2006.05.11 msystems’ Analyst Day Part II

Dov Moran, President and CEO
Ira Cohen, VP Marketing and Development- MNO division
Co-Manager- Mobile Handset Division
Amir Tirosh, General Manager Embedded Systems Division
Tzipi Ozer-Armon, General Manager Retail and Enterprise Division
Daniel Schrieber, VP Marketing and Business development

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Ira Cohen, VP Marketing and Development- MNO division

I’m Vice President of for marketing and development for the newest and the best and most innovative division of msystems, the mno, the mobile network operator’s division.

I’ll be speaking to you today about how innovation as demonstrated once again by msystems’ with the x4 is creating a tremendous new market opportunity for us in the mobile industry on the SIM cards.

I’m not going to read it again [safe harbor] and obviously you can take everything I say as you want. Don’t believe anything that I say.

Once again we have taken innovation, technology, flash memory, we’ve taken existing products and we’ve made them better. We’ve continued to do this. We did it with the mDOC. We did it with the DOK, the mDrive, with the U3, and today we are doing it with the SIM card, the MegaSIM.

You may not be aware of this, but 85% of mobile users have a SIM card in their pockets. The SIM card is what connects you to the network. It is your identity card. It’s who you are. How we bill you. And that SIM card is connected to the network 24/7, no matter where you go, no matter where you are. Almost anyplace on the face of the earth.

It is a very, very powerful message. It’s in everybody’s pocket. It’s in your pocket, but it doesn’t belong to you. It belongs to the network operator who provisions that SIM card. Your handset belongs to you. You paid for it. The SIM card doesn’t.

That means the network operator has a piece of himself in your pocket. A piece of his network in your pocket. And unfortunately until today, this has not been leveraged at all by the operator. It’s a cost, not a revenue driver. And they haven’t used it to create new business opportunities for themselves.

We looked at this industry a few years ago and we said that we at msystems could bring value to this industry.

The SIM market is expected to reach close to 2 billion units sold a year, in a few years time. This is 2 billion units. Much more by the way than the amount of handsets sold. Many people have more than one SIM card. In fact in some markets, people have 3 or 4 SIM cards.

That SIM card means that I have multiple identities, that I have multiple selves. I will talk about this in a second. But even though the actual quantities of SIM cards are growing amazingly, the average selling cost of a SIM card is going down. In some cases by 15% per year. That means that they are selling, but the crunch on the profits, the crunch on the margins is very very big.

We are looking at something else in cell phones. Maybe before I go into this slide, I’d like to do a little exercise here. We will do some speed networking. Is everybody up to that? Ok, but instead of trading business cards, I’d like to try something else. Go into your pockets and take your cell phones and hand it to the person to your right.

Go ahead. I’ve done this with many audiences. Don’t worry about it. Now that you have his or her cell phone, now I want you to take that cell phone, hopefully it’s not pin protected, and start going into the menus and start seeing who he sent FMS messages to, who he received them from, who’s on his phone book, look at his pictures. I mean look at all that stuff. Now look at that person who you took that cell phone from. Go ahead, look at them. Look at how uncomfortable they have become. Now you can give those phones back. Hopefully you didn’t see anything you weren’t supposed to.

The reason that they are uncomfortable is that because our handsets, our phones are extensions of ourselves. They are an extension of the individual. It’s a repository of our most sensitive data. Personal data. It belongs to us. There are very very few instances unless I’m going to psychoanalysis, I don’t let anybody go past this barrier to see what’s inside of me.

Now think about this. It’s a repository of our most sensitive data. And by the way this is new, because only in the past few years have we been able to store this data on our handsets. What happens when we have a repository for many, many years of memories and data in our pockets? Only with technologies like x4 does it make it possible to store that data. This is a very very important message. That device in our pocket is a personal trusted device. Probably the most personal trusted devices that any of us owns.

In the morning when we leave our house, we take our wallets. We take our keys and we take our cell phones. We take many other things, but if I leave the other things at home, I don’t go back for them. If I leave my wallet, my keys or my cell phone, I go back home in order to get it. Not only does it help me communicate to the world, does it help me get information, it is also piece of myself and I won’t leave that around for someone else to pick up.

In fact, the amount of data that we need to store in the cell phone, because of the multimedia capabilities, because of this need to be a repository of our personal data, Strategy Analysis (?) predicts that this growth by 80% per year. 80% per year more data in our pockets. We have to find a way in this tiny tiny device and they are becoming skinnier and smaller all the time to store our personal data memories. With the new technology of x4 we can do this, but we have to find ways to put it into our pockets.

The mobile industry has a number of important trends that we have to pay attention to. The mobile network operators are at the center of this industry, but they are faced with tremendous threats to their existence, because there is an erosion in the value chain for the traditional mobile network operator. Whether it is VOIP or whether its TV over cell phones or whether it’s discount service providers, the traditional ways that operators were making money are changing and they are not exactly sure what the future will bring.

[inaudible] The concept of media companies are becoming a very strong brand in the mobile space. How will the network operators ensure their central role in that value chain?

At the same time on the other side of the road, we have changes in the technology that goes into the cell phone. On the one hand, the smart card industry which is their IP(?). Smart cards by the way are used in many many other applications other than telecom. They are used for ID cards. They are used for banking cards. They are going to be used now for passports. They are all over the place. The same smart card technology.

This smart card technology brings something else to the table. It brings the highest level of security. Of course it is being used in banking, ID, and health applications. We must have a very high level of security for the data that is stored in that smart card. And so all smart cards are produced in secure manufacturing facilities. The silicon that goes into those smart cards is produced in secure foundries.

Handset technology. We just had a demonstration of handsets and what handsets are doing for our lives. Color screens, input devices, emails, music, video, as Dov said, we have no way of knowing in five years what it will be. What we do know is that this is our personal device, our trusted device for our own memories.

And finally the silicon technology. Again innovations like x4 mean that we can put much more memory in a very very small device. This is a 512 MB SIM card. I hate to correct you Dov, but this is 8000 times the traditional SIM card. Do the math. 64K into 512MB. 8000 times the amount of memory of the SIM card that is in your pocket. Every single one of you. It doesn’t look any bigger. It looks like a SIM card. Tastes like a SIM card. Smells like a SIM card, but holds 8000 times more memory.

We had a recent conference at the SIM World in Prague a few weeks ago. We had this big glass jar on the table in our booth and we had 8000 SIM cards in the jar and we had one MegaSIM inside the jar. We had a contest to see who could find the one MegaSIM in the 8000 SIM cards in the jar. And we had a contest to see who could find the one MegaSIM in the 8000 SIM cards in the jar. People said well, is it bigger? and I said no it looks just like all the other SIM cards. Obviously nobody was able to find the one MegaSIM among the 8000 cards and we had to do a drawing to give away the GPS device.

We did it mostly so that people would have this picture. 8000 SIM cards vs one of these. You can keep your phone book on 8000 of these little ones or you can keep your phonebook on one of these. You can keep a movie split up into 8000 different pieces or you can keep it on one of these.

It is a very very powerful message that we are bringing to the industry. How did we do it? We take a fully compatible SIM card. I take the same SIM card and put it into any device. It works as a SIM card, the MegaSIM. We take high density memory today with standard flash technologies. Tomorrow with x4.

