underwrite another such time- or times.

      We shall see,

      Here’s to Montana.


      • Marty says:

        Your wife’s caution is well-founded after the fatal Grizzly attacks this summer in Yellowstone. Gruesome stuff eh? The Glacier Lodges are delightful to stay in as well as The Flathead Lake Lodge (run by old friends).

        Like you, I can’t help but think there is much more to the SNDK endgame than a slowly appreciating stock price. As usual, we’re the last to know right?


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