Pliant Technology

June 12, 2011

$327M later SanDisk has an enterprise SSD division. And a rather successful one at that.

After careful consideration, SanDisk went for the low hanging fruit where there was bang for the buck. A commendable approach.

On 16 May, SanDisk announced its intention to acquire Pliant Technology. On 25 May the acquisition was completed.

The fit between the two companies looks good. The market opportunities are remarkable. Product synergies should abound.

For better or worse, we won’t get telling results until next year, when the first joint products arrive.

The Fit

SanDisk has the NAND, chip-level and system-level expertise. Pliant had the enterprise SSD expertise, the controller, and the enterprise customers.

Little if no overlap between the two.

SanDisk’s SSD scorecard to date is decidedly mixed. For the PC market SanDisk is late. Fortunately that market hasn’t really taken off yet.

The good SSD news is the modular or small form factor SSD market, where SanDisk seems to be racking up the design wins.

The enterprise SSD market has been a big zero for SanDisk. SanDisk has expressed interest, but delivered nothing.

All that is history now.

The Pliant acquisition gives SanDisk instant enterprise SSD credibility. Pliant has customers, design wins, and rapidly increasing revenues.

Morgan Stanley believes that Pliant SSDs have been qualified at key storage OEMs including LSI, Teradata, Hewlett-Packard, and Dell.

In March of this year, LSI sold it’s Engenio storage business to NetApp. This likely means that the Pliant business moved as well, both to NetApp and NetApp-partner IBM.

Reportedly Pliant also sells to EMC. There was a whisper a while back that EMC was an investor in Pliant. Take that for what you may.

Morgan Stanley believes Pliant’s sales will have tripled at the end of this year to around $100 million when compared to 2010.

Pliant was facing a cash crunch. Although it had raised $57 million in funding, it needed more capital to fuel growth.

Pliant also faced challenges in securing dependable NAND supply.

According to Pliant, it first approached SanDisk about a strategic relationship regarding SanDisk’s NAND. Pliant also faced the ongoing challenge of having to support and qualify NAND sourced from different suppliers.

No problem now. The Pliant team will know exactly what’s coming down the pipeline and will be able to design accordingly. Guaranteed NAND supply is secured.

How important this inside track will be remains to be seen, but given the increasing design complexities as NAND moves to ever smaller geometries, and the uncertainties at play in securing NAND, this competitive advantage shouldn’t be underestimated.

Needham, in its 16 May report rightly pointed out that, “Sandisk’s acquisition of Pliant ushers in a new era of direct flash player participation in the SSD market.”

SanDisk’s acquisition of Pliant might be the first, but given the market opportunities, it won’t be the last.

Market Opportunities

In 2010, the enterprise SSD market was somewhere around $900 million. In 2015, it is expected to exceed $4 billion. That’s a 4-5x increase in 5 years.

And that’s not accounting for the related cloud-centric markets of thin form factor SSDs and Tablets, which are expected to grow every bit as quickly and emerge every bit as large.

Some think that the emergence of cloud computing will mean less NAND used in devices such as tablets and thin form factor SSDs. Gartner doesn’t seem to agree.

According to Gartner the PC SSD market is looking at a 3-4x increase in 5 years. Tablets are poised for even greater growth at 5x+ growth.

As the slide above indicates, in 2014, Gartner estimates the total for new markets for NAND flash –  Enterprise SSD, PC SSD, and Tablets – will total $13.3B vs $3.4B in 2010.

As SanDisk likes to put it, the enterprise is the first node on the cloud network. Here NAND is poised for explosive growth, because it enables server application acceleration and high performance input/output operations.

The last nodes on the cloud network are connected devices such as tablets, smartphones and laptops. In these devices NAND is poised for explosive growth, because it enables smaller dimensions, lighter weight, lower power and faster response.

For the last node, mobility trumps bulk storage. NAND trumps HDDs.

Thanks to the Pliant acquisition, SanDisk now has high performance enterprise SSDs shipping to customers and it has next-generation products under development.

Pliant’s Products

Pliant’s products target the high performance enterprise SSD market. Today’s products, include both 2.5” and 3.5” SSD form factors and use a Serial Attached SCSI (SAS) interface.

Products under development include PCIe Cards, a market pioneered by Fusion-io.

Here is a link to a most informative 2010 article on the evolving enterprise SSD based on Gartner’s Forecasts.

Pliant, as part of SanDisk, will no doubt continue development of both SAS and PCIe interfaces. The chart below graphically shows why.

Both interfaces are expected to grow into dominant positions in the Enterprise SSD market by 2013. From 2010-2013 SAS is expected to grow from 18% of the market (by units) to 37%. For those same years, PCIe is expected to grow from 12% to 41%.

The SAS interface is expected to grow nicely, at the expense of Fibre Channel (FC) drives, another legacy HDD solution.

The future looks likely to belong to faster interface standards that are not constrained by disk-centric assumptions that have been baked into standard HDD interfaces.

PCIe is a good example of such an unconstrained interface.

Although Pliant has developed both SLC and MLC SSDs, it made the strategic decision to move as quickly as possible to the growing trend of MLC within the enterprise, where MLC SSDs are gaining ground on SLC due to their affordability.

In 2011 MLC-based SSDs are expected to comprise 62% of the 1.2m drive shipments and at least maintain this level for the foreseeable future.