Technologies that will enable us already this year, before x4, to reach 1 GB this year. In a SIM card again. To just add the memory we had to add the additional tools to make it viable. And so we added a high speed protocol to be able to access the data that is stored on the card. We added crypto algorithms, security, because I am going to have sensitive data stored en mass in this card. I need to have security for it. We added a 32 bit secure processor so that I can run applications from the card. We added additional security layers and obviously we added our patented controller for flash management.

What we have created is not simply a card with memory. We have created a powerful device able to run secure applications from this device. Able to use the environment, the architecture, that it is part of, for you to have better applications, more features and functionalities, like we have done with U3. This has never been possible to be done before in this world.

This is meant to empower the operators. We are looking for a way to transform the SIM into a revenue driver. Today it is a cost driver. It is the cost of customer acquisition. Today it is something that managers of the operator are constantly looking for to cut the cost of the SIM card. The message that we are bringing is that this is a change in the paradigm.

We are taking the SIM and making it into an application to drive new revenues for the operator. The operator will still have control over the storage media. The way for him to ensure that he isn’t low on the value chain is for him to have some control over the access to that storage media. Not control, in the essence that users cannot get to their data, but they are able to leverage that data to push or to market or to promote new applications and services from which he can take revenue.

If we are going to be using our applications by getting this data onto our SIM cards it is going to be much more difficult for any of us to move to another operator. As you know here in the United States and in other countries, where we have mobility in terms of my number, the issue of churn, of users leaving their networks for other networks is a tremendous cost on operators. The cost of acquiring new customers is huge. The cost of losing a customer, after you have invested in him, is even greater.

And finally operators looking for device management tools. To be able to manage the devices that are in our pocket via the network. The cost of a customer service call is tremendous for an operator. Think of it multiplied when we start to have much more advanced applications on our mobile phones. The ability to do device management and to personalize our handsets is something that the network operators have been looking for methods to do for many many years. With the MegaSIM they can do all of these.

Most importantly the MegaSIM will cause them to make revenue. How does it do this? How does it maximize the value? By bringing three key elements. If you remember anything from my presentation, forget about the little thing about trading the phones, if you remember anything about my presentation, remember these three circles. The first one is security. As I mentioned, the highest level of smart card security. The second, the operator provisioning, the fact that it is connected 24/7 to the operator. The operator sees it, knows where it is, gives it to us, and now can leverage it. The third is the high density storage.

Only the MegaSIM brings all three of these elements into this type of a device. Only with the MegaSIM, can I take the area where these three [circles] meet and create a unique value proposition. We will look for applications that will work on the MegaSIM together with our customers where [inaudible] applications that meet. This is the critical triangle, where we improve the bottom line.

What are the milestones we have had since we have begun working on the MegaSIM project? In October 2004, we announced the first MegaSIM, the first high density SIM card. A few months later, Oberthur, a partner of ours, announced the Gigantic, the first 128MB SIM, based on MegaSIM.

Then at this year’s 3 GSM there were three announcements that we were involved in among others. The first single chip SIM from Spansion. The Orange rollout of a 512MB SIM commercially in Europe this year. Again, based on the MegaSIM. Then we announced together with Microelectronica which I will speak about in a second, that we will have the availability of 1 GB MegaSIM by the end of 2006.

This year we are seeing trials and pilots with many operators and we will see full commercial availability of this product in mass market quantities in 2007. The potential is huge, because the amount of units of SIM cards sold is growing. MegaSIM will take a significant portion of this in the coming years and what this does for the SIM market: it increases the ASPs tremendously.

Microelectronica. At the end of last year, we purchased Microelectronica, a smart card company with excellent technology and people, based in Madrid, Spain. We purchased Microelectronica in particular, for three reasons. The first, is to leverage our flash expertise with their smart card expertise. We firmly believe that the ability to add flash into smart cards will bring many many new applications in the future, not just in the telecom industry(?).

Secondly to capitalize on that smart card technology and particularly the secure manufacturing facilities, both for MegaSIM and for possibly other products in the future.

Thirdly, to channel the access to the customer. The customer in this case being the mobile network operator. The only way that we believe that we can understand our customers properly is to have a direct channel to those customers as we have shown with our other business units.

What did we create? We created a truly personal mobile storage. We bring to the table the fact that we are the industry innovator. We created this market. We were the first to market with a product. We bring together all of the other msystems’ capabilities: the beneficial flash supply which will be improved even more with x4, the flash expertise, the access to the operators, our IP, our know-how, the ability to take a security technology that we have in house and the security technology of a smart card company together with our expertise and knowledge of the mobile world through our other business units.

All of these brought together brings us unique value to this industry and we believe that MegaSIM is one of the major drivers for msystems’ future growth. And if we incorporate into it, that we are a little more innovative, a little bit more thinking outside of the box than the other companies in the smart card world, together with our innovation of technologies like x4, we believe that this will be a very very big business in the future. Thank you.

**** end of Ira Cohen’s presentation ****

Co-Manager- Mobile Handset Division

Mobile handset division together with David Tolub. Today what I will present to you are some of the trends we see in the handset market and how we see these trends impacting the demand for additional capacity as well as discussing the innovative solutions that we have in bringing to the mobile market and with new x4, this new innovation, will allow us to address the constant growth of capacity at competitive prices.

We hope you know the safe harbor statement by now. Looking at the mobile market, there is constant demand for increased capacity. First of all we talked about it a little bit on the flash side, constantly pushing for higher capacity flash, higher growth because they can make higher profitability by selling higher density of flash. So the fabs are keen on selling higher capacity.

In the past if you remember we used to have very small capacity and then moving out of these capacities, constantly moving the entry level phones that brought more and more capacities. What are the reasons? Simple there is no NAND at the lower capacities anymore, because the fabs are moving to higher capacities.

Operators, we have just gone through a very vivid explanation of why operators want more capacities and need it. They want to increase their outlook(?) and this is again translating immediately, increased capacities in the phones.

The consumer market is impacting a lot, the phones. As we saw before, again, the music, the cameras are all getting into the phones. The phone is becoming a centralized device, which has integrated into it, many of the new applications. The iPod is the latest example for that one. This demand is going into the phone. Once again, pushing the overall capacity of the phone.

Handset venders are also keen on having more and more capacity. Not because they want to increase the cost of the phone. They are obviously working constantly to reduce the cost of the phone. However, in order to create additional value. In order to create the demand to replace the phones, because the market is turning more and more into a replacement market. They move to create new applications which translates immediately into more capacity.

So overall, we constantly see the demand going up and up. And we believe that the x4 is an excellent way to address this.

When we look at the capacity, what does it mean by driving applications for additional capacity? We started playing in the mobile cell phones with the smart phone segment, which requires relatively high capacities back in 2003/2004. That was 64MB, 128 MB capacity phones.

The 3G has caused the operators to put much more applications on the phone in order to utilize these networks and are now pushing for higher capacities as a result. So today the phones are already 256MB. 128MB is already an antique phone level in the 3G world. And again, moving to more and more capacity.

We call this the iPod effect, has created a big boost in the overall embedded capacity in the phones, because everyone has moved to the concept that, “Oh my god, you need to be very secure.” You need to be able to control the content of the phone or the iPod, the MP3 player. Therefore you need to embed a lot more memory as opposed to the removable card.

