2007.02.26 Eli Harari SanDisk Analyst Day

SanDisk Analyst Day 02.26.2007
Slides as pdf and audio as mp3 available on SanDisk Investor Relations site

Eli Harari
Founder, Chairman and CEO

Thanks Lori and welcome. Very nice to see you all here. I really appreciate it. I know that some of you come from long distances. We have a huge amount of material to cover today. We will try to give you our vision of our industry. The way it is now and the way it is going to be evolving in the next several years and our role in that.

Definitely very excited about the opportunities even though there is no denying that right now the industry is going through a very challenging time. In fact just two months ago, less than two months ago, at CES somebody asked me what do you lose sleep on? My answer was, I sleep very well. He should of course have asked, if the price of flash components dropped by 50% in the span of 60 to 90 days, would that influence your sleep? And the answer is, no, I still sleep very very well because frankly we see the current situation as a major opportunity for SanDisk and we believe that we will prevail through this very challenging time and you will hear today definitely about the near-term impact in 2007 from the current pricing situation.

What I want to do in my presentation is cover the long term view and really the strategic vision that we have for the company.

[Slide 5] If you will just allow me to indulge one slide on 2006. It was such a great year. You will hear some more from Sanjay and Judy, but I know that was yesterday and now it is the future. I want to talk about the big picture. The way that we see it. Talk about the market conditions this year and into the next 5 years. Talk about flash trends trends and technology trends. Technology where it is going, relative options are out there. Then talk about IP. I am going to try to answer many of the questions about IP, but this is a very sensitive subject and there are limitations about what we can and cannot discuss.

And then I’ll talk about Matrix semiconductor and very very importantly the acquisition of msystems that is ongoing right now. This is one of the major events in our history. Basically the combination of two pioneering companies. Us almost 19 years old. msystems almost 18 years old, that share a common vision and that together create a very very unique and very powerful company. And of course I’ll summarize.

[Slide 6] So, moving to 2006, really outstanding performance. Judy will go over the financials. This has definitely been the best year in our history. Particularly the 4h quarter was just phenomenal. Fab 3 played a major role in that. We were able to ramp it extremely effectively. Very excellent yields. Really increase our supply base and allow ourselves to capture market share and really do phenomenally well. Randir is going to cover that in his presentation.

The investment in mobile in handsets which was started 5 years ago really began to pay off in 2006. We think it is just very very early and we just came back from 3GSM and again having a combined team, msystems very strong in embedded flash and SanDisk on the mobile card and iNAND. That combination now when we talk to any customer, beit the top ten handset manufacturers and all the MNOs, really see the power of SanDisk.

Frankly that market if you don’t have very strong manufacturing capacity to backup your supply, their volumes are so huge. Their requirements are so immense that really, we’ve taken msystems major weakness and have eliminated it as a weakness.

We’ll talk about global channel expansion. Brand awareness. Greg is going to cover that in his presentation. Yoram of course is going to cover the handset business and the excitement (?) that we see there. Kate on the content side and Daniel on the USB and the MP3 is going to cover the innovation and the new products that we’ll be seeing and our strategy over there. Sanjay is of course going to cover the team and really the tremendous execution that we had in 2006 and how we are organizing ourselves moving forward. Our organization is very very focused on the business at hand.

Basically what is happening is that SanDisk is really transforming itself from a very strong semiconductor-based company, from specialization in flash memory, flash storage really, into a very broad-based global consumer electronics company. And that has very very major implications to the way we position ourselves and the way we think of ourselves and our product (?) strategy going forward.

In the big picture, we are in the midst of a digital revolution which is not news to any of you, but we feel that mobile flash, this kind of flash that we have pioneered over the last 15(?) years is an enabling technology. Its a disruptive technology. It is a basic technology in every kind of mobile portable application plus it is becoming on center stage. This is really the most exciting times in (?) in portable devices and we feel that this is going to be disruptive to the existing order.

Really who would have thought that Apple 4 years ago would be a premier consumer electronics company and that we would be outpacing Sony Walkman in MP3 players. So it is disruptive and we love disruption. Throughout our career, through the last 18 to 19 years we have been extremely good at calling trends 3, 4, 5 years ahead of the market, ahead of the competition. It is a tradition for us and we believe that the current situation is going to work very much in our favor.

On the technology front we pioneered the MLC. Now the market has really moved in that direction. The next step is x3, three bits per cell. x4 four bits per cell. 3D which is really going beyond NAND and I will talk some more about that 3 dimensional memory and of course continuing at a very rapid pace in very sophisticated controllers, systems and industry formats. So the world is really moving in our direction and we’ll see some of the things that our competitors are doing and basically they are emulating our model and moving very much in our direction.

No question that globalization, the rise of the new geographies, China, India, Russia, South America. We are very well positioned. There is a huge opportunity for SanDisk and we are going to be talking some more about that today.