Pliant’s MLC expertise should be a nice complement to SanDisk’s MLC and TLC expertise.

One of the big attractions of Pliant was that it has designed and developed its own high performance SSD controller.

As SanDisk apparently hasn’t been able to develop a controller suitable for the enterprise, without the Pliant acquisition it would have had to use a third party controller- if it wanted to pursue the enterprise SSD market.

Without Pliant, SanDisk would have likely become just another SandForce-inside player.

Far better to control one’s own destiny, both from a cost perspective and as a means of differentiation within the SSD market.

A whole lot hinges on how good the Pliant-developed controller is, or can be, when matched with SanDisk NAND.

As Gregory Wong, an analyst with Forward Insights, put it, in discussing SanDisk’s acquisition of Pliant:

“The premise is that as NAND flash scales to smaller process nodes, advanced ECC, flash management, algorithms and in-depth knowledge of the inner workings of flash will provide a competitive advantage, particularly against independent, non-vertically integrated SSD companies.”

Today no Pliant products use SanDisk flash, but the two companies have been working to qualify SanDisk’s memory in Pliant’s products. According the Wall Street Journal, the first Pliant/SanDisk products should be introduced in the first half of 2012, given that qualification typically takes nine to twelve months.

It will be interesting to see whether Pliant’s high performance controller expertise also finds its way back down into SanDisk’s PC SSD product line.

No reason it shouldn’t.


2011 Tailwinds

May 15, 2011

Whereas the last post looked at the headwinds SanDisk will be facing in 2011, this post will look at the tailwinds.

In many respects the tailwinds are more complex, or at least don’t fit neatly into categories. The promise for 2011 and 2012 can be found in the underlying dynamics of  2010.

2010 was a rather spectacular year for SanDisk.

Booming markets and a strong supply/demand environment are a powerful combination. Sometimes SanDisk was a grinder of a locomotive. Sometimes jet propelled. Sometimes both.

Mobile emerged as a mega-market with multiple subsegments including most importantly smartphones and tablets.

NAND became a strategic component in the mobile internet ecosystem.

SanDisk rode this exploding demand to record revenue, record gross margin, record operating margin, record profits and record cash flow thanks in large part to its OEM wins.

SanDisk was able to optimize pricing and profitability thanks to its product mix, its range of channels and its broad set of customers.

This post, like the last, is primarily based on SanDisk’s CFO Judy Brunner’s presentation at this year’s analyst day in February. Judy spent quite a bit of time on the relationship between cost reduction, pricing and gross margins.

Rightly so as this is the key dynamic driving the tailwinds.

Cost Reduction, Pricing, and Gross Margins

The top graph on the slide above shows cost reduction vs price reduction. The scale starts at zero and moves upward with negative numbers- a bit unusual.

The higher cost reduction, the better.

The lower the price reduction, the better.

The larger the gap between the two, the better for product gross margins.

Which are graphed correspondingly on the bottom half of the slide.

In 2010 SanDisk delivered 46% cost reduction on a per GB basis. As SanDisk has been saying for some time, the ability for the industry to reduce cost is slowing down. And that is reflected here.

From 2005 through 2009, SanDisk’s cost reduction was between 50 and 55% per GB every year. In 2010 it was 46%. Although lower, SanDisk believes that this was still industry leading cost reduction.

SanDisk believes that it is the industry leader in terms of actual cost.

The 46% cost reduction in 2010 reflected the very strong performance of its 32nm transition and the increasing usage of X3 within its products.

In terms of the price reduction, SanDisk reported 19% reduction in ASP/GB, in line with industry price reductions.

This is notable, because during 2010 SanDisk expanded the OEM mix of its business. SanDisk went from 50% OEM in 2009 to 62% OEM in 2010.

SanDisk’s OEM products carry a lower ASP/GB. Also within OEM SanDisk expanded the embedded portion of its business quite a bit.

And embedded products tend to carry higher average capacity.

Moving up the average capacity curve leads to a lower ASP per GB. So the fact that SanDisk was able to expand OEM, expand embedded and still deliver price decline- ASP/GB decline in line with the industry- says a lot about its ability to achieve a price premium in both retail and in OEM while optimizing its pricing across its broad set of customers and broad set of products.

The gap that SanDisk was able achieve in 2010, the gap between cost decline and price decline, 46% vs 19%, allowed SanDisk to deliver record product GMs- 43%, a full 30 points improvement from the underlying product GM achieved in 2009.

And then 2011 arrived.

2011 Headwinds

As described in the last post, SanDisk has hit headwinds in Yen exchange rates, non-captive mix and Fab 5 start-up costs. Added together these headwinds were expected to shave 7 to 9 points from 2011 product gross margins, before the March Tohoku earthquake and tsunami hit Japan.

This catastrophe resulted in Toshiba/SanDisk fab downtime, supply constraints and increased requirements for non-captive supply.

All additional downward pressures on product gross margins.

If this were the end of the story SanDisk would be in a world of hurt.

As it turns out the underlying strength of the business is pushing back. At analyst day SanDisk thought these tailwinds would add back a couple points of gross margin for 2011. The 7 to 9 points down from 2010 would end up only 5 to 8 points down.

At the Q1 conference call in April, these couple of points of recovery had grown to a half dozen. The total non-GAAP gross margin range for 2011 was raised to 41% to 44%.

Compared to the record 46% non-GAAP gross margin of 2010, 41% to 44% is quite respectable.