So, the entry level, before it was smaller capacity and removable card, now its high capacity and still maybe removable cards.

Now we see new applications coming in as well. TV phones, in some countries they are already talking to us about implementing Tivo-like applications on cell phones. I find it quite amazing, but that is the situation. GPS, gaming applications. Again, all of them integrated into the phone, making the phone the central application of our lives, but pushing much more capacity into it.

Turning to our customers. What do they need in order to have a good, cost-effective solution? Primarily, cost effective solution means they need good costs. Good costs means they need to work with greatest and best flash technology in the market. So we need to work with the latest processes. MLC gives them an advantage and obviously x4 will give them an even greater advantage of cost structure.

Guaranteed supply continuity. They must have the ability to if they want to use these high capacity devices in main stream devices, they must have multiple sources. They need to be able to be assured that there will be supply continuity. Again a very key(?) concern of the big players in the mobile market.

And they want fast time to market. At the end of the day, its all a game of who comes to the market first with these various new applications. And who hits the key milestones like the xmas season. Who gets the applications out in time for that. So they need to be able to bring the new technologies, the cost effective solutions very fast to market.

With our mobile solution, we have continuously been addressing these three issues.

As I said, the market is continuously growing in demand. From the point of view of performance, you now have an iPod, you have TV. You need more and more performance. You need more and more capacity. You need security that Ira talked about as well. You need all these additional things to be part of your basic storage device. So your storage has to be made smarter.

On the other hand the flash technology, moving from process to process, is actually been taking(?) a beating(?). This has been creating a huge gap in the technology, because what has happened is moving from the 90 nanometers to 70 nanometers, you get a better cost, however you get less reliable flash. The write/erase cycle that you can implement on this flash are much shorter. The amount of error correction that you need to do on the same data on the same flash to maintain a reliable device that you can actually store code on, is much much stronger. All of these are creating bigger and bigger difficulties on the flash.

And what msystems does, really is ditch(?) this graph(?). We take the technology that is available, the most cost effective technology and we make it viable. I think that the latest and greatest example of that that we have been discussing in depth today is the x4. We managed to take a technology that no one else has managed to implement as yet, because of reliability issues, because of performance issues, and with adding our unique abilities, we have made it a cost effective solution that does meet the market’s needs. It can play in this market.

We have been doing this kind of solution for many years. I would like to share with you a bit, the track record that we have in this market. We came into the cell phone market when the market was pure NOR. Nothing else. We came and said you know what, phones need more capacity, they need additional storage, so NAND is a much more cost effective solution. Cell phones didn’t know how to work with NAND, so we introduced MDOC, which was a NAND-based solution with a NOR interface, resolving that issue.

Now with time, people understood. The gap is usually more or less two years, after msystems introduced a new technology. Many of the players introduced NAND themselves(?). We were already by that time working with MLC flash. The only ones to use it as a bootable device in a cell phone, still today. Many years after the introduction of MLC. The only ones that managed to make it reliable enough that as a bootable device as a single storage device for code and data in a cell phone.

Other players started to introduce also embedded flash drives and using that kind of solution with a similar architecture to the DOC. We at msystems had already realized that the H3 technology was the right way to go and I will explain a bit in a minute how the H3 works. We identified the fact that the flash market has been moving and growing so fast that the embedded controller and embedded flash drive is actually an obsolete architecture and we have already moved to the next architecture. We are introducing it today.

Some of our competitors are introducing just today the old architecture. We are already on to the next architecture. And the demand(?) side capacity once again, the x4-based mDOC will allow us to address in a very attractive way, the high capacity requirements that are going to be seen in cell phones in the future.

Now as I said before, one of the key issues that customers are looking for, is to make sure that there is a multiple source. This multiple source has to be, not only having two companies making a NAND device, but these multiple sources need to be able to be dropped in replacement into a design of a cell phone.

So you have to make sure that all the software and everything in the cell phone is identical in both cases. This is one of the unique values that the H3 architecture brings to the world.

So with our virtual fab architecture that Dov described earlier we have now got the ability to offer the H3 architecture from multiple suppliers. You can buy H3 from Toshiba, from Hynix, and from msystems. With the vFab architecture, msystems actually brings additional value, because we have access to all the flash technologies of all the players. In some markets, it might be that supplier A will be a more cost effective solution? At other points, supplier B will be a more cost effective solution. We can go to our customers and offer them a one-stop shop for the best flash technology at any given moment.

We can continuously offer them the most cost effective [solution]. If it is low density, relatively low density, very high density. Different fabs are different situations at different times. We have access to multiple fabs and we can optimize our solution to the customer.

What happens is, the customer wins. Pure multiple source. True multiple source. Of latest(?) technology. Our strategic partners win, by getting our IP and it enabling them to offer their latest and greatest technology to the market much faster. A very good example is the way that we implemented the MLC technology with our G3 family of products. Toshiba would not yet be selling embedded flash solutions without this kind of architecture in the cell phone market. This is our amazing ability. So they [Toshiba] have a much larger market.

Another, msystems’ gains share, allocation of capacity. Dov went into details about how this vfab(?) is done. We traded our IP. We get the capacity, so we can offer our customers a very attractive solution. So it is definitely a win, win, win solution.

With the vFab strategy we are increasing the total available market, because companies are now feeling comfortable to work with the H3 architecture and that’s taking it into their main stream phones, their large volume phones, because they know that they do have true multiple sourcing.

I mentioned H3 a number of times. I’ll try to explain a bit about how this architecture works. Basically when you want to work with a NAND technology and x4 works exactly along these lines again, you need to have obviously a flash device, a flash technology. You need to have a flash controller. You need some software to manage the operation. And it all connects to some kind of host application, a CPU.

Now traditionally our old solutions, our G3, G4, H1 family of products are built with this kind of architecture where the flash controller is embedded together with the flash, either monolithically or hybrid, in other words a stacked(?) solution. And we have the TrueFSS which is our patented IP for managing the flash running on the host side.

Now what we’ve done with the H3 architecture is that we have actually simplified the process. By moving the software from the host side to be embedded within the the device itself, what we allow is a one time integration that differentiates between the flash technology and the CPU. And now when the handset manufacturer wants to move from one technology to another, all he really has to do is qualify a new hardware component vs touching his source code on the phone. The difference in qualification time of such a solution is something between weeks and many, many months.

This time shortening is actually allowing us to offer our customers a much faster time time to market with the latest and greatest technology. If we go back to the three points that are key for them: cost which we are using the greatest and latest technology, so they have the cost structure; and time to market so by doing this, they cut down the qualification pressure, from many, many months to a few weeks, again allowing them to hit the sweet spots, for example xmas 2007. So this is very [inaudible]

In talking about the mDOC and this is our primary product todate within the mobile market. We are expanding our product family within the mobile market and we have multiple solutions that we are offering.

The MegaSIM which Ira has discussed earlier is not being sold to handset manufacturers, but is being enabled by handset manufacturers. So we are working with many handset manufacturers to make sure that their future designs and future phones will allow the support of the MegaSIM.

