Apple & SanDisk

The Apple-SanDisk relationship continues to be interesting nonevent.

One of these days- or years, suspect we’ll officially hear more. Until then it looks like it’s going to be a connecting-the-dots game.

In this latest non-chapter, Apple acquired Anobit, an Israeli controller company with SanDisk/ M-Systems connections, and named SanDisk one of its 156 major suppliers.

For those interested in conspiracy theories, a good argument can be made that SanDisk is  building capacity dedicated to Apple.

Anobit

Anobit billed itself as a NAND-based solutions provider, but basically it was a specialized controller company providing the signal processing technology required for NAND chips.

The company was smart, private and Israeli.

They were on my shortlist as a SanDisk acquisition target. SanDisk acquired Pliant instead.

An Israeli friend has told me, that he was told by a SanDisk guy, that SanDisk passed on Anobit because Anobit didn’t have anything to contribute.

Anobit’s expertise is in signal processing algorithms to improve the performance of flash-memory chips. Which at the end of the day is what SanDisk is all about as well.

Purportedly Anobit has more than 60 patent applications. Apple will be happy to have those in their IP vault. Most likely to be used for defensive purposes if required.

One of the more interesting Anobit subplots is Samsung. Samsung liked Anobit too. Enough to send big business its way. Anobit had a big contract with Samsung.

Samsung had turned to Anobit to deliver performance for its TLC, or 3-bit NAND.

From all I’ve been able to gather, even with Anobit’s help, Samsung wasn’t been able to deliver viable commercial TLC in volume. The problem apparently was the lack of integration of chip level expertise with signal processing.

To the best of my knowledge, SanDisk is the only player to have pulled that one off.

Anobit’s CTO was Avraham Meir. Prior to joining Anobit, Mr. Meir was VP Corporate Engineering at SanDisk, and prior to that CTO at M-Systems- acquired by SanDisk in 2006.

One has to wonder how many SanDisk company secrets moved from SanDisk to Anobit with Mr. Meir, an internationally recognized authority in NAND Flash technology.

Does Apple now own the secret ingredients behind SanDisk’s TLC success?

Personally, I don’t think so. That special sauce ingredient can likely be traced back through M-Systems’ X4 to the original Stratosphere technology. This is the same technology that Samsung tried to get ahold of in 2008.

First through outright acquisition of SanDisk. And when that failed, through claims of license rights through prior agreements with M-Systems. No luck there either.

In the arbitration hearings, Samsung put a value on X4- “billions of dollars.”

It appears that Samsung’s backup plan was to use Anobit.

If Anobit was particularly special, there should have been a bidding war including Samsung. If anything, Anobit’s price slipped.

Initial reports in early December, estimated Apple’s purchase price of Anobit at around $500 million. By late December it was down to $300 – $400 million. An Israeli friend was told by local VCs that the final price was under $300 million.

So why did Apple buy Anobit?

It looks like it was all about preserving the status quo. Apparently Apple has been using Anobit controllers for a while now for X2 MLC NAND and liked what they had.

One of the beauties of Anobit was that their controllers work nicely with NAND chips from all the major Apple suppliers: Samsung, Toshiba, SanDisk, Micron, Intel and Hynix.

SanDisk

Yep, as of 13 January 2012, SanDisk is now officially a major Apple supplier.

SanDisk showed up on Apple’s official 156 company list which “represent 97% of its materials and manufacturing spending.”

This is a bit curious, given that the only teardown of an Apple product which revealed a SanDisk chip that I am aware of, was an iPod Nano.

The likely explanation is that SanDisk chips have found their way into other Apple product lines along the way and these SanDisk chips have been missed along the way by the teardown shops.

After all, SanDisk NAND and Toshiba NAND are interchangeable and Toshiba NAND has been uncovered in many teardowns.

Given the current tension between Apple and Samsung, it’s not particularly surprising that Apple and SanDisk would be working together.

Moving forward, Anobit’s SanDisk connections could prove more complementary than competitive.

Anobit’s familiarity with SanDisk’s approach just might make SanDisk NAND all the more strategically desirable to Apple.

Along these lines, two items from September 2011 bear watching.

First Baird analyst Tristan Gerra reported that “SanDisk is building capacity dedicated to Apple”

Then a Confidential Treatment order was filed by SanDisk with the SEC.

Such a CT order allows a company, in this case SanDisk, to meet SEC filing requirements while keeping the relevant info secret.

If a material agreement had been reached between SanDisk and Apple, a CT order wouldn’t be unexpected, given Apple’s obsession with secrecy.

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10 Responses to Apple & SanDisk

  1. gal2k says:

    hi Savo,
    great post as always. you are certainly teasing us with the Apple talk. anyway, i was not familiar with CT orders….but after a little research it appears that in order for the CT order to be granted by the SEC, the requesting filer needs to show both the competitive harm that would result from full disclosure, and why the information is not material to investors.
    so i can see how Sandisk could meet the first requirement and convince the SEC that an agreement with Apple if fully disclosed could result in competitive harm to Sandisk, but i don’t understand how they could meet the second requirement and convince the SEC that an agreement with Apple (the worlds largest purchaser of flash) would not be material to investors?

    Additionally the identity of a 10% customer is an example of required disclosure ineligible for redaction. if Sandisk is in fact in more Apple products than the tear-down guys have shown us, then why have they not risen to the 10% level for disclosure?

    Finally, it appears that Sandisk has used CT orders a total of 4 times..
    6-20-2008
    7-8-2008
    6-12-2009
    9-27-2011 the one you referred to
    i imagine that at least one of the prior CT’s were related to details of the Samsung licensing agreement …an agreement that was disclosed to the public but perhaps not 100% of the details of the pricing. i’m just not sure of the likelihood that the SEC would agree to a redaction of the disclosure of an agreement with Apple….just guesswork on my part since i really don’t know anything about SEC operations.