Given how things are going another bump up could be coming with Q2 results.

So what’s behind this optimism?

At the 2011 Analyst Day in February, Judy pointed to four potentially positive factors to watch for in 2011. Its probably a safe bet that at least two or more of these factors is doing better than expected.

24 nm, X3, Memory & Non-Memory Cost Reduction and Pricing

The key driver of cost reduction during 2011 will be SanDisk’s transition to 24 nanometer. In the Q1 conference call Sanjay Mehrotra, SanDisk’s President and CEO, noted that the 24 nanometer technology, utilizing both 2-bits per cell and 3-bits per cell architectures, continues to ramp well and is expected to account for the majority of SanDisk’s captive output in the second half of 2011.

Sanjay also noted that SanDisk doesn’t anticipate the recent events in Japan to cause any meaningful changes to the schedule of the ramp of 24 nanometer or the recently announced 19 nanometer technology.

In the Q1 conference call Judy wouldn’t give specific projections on a quarter-by-quarter basis, other than to say that the transition started in the fourth quarter of 2010 and is progressing across 2011.

The transition to 24 nanometer is not the only driver of memory cost reduction per GB. X3 mix also plays a part. SanDisk went from essentially zero X3 in 2008 to 50% X3 in 2009. In 2010 SanDisk achieved greater than 50% X3 usage.

For 2011, SanDisk has again projected  greater than 50% X3 usage. As OEM embedded is becoming ever more important, this is one to watch closely. SanDisk says that it is making very good progress in getting X3 adopted into embedded solutions, but won’t get more specific than that.

Non-memory cost includes things like transformation costs and non-memory materials. Non-memory cost reduction per GB was higher in 2009 than in 2010. SanDisk was able to reduce non-memory cost per unit about the same in both years- about 35% per unit in both years. But average capacity grew less in 2010 than it did in 2009.

Increased scale helps with both memory and non-memory in terms of reducing SanDisk’s cost per GB. SanDisk is expanding its Shanghai Assembly/ Test Facility.

Last, but not least is pricing. Suffice it to say that NAND pricing has been strong and looks like it will continue to be strong throughout 2011.

When all is said and done for 2011, it seems entirely possibly that tailwinds might cancel out the significant headwinds.

Another bump or two and gross margins will be back at 46%.

If this is how it goes, 2011 earnings will profit.

The big deal though will be 2012, when the headwinds look likely to lighten up.


2011 Headwinds

May 8, 2011

SanDisk knew coming into 2011 that it would be facing headwinds. Three variables would be pressuring gross margins. Yen exchange rates, non-captive mix and Fab 5 start-up costs were expected to shave 7 to 9 points from product gross margins.

2010 product gross margin was a record 43%. Taking into account the headwinds, and a minimal boost from costs and pricing, early 2011 guidance called for product gross margin in the 35% to 38% range. Adding in license and royalty brought SanDisk’s total gross margin forecast up to the 39% to 42% range.

This was before the March earthquake in Japan which resulted in Fab downtime, supply constraints and increased requirements for non-captive supply. All additional downward pressures on gross margins.

Rather remarkably, in the recent Q1 conference call (post earthquake) SanDisk raised yearly guidance for total gross margins to 41% to 44%.

This post will look at the headwinds. The next post, the tailwinds.

At this year’s analyst day in February, SanDisk’s CFO Judy Brunner spent quite a bit of time describing the three variables pressuring gross margins.

Paraphrasing her presentation:

Yen Exchange Rate

75% of SanDisk’s cost of sales is denominated in the Yen. In 2010 SanDisk had an average Yen to Dollar rate in its cost of sales of about 90 Yen to the dollar.

For 2011 SanDisk has engaged in a strategy to lock in about 50% of the wafer purchases that it expects to buy from the Toshiba/SanDisk JV across the year. SanDisk has done this with forward contracts.  SanDisk locked these in during the fourth quarter of 2010 at an average rate of about 82 Yen to the dollar.

SanDisk did this to limit volatility in managing its performance in 2011. The other 50% of wafer purchases will vary with the market in terms of market exchange rates.

Assuming that SanDisk achieves about 82 Yen to the dollar for all of its wafers, including the half that isn’t locked in, the impact of the Yen to the dollar, of 82 instead of approximately 90 is about 4 points of gross margin downward in 2011 vs 2010.

Non-Captive Mix

The second factor is non-captive mix. SanDisk expects to expand its non-captive mix in 2011. This makes sense for a few reasons. One is that this still allows SanDisk to bring real dollars to the bottom line- to net income and to EPS- despite the fact that non-captive costs SanDisk more than does captive supply, and thus has lower gross margins.

It also allows SanDisk maintain share with important customers and channels.

And it allows SanDisk to manage its captive supply growth in a prudent way to minimize risk, and mitigate risk within its business.

In 2010 SanDisk only purchased non-captive supply in the second half of the year and primarily in Q4. SanDisk only had about a 2% non-captive supply mix for the full year.

In 2011 SanDisk is estimating that it will have a mix of up to 10% non-captive supply. And that the difference from 2% to 10% will have an impact of about 2 to 3 points of product gross margin percentage.

The non-captive supply will still deliver positive product gross margin dollars, but at a lower percent, because generally non-captive supply produces product gross margin in the single digits or the teens.