We are also offering now to our customers, memory cards. This is a new activity that msystems has gone into and we are seeing a lot of interest from our customers that are bundling memory cards as well to use our unique technology embedded into their memory cards as well as the mDOC. So together if we look at it, we are now able to offer all the memory components that are required by a cell phone.

What does the future hold for us? In the past we dealt with enabling NAND. Now we are talking about mass market NAND, meaning commodity products and very high capacity. Again the x4 and the H3 are enablers for these abilities.

Moving forward we see looking at unique architectures of complete memory subsystems that take into consideration all the memory components that are on the phone including all the different components that I discussed before: the memory cards, the SIM cards, our memory [embedded] and additional components as well.

So together with these solutions this continuously allows us to stay ahead of the market and we believe with the x4 and our new architectures coming henceforward, we will be able to continuously stay well ahead of the market. Thank you.

**** end of presentation ****

Amir Tirosh, General Manager Embedded Systems Division

Good Morning to you all, my name is Amir Tirosh. I am manager of msystems’ embedded systems division. Today I am going to discuss the impact of the exciting x4 announcement on the solid state disk market.

So lets keep these safe harbor statements. Thank you again Illana. So lets take a stroll down memory lane. I’ll begin by discussing the current common technology which is the hard disk drive known as HDD in the industry. It was pioneered by IBM for main frame computers in the 1950s. You can see on the on the right hand side of the slide a picture of the IBM 350. It carried about 50 MBs of memory and it was as big as this room alone. It took a big staff to operate it. We have come a long way since that date.

Something which characterized the hard disk industry is in each few years a new generation of technology appeared in the market. Usually it was characterized by a smaller form factor. In the original IBM it was a huge device, but each two or three years a new device appears. It went from 18” to 11” to 8” to 5” to 3.5” [inaudible- continues the list down in size].

Innovators[?] dilemma, the new device is not as good as the old one, appears usually serving new kinds of applications. So that’s something which happened in the hard drive industry, actually since the 1950s.

The solid state drive, the drive which is based on microelectronics vs a rotating magnetic plate, was introduced in parallel by msystems and by Sandisk about 10 years ago. Again using the standard marketing terminology, a disruptive technology, a very different set of parameters, a very different set of operations(?).

It began very slowly ten years ago to displace hard drives in specific applications. An important fact that one needs to realize about the hard drive industry is that while the price per GB keeps dropping all the time, the unit cost is quite stable. You can squeeze more and more GBs into it, maybe 100, 200 GBs for example for standard commercial devices, for the standard form factor, but the unit price remains the same.

This is significant because this tells us that for a specific device, there is an entry price, even if you want to use 5%, 10%, or 50% of the capacity, you will still need to pay $50 or $60 for a standard commercial device. We don’t see these things changing rapidly.

Another important fact, and I think that you all know it but we are not used to thinking this way is that most of the data on our personal computers is what I would call static. Its last year’s presentations. Last week’s presentations. I saved certain versions of these presentations. I am not going to touch them anymore. I may edit this one a few more times, but it will remain without many changes for a long period of time.

Look at your own personal computers. MP3 music, pictures, video, presentations, documents [inaudible]. 99% of the average user hard drive is constant, not changing. Only a small part are changing.

In addition when you get home look at your drive, how much of it is free space.
Those three factors, the fact that there is a stable price or unit price for hard drives, that there is a static data [inaudible] interest in SSD drives.

Let’s forget for a minute about history or history of technology and look at the consumer. I think that nearly all of you are carrying blackberry devices or other kinds of smart phones. What we have seen throughout the history is that when a new technology appears in the market, that users can use to enhance their productivity, performance or life style, it is usually adopted, if we can see value added in the technology. What consumers or customers today are looking for in drives or storage systems. They are not usually buying storage systems directly, they buy them as part of hardware appliances. They are looking for this type of value. It’s not a real disk crash, it’s a slide and we can get it back [joke, probably slide malfunction. Audience laughs].

[inaudible] If you touch this device, a damage caused by incorrect handling is not covered by warrantee. You don’t want to either as a customer or consumer. So what are we looking for as a group? All of the [inaudible] for the past few years for PDAs initially, users of the Palm devices, am I right? All of you are carrying some kind of blackberry device, smart phone and so on.

Most of our iPods and cell phones are proven technologies. We have learned to appreciate a different kind of user experience. How much time does it take from time you press your iPod to when you are listening to music? A few seconds at the most. How much time does it take when you click on a blackberry to start an application or open an email?

The boot time. Usually it is a few seconds and it is on. The emails and so on. We got used to it and of course consumers, and early adopters are thinking what other devices we are using. Wouldn’t it be nice if laptop computers would be the same. Of course we don’t want to see them with small screen. We don’t want to experience a loss of data. For us as professionals a loss of data is a near disaster. If I lost the contents of this presentation 10 minutes ago that would be a bad situation.

Of course we want to use a device which is much more user friendly. We want them to be very light, flexible. There are different form factors that can be created. Today, the second biggest piece in each laptop is the hard drive. Very inflexible. What would happen if we can make things different shapes? make them flexible, narrow. There are a lot of things. We want a battery to run forever. Especially the one you are taking on a transatlantic flight. [we want] No heat, no noise. I think that is taken for granted. The existing laptops, they generate some [too much] heat.

We as consumers are pushing the PC OEMs to adopt SSDs. They will come to the SSD market to find solutions.

Let’s take look at the interaction between the SSD market and the general PC market. I’ve done a segmentation here using only two variables: on the left hand side is the capacity or the density, how many GBs are in the device; On the other side is the premium the customer is willing to pay for a solid state drive. Going from left to right and also up. The first form factor to utilize the SSD was the rugged notebook. They are used in many military kinds of applications, oil drilling applications, engineering applications, police applications, and so on. If you hide behind enemy lines doing some kind of special operations, you don’t want to be in a situation where you lose your data. If you are in oil exploration you don’t want to use an old laptop. Those people are already paying a premium.

On the other side, thin clients are using SSDs for a different reason. Thin client storage is characterized by very low density. If you have a thin client you don’t store your powerpoint. You store your operating system and a handful of important files. So we are speaking today about 1GB, 2, 4, maybe 6 GBs. Here flash SSDs already provide a cost advantage. Hard drives are no longer needed in this sector.

Also we have PCs of different forms and factors. We are speaking here about densities of 6, 8 maybe 12 GBs. What will happen to the others. We are talking here about ultralight laptops, thin laptops, and the Vaio here. What happens here. What kind of premium are people willing to pay to get all the benefits we have seen of the solid state drive?

Today we have the technology, but the adoption rate would be [??]. x4 technology should then accelerate our ability to provide cost effective solid state drives to these markets, to segments such as sub notebooks, tablet PCs, [?], and future devices might be a mixture of ultra mobile PCs [see OQO and MSFT UMPC] and laptops which is in a few years, but all of these will require storage which will be light and solid.

A huge market. In a few years, the number of laptops on the planet will exceed the number of desktops and it is already a sizable market of over 100 million units annually. A fact which might interest you is that over 30% of the laptops sold today belong to the premium category. There are consumers and end users willing to pay extra for these features. Solid state drives, we see is going to be one of them.

Looking at the future and how it compares to today. Dov mentioned earlier that one of our biggest competitors has created this impression that the flash-based solid state drive was brought(?) only six or seven months ago. Far from being the truth. We have been there over ten years.