    Always appreciate your great insight,
    Gal2k

    • savolainen says:

      Hey gal2k,

      FWIW, my understanding of the CT process is that it can be a bit loose. And the SEC isn’t all that restrictive.

      The more intriguing angle is Tristan Gerra’s comment that SanDisk is building capacity dedicated to Apple. If anyone has contacts at Baird, it would be interesting to hear what he has to say.

      Although I didn’t include it in this post, Gerra’s comments were somewhat reinforced by Morgan Stanley in its 10/5/11 report:

      “Moreover, recent checks show Apple has increased NAND allocation towards suppliers like Toshiba and SanDisk and away from Samsung.”

      You are right, if Apple were a 10% customer, it would have to be disclosed.

      So apparently from Apple’s perspective, SanDisk is a significant supplier, and from SanDisk’s perspective, Apple is not a 10% customer.

      I suppose all Apple’s SanDisk purchases could be for its iPod Nano, but that might be a stretch. More likely, to my mind, is that SanDisk NAND is finding its way into other Apple product lines.

      A couple of other angles or background, that didn’t make it into this post.

      Back in 2009, the capacity that SanDisk sold to Toshiba, was flipped by Toshiba into Apple supply.

      In January 2009 SanDisk sold ~20% of its captive capacity to Toshiba. At the beginning of July 2009, Toshiba turned around and entered into a long term NAND supply agreement with Apple.

      SanDisk is the only NAND producer that has not entered into a long term supply deal with Apple on a prepayment basis. Though a while back Intel has bailed.

      Selling NAND to Apple doesn’t work out for everyone. Back in Q4 2008 Intel canceled its supply deal with Apple.

      How about those Apple earnings? Lots of NAND required.

      Happy New Year. And thanks for your thoughts.

      Regards,
      Savo

  2. Poofypuppy says:

    Thanks, Savo. Like gal2k, I wasn’t familiar with Confidential Treatment orders with the SEC, but I guess some kind of provision would have to be made for sensitive info.

    I wonder what the cost/benefits are to SanDisk as a supplier to Apple. On one hand, Apple can guarantee huge purchases, but on the other hand, I’m sure Apple presses its vendors hard for good pricing.

  3. MartyS says:

    Savo, the SNDK/AAPL relationship certainly is an enigma, as you’ve pointed out. Lots of smoke but no fire yet. The recent rumor of Toshiba’s interest in acquiring SNDK to control their fabs adds to the mix, although the rumors may have been planted for trading purposes near option expiration dates.

    There have also been rumors of AAPL turning to INTC and TSM for foundry services as alternatives to Samsung which lends credence to the “away from Samsung” theory.

    What are your thoughts on some sort of AAPL/SNDK/Toshiba deal involving IP, fab ownership, and NAND supply?

    MartyS

  4. Tal says:

    Hi Savo,

    Very interesting and ‘Sherlock Holmsy’ post.

    Are you rethinking part of your theory about SNDK-APPL in light of today’s SNDK results?

    I’m also curious to know what is your preliminary analysis of the results. It seems Goldman Sachs were right.

    Thanks!

    Tal

    • savolainen says:

      Greetings Tal,

      In light of SNDK’s Q4 earnings, it’s clear that today SNDK is not shipping in volume to AAPL. It’s also clear that they won’t be shipping to Apple in volume in 1H of 2012.

      That said, 2H 2012 is not so clear. SNDK appears to think it will be getting a big revenue boost. Apple could be a factor.

      Another of the items, I didn’t get to in this post is where the best fit would be between Apple and SanDisk.

      Apple would like NAND dirt cheap.

      SanDisk prefers to sell integrated product with added value which help keep SNDK margins up.

      If there should be a meeting of the minds between the two companies, the obvious point would be product where Apple needs sophisticated NAND solutions. Beyond what Anobit can provide.

      One such area would be SSDs.

      I doubt Apple is going to get into the SSD business. Right now Apple uses Toshiba and Samsung where SSDs are required.

      No reason that SanDisk shouldn’t get a piece of that action- if SanDisk can deliver a cost effective high performing consumer SSD.

      Personally I have been underwhelmed with SanDisk’s SSD efforts to date.

      I expect we will hear more on SSDs soon at SNDK’s upcoming investor day.

      Probably more management turnover as well. SanDisk appears to be evolving- hopefully for the better.

      As I tried to say in this post, and as MartyS put it: the SNDK/AAPL relationship is an enigma.

      Lots of smoke, but no fire yet.

      Regards,
      Savo

  5. MartyS says:

    So I guess one could say that something is “Cooking” eh Savo? Sorry…couldn’t resist. Thanks for your insights.

  6. Poofypuppy says:

    Hi Savo,

    What are your thoughts on SanDisk’s acquisition of FlashSoft? Seems like a very minor acquisition.

    Thanks.

    • savolainen says:

      Hey Poofy,

      I’ve been a bit distracted.

      Your question about FlashSoft is a good one.

      Not much in itself, but this acquisition is, purportedly, symbolic of the next step in the evolution of SanDisk. At least according to Sumit Sandana at Analyst Day.

      The last big step was the transition from being primarily a retail company to primarily an OEM company. So far so good on that one.

      For the next step, SanDisk is going to try to “engage” customers at a much “higher level,” by offering software and solutions. SanDisk hopes to increase the “value-add.”

      We shall see.

      I hope to finish another Apple/SanDisk post for tomorrow. It will touch on Analyst Day, the Kinnucan FBI capers, and rumors.

      Best,
      Savo

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