Fab 5 Start-up Costs

The third factor is Fab 5 start-up costs. Every new fab has initial start-up costs. Fab 5 is no exception.

These will impact SanDisk in 2011. SanDisk estimates that it will record about $50M in start-up costs in its R&D expense primarily in Q1 through Q3, with the heaviest period being in Q2.

Also, SanDisk estimates about $75 million in cost of sales- with the majority of that spending, or cost, being in the second half of the year. So if one takes just the amount that is going into cost of sales, approximately $75 million, that is approximately 1.5 points of gross margin.

At Analyst Day, these three factors, added together, were expected to pull down product gross margins 7 to 9 points in 2011 vs 2010.

Today the earthquake also needs to be added to the downward pressures.

The 2011 Tohoku Earthquake and Tsunami

On March 11, Japan suffered a major earthquake and a series of significant follow-on events. Fortunately for SanDisk its joint-venture wafer fabs in Yokkaichi were relatively unaffected as they are approximately 500 miles from the quake’s epicenter. The earthquake halted normal fab operations for less than a day. The fabs have not been subject to rolling power outages or blackouts.

SanDisk and Toshiba have been working with business partners in Japan to minimize the impact to NAND flash wafer production.

SanDisk has dodged a bullet.

If Fab 5 had been located in northeastern Japan, in Kitakami City in the Iwate Prefecture, as once contemplated, the situation would be far, far worse. As it is, there has still been collateral damage.

While there are no immediate constraints of key materials, SanDisk did suffer a modest loss of supply due to the downtime from power outages.

In addition, SanDisk expects some earthquake related delays in tool deliveries from certain suppliers in Japan that will reduce its expected 2011 mid-80% captive bit supply growth.

SanDisk quantified the direct damage at $25 million, or 2 points of product gross margin in Q1. This includes the cost of scrapped wafers, fixed costs associated with lost wafer output, and costs to bring the fabs back on-line.

In addition, for the second quarter, SanDisk’s captive memory supply has been reduced by the fab downtime in Q1, and SanDisk does not believe it can fully make up the shortfall with non-captive supply due to lead-time constraints and mix considerations.

Updates

Yen exchange rates, non-captive mix and Fab 5 start-up costs all look as challenging today as they did at SanDisk’s February Analyst Day.

The Yen is current trading at 80.62 to the dollar. How the exchange rate will play out for the rest of the year is anyone’s guess. Many believe that Japan will loosen monetary policy to help the country recover.

On the other side of the equation the Federal Reserve seems intent on printing ever more dollars in an attempt to resuscitate U.S. economic growth.

Fab 5 start-up costs haven’t changed.

Non-captive requirements have increased.

If this weren’t enough, SanDisk is currently supply constrained even with non-captive supply.

Headwinds haven’t let up, if anything they’ve picked up for 2011.

Faced with these challenges, on what basis could notoriously conservative SanDisk, confidently increase guidance?

While SanDisk’s not spelling it out, there are lots of hints as to what these tailwinds might be. That discussion will have to wait until next time.


A Close Call

April 17, 2011

Back in 2006, when Fab 5 was but a twinkle in the eye, Toshiba and SanDisk reportedly were considering locating Fab 5 in the Iwate Prefecture in northeastern Japan.

Toshiba already had production facilities in Kitakami City, so this was likely the site under consideration.

At the end of the day, the decision was made to build Fab 5 in southern Japan, in Yokkaichi, adjacent to the existing fabs.

Good decision.

I shudder to think of the implications, if the decision had gone the other way.

This was a close call.

Kitakami is only 89 miles from devastated city of Sendai and the Fukushima Nuclear Plant. Sendai itself is only 80 miles west from the epicenter of last month’s massive Japanese earthquake.

If Toshiba and SanDisk had decided to build in Kitakami, today’s worries would likely run the gamut from building and equipment damage, through rolling power outages to potential radiation risks.

As it worked out, Toshiba and SanDisk decided to build next to their existing NAND fabs in Yokkaichi, about 500 miles south of Kitakami.

Whew.

We’ll know soon enough how the last quarter went at Yokkaichi.

FWIW I am inclined to believe that SanDisk will emerge relatively unscathed. Next weeks earnings report will likely be pretty much steady as she goes- along the lines of the MS 3 April report:

“Our checks suggest wafer scrap was likely lower or 1/3 of the $18M impact experienced from power outage last year.”

While there could be some issues obtaining raw wafers, my guess is the Yokkaichi fab complex will be able to patch together sufficient supply.

Since Yokkaichi is in southern Japan, power supplies should be OK. There is likely minimal risk of rolling blackouts. Electrical power from the south can’t be sent north because the southern half of Japan uses 100 volt, 60 hertz, while the north uses 100 volt, 50 hertz (cycles per second) electricity.

The two are incompatible.

In the graphic above, Yokkaichi is on the first bay south of Tokyo in the 60 hertz zone.

While no one is talking publicly about Fab 6 yet, one would hope that recent events have shaken up the status quo.

Fab 6

In 2008, Toshiba announced its plan to build Fab 6 in Kitakami City, whether SanDisk was on board or not. Reading between the lines, SanDisk was having second thoughts.

Good thinking.

Fab 6 is coming, on way or another. Fab 5 will likely reach full utilization in 2014/2015.

NAND demand driven by mobile, tablets, laptops and the enterprise will likely be overwhelming. Those such as SanDisk/Toshiba riding this wave with the expertise and IP to lean into the trend, will have to build or be left behind.