Here is the list of applications that are already using SSDs extensively. Lets go through some of them. Its very common in the telecom industry. If you have a base station for cellular applications, sometimes on top of a mountain, on a tropical island, or just in a place where it is very hard to get to(?). The hard drive, its rotating, if it crashes, your station is done and income based on it is done as well. Sending a technician to an island is an expensive exercise. So these people are already using flash drives, SSDs in their applications.

Blade servers. I am not speaking about the (?) servers, but the actual blade server hardware. You need to service them, you need to store the operating system. [They need to be] Very reliable operations. Medium density, 2 GBs, 4 GBs, solid state flash-based drives already found their way there.

Laptops, we discussed at length.

Tablets PCs, 4 GBs.

Military data recorders, commercial data recorders. A new in flight entertainment system uses these types of SSDs. Capacity, performance, endurance, it’s already there.

Point of sale applications, another great example. You don’t want to do any service and point of sale employees are not watching movies. So its already there. The number of users is quite impressive.

It didn’t come easy. Just like many other high tech technologies, it started in the military and we still are serving military customers. Their demands are quite hard to meet. When they build systems for flying 2000 miles or behind enemy lines, or getting close to space, there is very strong demand. They have very high performance requirements.

Technologies keep changing all the time. It is very hard to manage it. Very hard to match between the performance, the endurance, temperature, the vibration demand, and complexities(?) of flash. We have done it very successfully. It has allowed us to develop over 15 years TrueFFS and many other technologies which make our SSD the most sophisticated in the market as a challenging exercise.

Now if you take all these capabilities, like as has happened many times in the past, and bring them to the commercial world [inaudible]

To summarize, the solid state drive will begin to eat into the market share of hard drives, absolutely in 2007 in standard commercial applications. And we believe that the interaction of the x4 technology combined with our know-how gathered over this last 15 years will create a winning combination. Thank you very much.

**** end of presentation****

Tzipi Ozer-Armon, General Manager Retail and Enterprise Division

Good Morning. I am Tzipi Ozer-Armon. I am the the general manager of the retail and enterprise division. First I want to thank you all for staying til my presentation. I know there have been many presentations til now. What I want to do with you today is to show you what a great division we are, and why we are the most promising thing, and not what Ira said, their division [laughter.]

I will show the presentation with Daniel Schrieber, the VP Marketing and Business development. Here’s the safe harbor, which by now, you probably know by heart.

So first, what is it that we are doing? We take particular pride in being the innovator, creator, patent-holder of this category. In 1998 actually Dov Moran, invented the concept of USB flash drive or DOK and so on. For my presentation I will refer to it as USB, and this is basically what you all picked up when you registered. How many people had DOK before you got it today?

What you will see when I continue is that you are not the majority of the population [implying that not many in the audience already had DOKs.] When we first invented this product, many people just didn’t believe in the product. The floppy at that time was a product that was very easy to use. The CD product was a much better product on a per MB basis, but as you see with the x4 announcement that we did today, when someone tells us that something is impossible, we feel that the major challenge for us is to make it happen.

We created this category [DOK] and in 2005 the category reached $3 billion. This is in retail price. We have have been selling 10s of millions of devices to the most favorable and most-loved brands. We have more than 10 worldwide hubs and we are selling it with very sophisticated logistics and operational excellence with more than 800 concurrent products running, lowest RNA(?) [R and A?] and greatest on time delivery.

But not only with this product was great innovation required, but what we also needed was to operate in a great market. So far what we have been operating in is a very high growth market. In the chart we can see that in the last few years, every year we see a growth of more than 30 million devices that are being added to the market.

The major question that we have is how are we going to increase this growth even further? We started with what we call the (?) product. The DOK product that was targeting the retail audience. A tool of usage(?). One product was a cheaper product with lower performance with cheaper cost. And another one with higher performance, higher security and higher cost.

In the last 18 months we have expanded our portfolio significantly. I’ll start with the product that you all have on your tables hopefully by now. You can open it. It looks like a CD. It smells like a CD, but it is not a CD. What it is is a product that has the same convenience, user interface of USB flash drives. You don’t need to burn a CD. I’m sure that many people here do not have a CD drive in their computers. They are using a smaller computer.

What happened up until now is that the USB drive was a very expensive product. What we managed to do is to get the price down. It has been selling at [?].

We launched the product just recently. Its been selling at Best Buy under the Memorex brand. Soon its going to be launched with other brands and retailers.

The other products still within the retail market, that we are going to announce soon is a product that we call the flat product. It looks like a credit card. Smells like a credit card, but it is not a credit card. The idea here is that you have again the same USB flash drive that you can put in you wallet in a very convenient way, making something which is very very personal.

On top of this retail offering of USB flash drives, we have added last year, a whole range of form factors, from memory cards. Now we are selling most of the form factors of the memory cards.

But as our name suggested, we are the retail and enterprise division. We are also targeting the enterprise market. What we have been doing is investing and so far we are starting to see the fruits of that, in an end-to-end solution for the corporate market. Now this enterprise solution includes a drive on the one hand and a server on the other hand. The combination of the two allows us to do two things.

One is to do a secure(?) control via the server. And the other one is to do management of the keys.

The fortune 1000 companies that we are working with, do not want to introduce keys that are not secure. These are highly secured keys, on the one hand. On the other they do not want to introduce 50,000 keys to their employees without the ability to manage them and without the ability to update them.

Just recently we are starting to see the fruits of our investments. I am sure that some of the people here in the audience, their companies have approved our product as the only product that can used.

All of these products that we have are already supporting the x4 technology. So if you are questioning the time that it takes between when the flash is developed and when we can adopt it, basically it is very fast.

So far we’ve been doing great operating in a category of $3 billion. As you have seen, the challenge that Dov set us, making the impossible possible. What we have set ourselves is see how we can grow the category a few time higher. Ok? The question is how will we do it? We see two high impact trends on how to do it.

These two trends are what we call the second wave. What we mean by that is that so far we have been riding on one wave of growth of the category. When we look at it, we are just on the verge of the turning point to enter into the second wave. For those of you who follow Gartner publications, what Gartner is saying is that they see there is an inflection point in 2007 where growth is going to grow higher than it was before.

Why is that? There are two phenomena behind that. The first phenomena is that what we see is that there is much higher penetration to be achieved than has been achieved so far with the USB flash drives. The other one is that there is a change of behavior that is both due to the technology change and that the USB drive becomes a personal work space.

Now I am going to talk about these two phenomena. The first thing we are going to look at is the overall market and the penetration that we have managed to achieve. What we see is that the USB has reached something like 15 to 20% penetration up until now. So you guys here in the audience with 100% penetration, clearly you can call yourselves the early adopters of the category.

The amazing thing about the category is that something like 80% of the people that are using computers do not have a USB flash drive. So in the same way that when you look at all your friends and colleagues and you see that everyone has blackberries, and you think that this is something that everyone has, I think that in USB it is the same phenomena.

It is very common among people who are early adopters, but actually the penetration is something that is going to be achieved in the coming year. We see that the penetration is about to start to go to what we call the majority of the customers, the early majority.