Working backwards, I’m guessing we’ll get the Fab 6 announcement round about 2013. Initial planning is likely underway already.

There are lots of angles which could contribute to decision making. The biggest would be progress on 3D R/W, the potential successor to NAND.

All this said, I would hope that Toshiba realizes that Kitakami City is a risk not worth fighting for, as a location for Fab 6.

Might be time to bite the bullet and look outside Japan to Southeast Asia.

China?


Wafer Production

March 6, 2011

Periodically analysts ask for the details of SanDisk’s wafer production.

Invariably SanDisk notes that it doesn’t provide numbers. That said, SanDisk does provide hints, which over time give the broad outlines of production numbers.

Time to give that one a shot.

Interesting angles too. Especially the sale of wafer capacity to Toshiba in early 2009, and why the numbers don’t seem to reconcile.

Before getting to those stories, the stage should be set.

2007 and 2008 Wafer Capacity

Wafer production in 2007 was primarily a Fab 3 story.

Almost a Mega-Fab, Fab 3 has a capacity of around 150 K 300mm wafers per month (150,000 wpm). Fab 3 reached maximum capacity early 2008 as indicated by the slide below from the SanDisk Analyst Day in February, 2008.

At that time, Fab 4 was projected to ramp to 110K wpm in 2H08, also noted on the slide above.

In the second half of 2008, the SanDisk/Toshiba joint venture had a capacity of 150K wpm from Fab 3 and 110K wpm from Fab 4 for a total capacity of around 260K wpm.

All this production was split 50/50 between SanDisk and Toshiba. Each had 130K wpm.

2009 Wafer Capacity Sale

In January 2009 SanDisk sold ~20% of its captive capacity to Toshiba as indicated in slide 192 below from Investor Day 2010.

The loss of 20% of SanDisk’s wafer translates to 26K wpm and a capacity drop to 104K wpm for SanDisk and a gain for Toshiba to around 156K wpm.

The captive capacity sale was valued at $890 million. SanDisk received about 1/3 in cash and 2/3 in reduced equipment lease obligations.

At the beginning of July 2009, Toshiba turned around and entered into a long term NAND supply agreement with Apple. Apple made a $500 million prepayment to Toshiba.

Not a bad deal all around.

Apple secured NAND supply- purportedly at least according to Reuters- “about a quarter of a year’s worth of Apple’s allowance for NAND…”

Knowing Apple, they got a sweetheart deal.

Cash-strapped Toshiba got the bucks back it had to shell out to SanDisk.

SanDisk was able to strengthen its balance sheet and reduce NAND memory production commitments.

If there was anyone left on the outside looking in, it was Samsung. SanDisk had escaped its clutches. Toshiba wasn’t crippled in lending its partner a hand in its time of need.

And to rub salt in the wounds, one of Samsung’s best and most promising customers, Apple, had a supply deal with Toshiba- the competition.

It’s important to remember that these were days of oversupply. My guess is that Apple, Toshiba and SanDisk were all betting that NAND oversupply wouldn’t last long.

If so, they were right.

2010 & 2011 SanDisk Wafer Capacity

By the end of 2009, NAND had swung into under-supply.

Toshiba and SanDisk had a low-cost ace-in-the-hole in Fab 4. The wafer capacity SanDisk sold to Toshiba and which in turn Toshiba dedicated to Apple, could be made up and then some, by finishing off Fab 4.

It’s worth noting that no capacity had been added- 2009 to mid 2010.

Mid 2010, the Fab 4 push to completion began. This additional 100K wpm capacity is to be split 50/50 between SanDisk and Toshiba, and will be complete by mid 2011.

At Analyst Day 2011, SanDisk noted that by this milestone, mid-2011,  its wafer capacity will be 2M wafers/year or 167 K wpm. See slide 32 below.

The numbers don’t add up: 104 + 50 ≠ 167.

There are many explanations for the missing 13K wpm.

Personally, I am partial to the possibility that somewhere along the line, SanDisk and Toshiba had a meeting of the minds and worked out an unannounced deal whereby SanDisk bought this capacity back.

In any case, mid-2011, when Fab 4 is complete we know it will have a capacity of 210± wpm. This number added to the 150 wpm from Fab 3, gives the SanDisk/Toshiba JV a capacity of 360± wpm.

If SanDisk claims 167 wpm, that leaves 193 wpm for Toshiba in 2011, before Fab 5 is accounted for.

Fab 5 SanDisk Wafer Capacity 2011 & 2012

SanDisk has been waffling between 5% and 10%, for what Fab 5 will contribute to 2011 capacity.

At Analyst Day 2011, it’s was back up to 10%, which translates to another 16K wpm for SanDisk (rounding down) in 2011, bringing its total capacity up to 183K wpm from Fab 3, Fab 4 and Fab 5.

When complete, Fab 5 will be about the same size as Fab 4, ~210K wmp.

SanDisk can claim half of that, which it appears ready and able to do.

At Analyst Day 2011, Judy said that Fab 5 Phase 1, about half of the total Fab 5 capacity, was expected to be complete at the end of 2012.

If this is how it goes, at the end of 2012, without any other capacity buy-backs, SanDisk will have a wafer capacity of ~217 wpm. Toshiba will have a capacity of ~243 wpm.