The x4 allows us to do it, because it makes the product more cost effective for them. The early majority, not like the early adopter is not willing to premium prices. They want to have a good value for money. The x4 will support us in penetrating the majority of the customers.

If we look at the share difference between the current penetration which is around 15% and expected penetration within the next coming years which is between 45 and 50%, only that provides us with the potential growth which is two times the current [market size.]

The second phenomena is what we say is how technology and innovation change the way people are using the product. Here I am going to take the point of view of what happened in other industries just to give us perspective. First of all one example out of three that I have here.

When we look at the TV screen, at the television, what we see is that the category was already in the situation that this market was stagnating. It reached something like 2% growth, a truly stagnating market. GMs in the category were well below 10%. What happened is that there was a technology of flat screens, plasma(?) designs. The result of this innovation, of technology of flat screens, last year growth was around 110% and GMs went up to 30%. We see that also happening in USBs.

There are other examples. For example, the Casio category(?) that was selling for something like $100. Then Palm came and and put application platform on top of that. Brought 20,000 developers to it. As a result of that the category grew by a factor of 20 and the price of the product went up to $300.

Cirque added to the circus some opera and rock. If we look at that also from an industry totally stagnating(?) what we saw was that last year it brought 7 million people to the Cirque de Soleil and paid $650 million dollars.

What we mean by that is that sometimes when you see a product, when you change the techology of the product and bring innovation, the product reinvents itself. This is what we believe is going to happen to USB flash drives with the introduction of U3. Meaning that the overall trajectory of the USBs is going to grow higher. Today Daniel will show you what is the value of USB and how we are going to do it.

[inaudible] The real question is whether all the forces in the industry are aligned to achieve that? When we look at the forces in the industry, technology is the first one. When we started, basically this was just a floppy replacement. Since then, capacity grew by a factor of 1000. Speed grew by a factor of 30. USBs [drives] became more suitable for applications.

x4 improves the capacity in a way that allows you to do much more with your device. So the technology improves (?), the cost improves (?), and the end user sees that the new capacity leads to more and more sensitive data to be stored, so that you have more applications, more functionality and the applications are becoming, the main stream (?) [thing?].

What about the other factors in the value chain? When we look at the value chain of the USB, from the fab, here are the brands, all of them are looking for differentiation, for margin reach(?), for storage hungry applications and actually U3 does give them support for all of that.

The last one is the impact of the software vendor. When we introduced U3 [USB?]and just after, the ratio of USB to PC was one to ten. Now the ratio of USB to PC is one to two. So actually what it means is that all the application venders see that as a channel for applications, for selling applications.

Now what are the technological capabilities that the USB with the U3 gives us? It makes us an optimal software channel to sell. So all of that, what brings us to the conclusion, is that all the forces are there to make U3 a mass application on the USB. So what we will have now is to have a presentation by Daniel Schrieber who is going to run a quick demo of the U3. By the way, all of the devices that you got today are U3 devices, so if you are lost, then follow Daniel and you will see how to use the device and the great value it brings to us. Thank you. By the way, you can take these home.

**** end of presentation ****

Daniel Schrieber, VP Marketing and Business development

My name is Daniel Schreiber. I run marketing and [?] for the retail and enterprise division. What I propose to do is to spend a few minutes just showing you what a U3 device is about and then I will back off a bit and try to give you some of the contextual and intellectual underpinnings of the whole enterprise and how we see this fundamentally shifting competition here and the nature of our industry. Nothing less than that.

Let me give you a concept of what this device is about. You have one now and you can try this at home and see for yourselves. There are a billion PCs on the planet today, something on that order of magnitude. They are all ostensibly [essentially] the same. They all have the same basic [inaudible], the same basic intel components and pretty much all of them have the same Windows operating system.

In a sense, they should be interchangeable. If you were to repeat Ira’s experiment with PCs and hand them around, you should be able to work on other PCs. But in truth, we really can’t.

So a billion PCs on the planet, but our PC is one in a billion. Once we take off the wrapper (?) and spend a couple of weeks on it, all the applications, and the configurations and the files, and the settings and the security and the trust (?), the Adams (?), roots on our computer in such a way that if he tries it, compared to anybody else, it would be so hard to work.

It wouldn’t be configured the way you want it. You couldn’t find what you are looking for. The presentations just aren’t present there. It becomes very difficult indeed.

What if we could somehow unshackle all of that from the PC? Take the spirit of the computer away from its body? Take all of the stuff that makes it your PC, idiosyncratically yours, and transforms it, transports it, enable-ize it on one of these devices.

So the USB [drives] will shift from being something that takes your files from one PC to the other, to something that takes your computer from one PC to the other.

Well it might look something like this. This is not my computer. I do not know. I do not trust. I’ve never worked on it before. I take my U3 device and I plug it into the computer. Here, I even have to look for where the USB port is. There we go.

You will find the device will also inform the computer, before (?) it does anything at all. A flat screen. In this case you can [inaudible] as well. This is a password protected device. As you will see it has all of my stuff on it. I enter my password, and I have a USB which has U3 capabilities. I open up what is now the X drive or the E drive and use as normal, but I can do so much more.

What I am going to do now is, I don’t know what applications are on this computer. I do know that what I’ve got is a new start menu. A little U3 icon on the system tray. Never obtrusive, but always present. One click on it will reveal an entire suite of applications that will travel with me preloaded on my U3 device and allow me to launch from them.

I’ve got pre-configured, one of them, Media, it is a great synchronization application from one of our partners. [inaudible] to transform this computer from what I believe is a [inaudible] PC to my very own.

So I have Icons.

[He runs through many U3 applications etc]

Pretty powerful stuff. U3 has the potential to revolutionize the IT world. This is what we are talking about. This is potential for a fundamental shift in the whole way that we use computing, the computer paradigm. Instead of having one computer that is available to you, out of a billion. Suddenly the billion computers on the planet are suitable computers, that you are free to work from. From a U3 compliant device.

I would like to spend a couple of minutes giving you the conceptual underpinnings of what you just saw and take it up a level of abstraction. I will really try to analyze for you why this is such a fundamental and important component of our industry over the next 5 years if you like.

Tzipi referred to applications earlier as one of the driving forces behind the new wave, in way that is equivalent to the transformation of Palm, equivalent to the transformation that flat panels themselves introduced. We see U3 and the whole flash drive computing paradigm as having equal potency in our industry.

Lets use a model. You may be familiar with it. [sounds like Proctor] innovation model. What’s happened in the past. What’s happening in the present and what is going to happen in the coming years.

Mapping out the performance of the device. Features and functions on the one hand and time on the other. For every product that is introduced there will be a trajectory of that line which consumers are willing to absorb in terms of features and functions. The minimum requirement that they have and at the same time greater and greater performance. In a way that on average looks something like this.

When it was introduced, it terribly underperformed at the beginning. People hungered hungered for more performance. The first generation in that respect. They want them to be faster, more reliable, and more feature rich. At some level there, at some point in time, there is a cross over which shows you the whole dynamics of the industry.

Instead of a deficit in functionality, it shifted to a surplus. How many of us use everything that MSFT word has to offer? 95% of those features are beyond us. Its a surplus relative to our requirements.

Intel has the challenge on a regular basis. How to drive demand for elevated clock speeds in ways that really don’t need any more in terms of our uses.

In the USB space in 2000, we clearly were in deficit. Sometime, I estimate around 2003, [inaudible: crossover?] speeds were good enough, reliability was good enough, and the successful introduction of MLC which cut down the specifications and was happily adopted by the market. We were in a surplus in performance. People were willing to take a cut in performance for their U3 device.

This is the thing that happens in these markets as the pendulum swings back. This is where the second wave comes in. [inaudible] As a floppy disk replacement you need so much speed, so much performance, so much capacity. Do you really need 50 GBs on one of these things as a floppy replacement? Clearly not.

As we get better and better, we start coming within reach for a whole new use scenario. A whole new use case for these kinds of devices. And that use case is the one I just demonstrated for you a few minutes ago. Its a use case that says I’m not just going to use it to transport a document from one computer to another. I’m going to use it to transport my computer from one computer to another and take my entire digital work space, personal work space with me.

Now that is a vision that is only just becoming feasible. That is something that we is something that we really would like to improve: enhanced performance.

Analyzing, we can map out our industry into three distinct stages. The first stage, if you would like is the floppy disk replacement. We were under performing. Under performing sounds bad. Under performing is the best possible place you can be. It means that consumers are hungry for more innovation, more features. That is absolutely where you want to be.

Because of the reliability criteria, the competition criteria of our industry, was around technology, around innovation. People wanted greater speed, greater reliability, greater capacity, greater durability. TruFSS gave us greater competitive advantage. Our security gave us a competitive advantage.

At some point along the way, there was crossover. I estimate this around 2003. We were in the second stage. Performance was suddenly good enough and in fact there was a surplus of performance. We could cut down performance in the form of MLC and the market didn’t blink. And then the nature of our competitive advantage shifted pretty substantially. It wasn’t so much a feature and function set, in fact, if you look back at the packaging in the early days, it was all about how fast the devices are. If you look at the packages today, they don’t even post performance, because everybody has reached the minimum requirements that customers want.

The nature of the competition shifted and suddenly we were competing on price or supply or operations or infrastructure or return. On a whole bunch of other things that composed value, which are quite distinct from the consumer requirements. Everybody meets the minimum requirements pretty much.

2006 reflects another point in our category. Reflects the pendulum swinging back. We’ve had so many changes in this device. A thousand-fold increase [in capacity]. The first drive that we shipped was an 8 MB drive. Today we are shipping 8 GB drives. That’s a thousand-fold increase.

The small changes in the beginning has [inaudible] change in time. You cannot treat this device as simply more of the same. It has now become a radically new paradigm shifting device.

As we enter into a new use case, people start to regard this not as a transfer device, but as something of a computing and personal work space device. We are once again in feature and function deficit, we shift back into state #3 where once again, we are in feature and function deficit.

In the use case that I have shown you, demonstrated, U3, taking my computing environment with me, a 50 GB device doesn’t seem excessive. 8 GB is paltry. Suddenly I am going to take my entire computing environment here, I am going to dramatically higher densities than are feasible for us today.

x4, of course, is a key enabler for that kind of thing.

As we swing back into under performance, the nature of our competition shifts. We are once again re-entering our real comfort zone. We are competing now on which applications become bundled. On what kind of capacities we can drive and how quickly we can drive them. …

Gartner is talking about the smart USB drive as becoming the mass market and the majority of the USA(?). As Tzipi said before, they are predicting that the USB smart market are going to grow at a compounded annual growth rate of above 100% for several years to come. [inaudible]

Toshiba has announced its endorsement and support for U3 and its intention to ship U3 compliant devices. I think that Toshiba is one of the top three manufacturers of USBs in the world. The other two which are ourselves and Sandisk, clearly already support U3. This is a massive endorsement, of industry changing proportions. Not to go unnoticed.

We are already seeing announcements by leading software vendors. As I said there are already over a 100 applications already out there. But over a 1000 developers have already signed up to develop and to download tools to use them. We have names such as Yahoo , Skype and McAfee, and Mozilla and a whole bunch of others that have either already brought out applications or announced their support for U3.

The CEO of U3, a lady by the name of Kate Purmal. Kate was responsible for building out the platform at Palm. We hired her in part because of her tremendous success in building out the platform there. She is a very metrics-driven CEO and she has been comparing the metrics that U3 is achieving during the process of adoption compared to what Palm achieved. We are outstripping Palm in terms of success and growth of the platform.

Palm was a staggering achievement in the heyday of the PDA, with over a 20,000 applications available and a real powerful ecosystem.

We have one other fact and figure for you to bear in mind. We recently finished an enduser survey. Trying to gauge the satisfaction of the endusers to the U3 devices. 93% of the users surveyed said they were very satisfied with their device. 96% said they will, or had already recommended it to others. 89% said that the next time they buy a device, they will be sure it is U3.

People are buying devices today although awareness is still low, we would say almost by accident. 89% of those that end up with a U3 device are discovering its features and becoming comfortable with the whole paradigm set that I demonstrated earlier and have resolved to buy it again in the future.

Gartner is talking about smart USBs becoming the majority next year. We have even more aggressive estimates. I think that already this year you will see, before the end of this year, you will see the majority of the drives that will ship, will ship with these kinds of capabilities.

U3 and it impact for msystems. Within msystems and within our industry, this kind of capability, this ecosystem that we have been building out, is really changing the way we are functioning.

I go back to the competition criteria for our industry. For the last couple of years, price and to some extent performance, design, these have been really the only ways that one seller could differentiate itself from the other, and too often it came down to price.

We are finding that basically it is differentiating itself as an OEM vendor, our customers now based on a whole bunch of new features. We have built over the course of the last 18 months, a very substantial network of software partners. We are starting to see pre-bundled with your drive, where it is magazines, where it is media synchronization, where it is the most popular password manager in the world. Where you can get all your passwords on there. Where it is the McAfee anti-virus software that you saw. And a whole bunch of others. Photo editing software. All kinds of other applications. These are available exclusively through msystems.

If you are in the market to manufacture USBs and you want these capabilities, there is only one show in town and its msystems. So we are really leveraging all of our software capabilities and co-developing applications with these partners, to differentiate msystems from its competition.

Our customers are doing the same thing.

I guess I’ll wrap up. The last five years have just been breathtaking for us. It is a phenomenal time to be in our industry, to be at msystems, and to be in the retail and enterprise division in particular…

If the last few years were a blast, the next few years are going to be absolutely phenomenal. Thank you very much.

**** end of presentation****

**** Q&A****

Dov: We are ready for questions.

Q: Just a follow-up on the development on the solid state disk market for notebook PCs. You mentioned 2007 adoption. Do you have any initial design wins, customers? Is the business model going to be through msystems? Will it be through your manufacturing partners?

Dov: Well, we do have enquiries from large notebook manufacturers, large computer manufacturers. It is very clear that big players are looking at this market, and that this market is a market that will arrive.

At this time there is no supply, no orders. It is a relatively new market and the market is immature.

Q: What density are they inquiring about.

Dov: They are talking about densities beginning at 32GBs and up. We believe that we will see the market, some applications that are going to be much lower: 4 to 8 GBs and then some that will be at the level of 10s of GBs.

Q: And again, the business model is going to be direct: msystems selling to an a notebook OEM?