One of Sanjay’s big points at February’s Analyst Day 2011, was that almost one in two NAND bits produced in the world today, is being produced by the SanDisk and Toshiba joint venture.

At the end of the day, all this math and speculation just means that SanDisk is nicely positioned to maintain it’s market share- as the Post PC world arrives.

Make of that what you may.

**** Postscript ****

There are other ways to figure the wafer permutations of the past- or how SanDisk has reached its current baseline wafer capacity.

The numbers used for Fab 3 and Fab 4 are probably more fluid than public announcements might indicate. Fab 3’s capacity is purportedly 150K wpm and Fab 4 210 wpm.

If, for example, Fab 3 has been pushed up to 160K wpm and Fab 4 will be able to reach 220K wpm, the extra 20K wpm – split between SanDisk and Toshiba pretty much erases the need for the awkward scenario of the off-the-record buyback of capacity outlined above.

Whatever has happened in the past in this regard, is over and done with now. We have our baseline to work off for SanDisk, because SanDisk has announced that by mid-2011 its wafer capacity will be 167 wpm or 2 million wafers per year.

Split this up as you will, but both Fab 3 and Fab 4 will be fully utilized and their wafers out at full utilization have been announced and we know the broad outlines of Fab 5’s ramp.

Toshiba’s share might be a bit more than 193 wpm or a bit less. Figuring out the specifics of what that is, well, a problem for others.

2 million wafers a year is a whole lot of wafers to control. Lots of leverage in controlling  ~20% of the world’s NAND bit supply, which is what these numbers boil down for SanDisk’s market share.

It will be interesting to see what SanDisk comes up with. This should be quite the opportunity. No doubt SanDisk’s Chief Strategy Officer, Sumit Sadana, has been carefully weighing his options.

NAND is simply a commodity in times of oversupply, but in tighter times like these, it becomes a strategic material.


Fab Updates

February 6, 2011

This post started off as a Q4 wrap, but has morphed into a fab update.

For anyone interested in the Q4 2010 transcript, it can be found here or at the bottom of the Pages box to the right.

There is a lot of interesting info in the conference call. Sanjay’s style is very different than Eli’s. Not as many sound bites, if you will, but very forthright and informative.

Most of the important points from the conference call have already been covered in analyst reports and general media coverage. The fab info, on the other hand, has just been skimmed over, so I’ve decided to concentrate there.

In the big picture, it’s all good news. The Fab 4 expansion is on track. This expansion is leading edge, significant and generally under-appreciated.

Plans for Fab 5’s initial ramp were revealed. No surprises, but a couple of puzzles.

Fab 4

Once Fab 4 is fully provisioned mid 2011, SanDisk’s total production output from Fab 3 and Fab 4 combined will be 2 million 12 inch wafers per year, or 166,667 wafers per month (wpm).

From mid 2010 to mid 2011 about 62,000 wpm will have been added in SanDisk/Toshiba JV fab capacity, SanDisk’s share is 31,000- Bank of America’s (BoA’s) numbers. See graphic below.

This is a lot of wafers. And given demand, they’re all going to be needed.

BoA’s numbers look close enough and cross-check with SanDisk comments. Jun-11 is pegged at 333 K wpm. 333 K wpm x 12 = 3996 K wafers per year – rounding up- 4 million. SanDisk’s share is half that- or 2± million wafers per year.

In parallel with the wafer expansion, SanDisk/Toshiba has been converting existing production from 32 nanometer to 24 nanometer.

By the end of 2011 all SanDisk’s production is expected to be 24 nanometer, “except for any 32 nanometer requirements that we still may have related to certain customers.”

The big deal about 24 nanometer is that it will be the primary cost reduction driver for 2011, deployed on both two and three bits per cell architectures. Going from 32 nanometer to 24 nanometer will give SanDisk a chip cost reduction of 30% to 40%. A most interested interchange from the the Q4 conference call:

“Atif Malik, Morgan Stanley: OK and one last one. If I look at your history of cost reduction in the last three years, you have been very strong and you’ve always upsided your cost reduction targets in the 3-bit per cell or technology migration. But just according to physics, if you scale 32 nanometer wafer to a 24 nanometer, you should be able to get a 45% kind of cost reduction just doing the 24 square over 32 square. And then you have this 3 bit, you have a knob of 3 bit per cell just getting embedded in OEM applications. So I mean why should we believe that the cost reduction should be less than 40% this year?

Sanjay Mehrotra: Let me just provide you some help here. The result, the technology is not only about scaling the flash memory cell but it is also about scaling the periphery transistors, the circuits inside the chip. And those two tend to scale at somewhat of a different rate. When we look at 32 nanometer to a 24 nanometer, wafer comparisons at mature yields, the 24 nanometer can give you a benefit in the range of 30% to 40%.

Again, at the wafer-level, with mature yields, on both the 32 nanometer wafer, as well as 24 nanometer wafer. However, for our yearly cost reduction, as Judy pointed out, there are many factors. One of them is certainly 24 nanometer ramp up. We will be ramping up 24 nanometer during the course of the year. And other factors, of course that play a role in our overall cost reduction are the non-captive supply, as well as Fab 5 related start up costs and the impact of exchange rates.

Atif Malik, Morgan Stanley: Should we model a linear kind of a ramp for 24 nanometer for this year?

Sanjay Mehrotra: Yes, the 24 nanometer ramp will be fairly linear during the year.