Dov: Yes, this is exactly our model. Clearly, an sort of OEM business that we know how to do. We know how to serve. We’ll do it.

Q: Thank you.

Q: With regard to your MegaSim product, obviously you guys have Oberthur and Microelectronica. Gemplus has obviously consolidated their business and it looks like they have their own product. First of all, who are they using? and what do you think the limitations of their product is going to be? and do you think that eventually they can migrate to msystems’ platform.

A (not Dov): Our MegaSim business model has changed since the acquisition of Microelectronica. On the one hand, we’re enabling IP for the industry. So our IP is going to be used by many different chip suppliers to the industry. Including chip suppliers that supply to some of our competitors, because we are now a card vendor and we will be selling SIM cards directly to customers.

Obviously Microelectronica will be using our technology. The other venders can use our technology, buying it from chip suppliers or there is one other company that has announced a competing product where they can also get it from.

Q: Again who would you identify as the competitor on the chip side?

Dov: I will give the answer. First of all, relations are going very well with all of them(?). We are in very good relations. We hope to expand those relations and make it a business relations, and work with Gemplus, Axalto as the combined company and others in this industry.

You asked about the competitor. I think that Samsung can be defined as the competitor in this business. Again coming to the market much after us. [We had] the first SIM with high capacity flash.

Q: Switching gears to U3. You have [not] articulated a very methodical or specific licensing strategy. How do you think that U3 is going to be licensed? Is it going to be more like SD where you seed the market for years and then people come to you? or are you going to be aggressively pushing the licensing strategy?

A [not Dov]: I think that U3 has a very clearly articulated licensing model. U3 is licensable to anybody who wants to license it. Phison has announced that it is producing a controller that is U3 compliant. That was a couple of weeks ago. That has been the main obstacle for 1/3 of the NAND [USB?] systems manufacturers in order to manufacture U3. That large obstacle has been removed just in the last fortnight. I think that you will find in the next few months, quite a few licensees coming on. So this is absolutely licensable. Very much like SD in that sense.

Q: Dov, a follow-up on the solid state drive question earlier. From the inquiries that you see, from either the ODMs or the OEMs, can you tell how broadly the manufacturers might be looking at SSDs penetrating their product lines and how quickly they might be expecting a ramp of solid state drives in the products that they are initially going to initially deploy?

Dov: I think that SSDs are coming to the market because they provide very clear advantages both to the users and to the manufacturers. At the end of the day they create a product which is much more reliable and we believe that with the technology progress, much faster, much quieter, with much lower power consumption. [inaudible] and there has been an issue which limits this market from truly growing significantly, and this issue was price.

Therefore we believe that the x4 technology that allows us to bring products to the market with lower price, will be a leading motive [factor] in order to drive the growth of this application.

Its very difficult to predict when the first SSD drive [will arrive]. It may be a situation where it will be in the computers side by side [side by side with computers with HDDs]. There are many other possibilities. The form factors of notebooks are going to be very different from what they are today. The notebooks that we have here on the table are traditional notebooks that have a form factor and architecture that has been the same for the last 12-15 years. This might change and the SSD concept might be a very important part of this change.

Q: I’ll repeat the question [moderator repeats inaudible question from the audience]. Is it fair to say that the initial increase would be more for the power business user where pricing can afford initial adoption.

Dov: Yes. This is very very clear. Its not a situation where one day you wake up in the morning and hey notebooks now have SSDs. It will come first of all to the very high end of ruggedized notebooks. In fact it is already there in several applications already. It will go next into very high end notebooks for a price for customers which do appreciate reliability, size and performance. The kind of notebooks that are today its a family of a couple of [inaudible]. A couple of days for the analysts, a couple of weeks for maybe some others, but the price goes down and the reliability is very important. Clearly there will be a market. It will begin with the high end and move to the medium and then go [inaudible].

Q: Can you comment on the opportunity for mcard? When does that become a big opportunity for msystems? and are you somewhat concerned or not concerned that you may be going against big players that are already in the memory card business and this is an opportunity that is a fairly new opportunity for your?

Dov: Well mcard is a product that we brought to the market recently. We are not going to compete in the retail market directly with the other companies that are there. We do see [mcards] as a service to our current customers. The customers which are the handset manufacturers or the operators. Again we have the model of selling to OEMs, not selling directly to the retailers.

Clearly a much better opportunity when we bring to the market the x4 and therefore [we have] a much better cost competitiveness. This is going to be an interesting as it coincides(?) with the growth of the x4 as the leading technology in the market.

OK. Thank you very much.

**** end of Q&A****

**** concluding remarks****

Dov:

We go now to the conclusion part of this meeting. What I am going to do now is present you msystems in a single slide [see slide 20]. Not this one [laughter]. OK.

What happens to a company that has no value added and buys flash memory at the market price? What you see is the profit of such a company. In that case it is negative gross margins.

Then you will need value. How do you get value? One way to get value, which is a very legitimate way, is by reputation. We believe that we have a very good reputation as a company with reliability, with high quality, and a great approach to our customers.

Then you add to it, a contribution(?) which is generated by added value and functionality, uniqueness, differentiation and performance. All of our products are products that provide high functionality, uniqueness, differentiation, and performance.

Here comes another part which is very important in our business model. That is the part of buying flash components at a lower price than the price of the competitors. This is something which we achieve through our unique IP that we have through the strategic relations that we created with our suppliers in the vFab model. The question is how to expand this contribution, this profit(?).

Execution. I think that we did great in the last years in providing very good logistics, very good inventory control and time to market. So how can we expand it. Added value would be generated, would continue t0 be generated by new products, by U3, by H3, by MegaSIM, by the x4-based SSDs, and future products that we cannot explore [know] yet.

So execution will continue to grow, for constant improvement. We are a company that truly believes and truly performs constant improvement.

Here comes the contribution of x4. New markets, x4 is opening for us new markets and very significantly new additional flash cost advantage. This is what x4 is going to do for us. Thank you very much and have a great day.

**** end of analyst day****

2 Responses to 2006.05.11 msystems’ Analyst Day Part II

  1. poofypuppy says:

    Hi Savo,

    Thanks for all your efforts. You’ve posted so much transcript(s), I can’t read it all in one sitting. :-j

    Regards,
    poofy

  2. savolainen says:

    Greetings poofy,

    Yep the 2006 FLSH analyst day transcripts have some bulk. Good stuff, but not a quick or easy read. Part II is something like 35 pages single space. We know the back story and it is still heavy slogging.

    The SanDisk analyst day is every bit as dense. Total recording time: 5 hours 36 minutes. Really appreciate SNDK making the recording and slides available to all. Lots of very smart folks tried to tell the SNDK story as best they could.

    Hey there SNDK, someone’s listening.

    Eli himself takes an hour in his intro overview. FWIW really like this stuff. Eli is a character. Smart, hard nosed and cunning like a fox. Still has a sense of humor too. Believe he truly enjoys taking on the world.

    If you haven’t watched/listened to Eli’s Stanford 2006 talk, its worth a listen. Highly recommended. At age 43 Eli started all over again and came up with SanDisk. This is not a guy intimidated by adversity. Talk is a bit less than hour. Fascinating.

    http://www.gsb.stanford.edu/multimedia/vftt/harari.ram

    Best,
    Savo

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