Atif Malik, Morgan Stanley: And Fab 5 we’ll start with 24 or 18?

Sanjay Mehrotra: We are not disclosing the plans for Y5 [Yokkaichi 5- Fab 5] at this point. As I said, that 1x technology will start late this year. Y5 will start in the August timeframe with production in the Q3 timeframe.”

A couple of things jump out, aside from the 30% to 40% wafer-level benefits. First, the 24 nanometer ramp will be relatively linear. Second, SanDisk is being coy about the technology or node, that Fab 5 will be starting up with.

Fab 5

Fab 5 will be a mega-fab. It will be a beast- about the size to Fab 4, which has an official capacity of 210,000 wafer starts per month and is one of the largest 300mm facilities ever built.

Right now the building shell is under construction.

Once the shell is complete, Fab 5 will be fitted-out in two phases: Phase 1 and Phase 2, each of which is expected to be of approximately equal size.

On the Q3 2010 conference call, SanDisk said that no decision had been made on the timing of Fab 5’s startup of Phase 1.

Decisions have now been made.

SanDisk feels comfortable moving forward with Fab 5’s ramp in the third quarter of 2011.  No surprise there.

Up to now in SEC filings and industry commentary, SanDisk has consistently been saying that “that Fab 5 will increase its 2011 wafer output by less than 10%.”

As of the Q4 conference call, this has dropped to less than 5% for 2011. Sanjay’s exact words: “The incremental contribution from Fab 5 to our total wafer output is estimated to be less than 5% for 2011.”

This change from less than 10% to less than 5% is no cause for concern. First, those paying attention understand there many variables. Second, most aren’t watching this closely.

That said, one has to wonder, if this slight slip isn’t part of a larger effort to accelerate the transition to 1x, the next node down below 24 nanometer- which would be most welcome news.

1x

The graphic below- SanDisk’s NAND Roadmap- is from the SanDisk Investor Day 2010.

Transitions roll right along 43nm ⇒ 32nm ⇒ 24nm, then there is a year+ gap, from late 2011 to late 2012, before 1x and then nothing thereafter. The gap from the end of 24 nanometer -late 2011- to the beginning of 1x nanometer -late 2012, has been puzzling.

In the Q4 conference call, quoted above, Sanjay says that 1x production will now begin late 2011- not late 2012.

Looks like we’re going to be getting a new slide on 24 February, this year’s Investor Day.

When pressed, Sanjay wouldn’t comment on what node 1x will start or whether Fab 5 will start on 1x.

Eli has described 1x as 20nm or a little bit under and 1y as closer to 15nm.

We should know soon enough, but my guess is that for SanDisk, 1x will be 20nm to start. This might set up one more node down before extreme ultraviolet lithography, or EUV, around 15nm, and 1y.

Up until now the SanDisk/Toshiba party line has been that Fab 5 will start with “leading-edge 20-nanometer generation, with subsequent generations to follow.” Translation: 24 nanometer.

Maybe this is still true, but one has to wonder why Sanjay just didn’t say so. Also if 1x will be starting only a few months later, why wouldn’t Fab 5 just start off with 1x- whatever that node may be?

However this turns out, it’s all good news.

Thanks to the Fab 4 expansion and the Fab 5 start-up, SanDisk will soon have access to a lot more NAND, at leading edge geometries and at best costs.

While not discussed in this post, EUV seems to be making steady but slow progress. ASML Holding NV has reportedly shipped the world’s first ”pre-production” extreme EUV lithography tool to Samsung.

Toshiba will be getting its EUV lithography tool from ASML by mid 2011, just in time for Fab 5 R&D.

From the look of it, EUV won’t be ready for high volume production until 2014 at the earliest. There are still issues with the power source, resists and defect-free mask technology.

In the meantime, double patterning, plus various computational lithography techniques might just do the trick.

SanDisk appears to have a plan and the required facilities.

How this translates to the bottom line in 2011 has yet to be determined. The pieces seem to be in place, but in the Q4 2010 conference call, Judy wasn’t reassuring about the bottom line. Guidance was decidedly tepid.

Q1 appears to be looking OK, but guidance for 2011 left a lot to be desired.

It’s not like this hasn’t happened before. A year ago today for example.

The Q4 2009 conference call took place on 28 January 2010. SanDisk closed at $28.78. SanDisk guided most conservatively. The next day SanDisk dropped over 11% to close at $25.42.

The stock gradually recovered passing its 28 January 2010 price on 17 February.

SanDisk 2010 investor day took place on 26 February 2010. SanDisk closed at $29.15. Guidance was raised. The next day the stock gained over 11% and closed at $32.63.

SanDisk’s 2010 Q1 cc took place on 21 April 2010. SanDisk closed at $37.59. The next day the stock closed at $42.22, a gain of over 12%.

It will be interesting to see if the cycle repeats in 2011. So far we have the lukewarm yearly guidance and the ensuing drop.

Next stop will be SanDisk’s Investor Day on 24 February.


Tablet Mania

January 9, 2011

Here come the tablets.

Let the party begin.

Thanks to smart phones, 2010 will be a record year for SanDisk.

The outstanding question has been whether the Goldilocks NAND pricing of the last two years will hold up through 2011.

Thanks to smart phones and tablets, 2011 is looking rather good. Quite possibly party-all-night good.

It all comes back to supply and demand.

A 5+% nudge one way or another can have a major impact on pricing, which in turn directly impacts gross margins.

Balanced NAND supply and demand, or even better, slightly under supply, should enable SanDisk to clean up in 2011: $5.50 – $6.00+ EPS.

Analyst current consensus for 2011: only $3.78.

Interestingly it all seems to come down to tablets- the upside above smart phone growth.

The magic number seems to be 55 million tablets.

50M, the current consensus, is OK.

55 M is better.

60M, and its off to the races.

Nice to have a scorecard.

Supply and Demand

Bit demand is expected to rise 90% in 2011. Supply to rise 87%. At least according to Credit Suisse, 01 October, 2010. I’ve seen similar numbers around.

This 3% undersupply is predicated on 50 million tablets shipped in 2011.

This translates as 609% tablet growth year-over-year with tablet capacity growing from 32GB avg. at present to 60GB± exiting 2011.

Credit Suisse (CS) expects smartphones to account for 16% of total NAND demand in 2010 and 19% in 2011.

CS expects tablets to account for 4% total NAND demand in 2010 and 13% in 2011.

So what’s the potential upside to this good news?

CS provided two most illuminating charts for sensitivity analysis:

For example, if tablets hit the 60M mark (vs the base case of 50M) and average NAND content increases to 72GB (vs. the base case of 56GB), tablet NAND consumption will represent 20% of total NAND supply (vs. CS’s base case of 13%) and drive NAND bit demand growth to 103% vs. the 90% base case estimate.

Which means 13% undersupply.

So what are the chances of 60M tablets in 2011?

Actually pretty good.

Apple’s iPad and the other Tablets

Analysts have been consistently underestimating Apple’s iPad. When the iPad was announced in January 2010, consensus was that only 4M to 5M units would ship in 2010.

As it turns out, Apple probably shipped somewhere around 10M in 2010.

Today analyst consensus appears to be around 40M iPads for 2011.

In December 2010, Digitimes noted that Apple’s China supply chain is gearing up to produce 6 million iPad 2s a month in 2011. In another report the Taiwanese-based Digitimes projected that Apple would ship 65 million tablets in 2011 based on projections of iPad LCD panel displays that are set to ship next year.

65M iPads is probably a stretch for 2011, but I wouldn’t be particularly surprised by 50M+.

Apple’s competition was caught flat footed by the iPad. It has taken them a year to regroup. CES was their party.

Among others, Samsung, Motorola, Toshiba, Asus, Dell, Vizio, Lenovo, Fujitsu, Panasonic, and Blackberry showed off their soon-to-be-released tablets in Las Vegas at CES 2011. HP is expected to announce their offering soon.

Curiously numbers-wise not much is currently expected by analysts. Only about 10M to 15M tablets are expected to be shipped from non-Apple players in 2011.

This seems low, given the stakes, the resources, and the expertise.

These companies are pushing hard. And for good reason. Market share, mind share, and first mover advantage will go to the early winners in this emerging tablet market.

The tablet I’m watching is Motorola’s Xoom, headed to Verizon in Q1. Xoom has the look of a winner, probably the first serious competitor to the iPad.

Xoom hardware is flashy enough, featuring a video-friendly dual-core processor, a 10.1-inch widescreen HD display, a HD camcorder and a 5-megapixel camera.

But it’s the software or more specifically the OS that makes the Xoom particularly interesting and promising.

Xoom will include the upcoming Honeycomb version of Google’s Android software. Honeycomb has been designed specifically for tablet’s larger touch screens.

Here is a video of Google’s live demo of Android 3.0 Honeycomb from CES 2011. The video is a bit technical and on the long side, but therein lies the charm:

It looks like we’re in for a replay of the iPhone vs Android phone scenario with tablets.

Apple establishes a new booming market and shortly thereafter Google arrives enabling broad-based competition.

Apple introduced the iPhone in 2007. The first Android phone arrived late 2008. In the fall of 2010, Android-based smartphones outsold the iPhone for the first time in the U.S.

It took Android about 2 years to catch Apple.

Apple introduced the iPad in 2010. The first tablets optimized for Android will be arriving in the spring of 2011.

If the pattern holds, Android tablets will surpass the iPad in 2013. This is probably conservative.

Apple doesn’t have quite the head start this time around and Google and its hardware partners are better prepared.

My guess is that Android tablets will surpass the iPad sometime next year in 2012.

If so, that 10 million number non-iPad tablet number for 2011 is likely low.

No doubt this is not lost on Apple. And all the more incentive for Apple to ramp the iPad 2 as quickly as possible in the highest volumes possible.

Is so, that 40M iPad number for 2011 is likely low.

If so, 60 million tablets in 2011 is likely low.

If so, NAND is going to be tight- all year in 2011.

Of course, lots of things could go wrong. The world economy could tank for one. Component shortages could stifle growth for another.

That said, fundamentals are looking rather good. Smart phone growth could easily top estimates.

Bit growth itself could fall short. The Micron/Intel JV in Singapore looks to be ramping slower than anticipated.

Yield issues loom for all players on 2Xnm.

And last but not least, bit supply estimates are counting on significant viable X3 from all players. To date only SanDisk appears to have met those challenges.

The beauty of the current market, from a SanDisk perspective, is that both the smartphone market and the tablet market have entered a rapid-growth stage, with current NAND pricing.