Handsets are clearly the hot growth market. 1.2B units this year and the trend is very very much towards the ultimate converging device, the MP3 player, your communicator, your email, as well as your TV and video and you need storage and we have said that every year in the last 5 years. It is interesting that we always said that music is going to converge into phones and now Apple has acknowledged that iPhone really is the way to go.

So you will see the combination of msystems and SanDisk focused very much on the handset market. That creates a very unique and very powerful company on its own merits. If that is all we would get from the acquisition of msystems long term that would be a very strategic and smart move.

Vertical integration. I think that we are getting better at this all the time. Again, it is a very unique and very powerful model taking us all the way from the cell to the sell. Cell with a “c” to sell with an “s.” In 2006 with fab 3 ramping up, as rapidly as it is, it is helping us gain economies of scale. So on the one hand we are scaling down the technology and on the other hand we are scaling up our business. We are focused on both sides of this game.

IP. By the way, all of your seats are wired so that you can use your computers. It is a two way wire [Eli was starting to try to tell a joke, but thought better of it.] Just kidding any way.

Our IP, I believe, really is unmatched in the field, in these markets and I’ll discuss it. You can see for yourself.

The (strong) balance sheet that we have. We are constantly being asked why don’t you use all this cash to buy back your stock? You will see at the end of the day why it is a very wise strategy to have the position that we have, so we can in fact execute our long term strategy and use the confidence of our strong balance sheet to add to the future for a long time.

00:14:21 We have been relentlessly building our consumer value proposition starting from our core competency which is our IP, our core technology in flash storage, our MLC is now moving to x3 and x4, our 3D development activities, controllers, TrustedFlash and new applications of all of these technologies, the captive manufacturing that we have now with Toshiba, the Global Logistics that we are setting up, phenomenal global Channels, retail as well as OEM, and of course building the brand. This has been our core competency.

We have taken it first today to the area cards. This was really if you look over the last 10 to 15 years really. Starting with imaging. This is a maturing market, but has a very large installed base. We now have gaming which is a brand new market. GPS. Two years ago all GPS systems were disk drive based, microdrives. Today just about they are all flash based. It is a brand new market. Consumables you’ll hear from Greg about this is our one time programable archival storage system (?) that we think has tremendous potential in the future. So this is where we started.

We then move to mobile. In mobile I believe we are the premiere storage supplier now both in terms of removable and embedded. It is a very young market. As you will see from Yoram, huge growth ahead. We think that it will be a major major consumer of our technology and products. I believe that we have an unmatched profile in that market.

By the third market which we joined about 2 years ago. The audio market now moving to video and delivery of content. That market again is very very young. Huge global opportunity. You will hear from Daniel. We think that over the next two years we are going to move from really a follower to an innovator and a leader and we definitely are not content with the market share that we have gained, a pretty strong number 2. But we have pretty ambitious plans there and we think that we have a very good opportunity through innovation primarily and through the channel.

And the fourth area is computing. Computing of course is a very embryonic market. Interesting enough our first product was in fact a 2 1/2” solid state disk. This was in 1991. So the more things change, the more they stay the same. Its kind of a circle. Flash prices have finally come down to the point where it is becoming a real market. This space of flash is now really becoming disruptive. We believe over the next few years disk drives first in notebooks and basically we see that as a huge demand driver. But it has to be the right price.

Moving now to 1H:07. I’ll talk about NAND components, the current pricing situation which is very challenging for all players. There is nobody that is doing well today in the NAND business. Frankly what has happened in the last 90 days is NAND at the component level, particularly MLC has become commoditized. We have seen about a 50% price decline at the component level mostly from the DRAM suppliers. Primarily because basically they brought MLC out in a pretty high percentage of their output. They were having difficulty moving all that MLC because the controller manufacturers had difficulties absorbing the requirements of MLC. We have always said that MLC is a very difficult sell (?) at the performance and really developed together with the controller, and the market unfortunately confirmed that. So we ended up with suppliers that switched from 100% SLC to 70 to 80% MLC with a lot of inventory that was a very difficult thing to move. They tried to price MLC at basically 1/2 the price of SLC, but when 80% of your output is at half the price, basically that becomes the market price.

We have never priced our product based on MLC or SLC. We don’t sell a component. We don’t sell you a MLC component or SLC component. We sell you a card. The card has to meet the performance. Often SLC has the competitive [advantage] relative to MLC. We use of course MLC. Our controller which is very fast allows us to do so.

So we are where we are today and the damage is done. Also there were a lot of new capacity additions that came on board really in Q3 and Q4. Ourselves included. Our fab 3. But the combination of doubling the MBs/wafer, going from SLC to MLC. Going to 60 nm from 70 nm and ramping up 300 mm capacity. All of those temporarily created a glut in the market. There is no other way to call it. This is what we are dealing with today. The market is just unable to absorb so much excess capacity in such a short time and of course moving to Q1:07 we typically have a seasonally weak quarter.

Vista is off to a little bit of a slow start even though they of course are very good and very promising. But it is still relatively slow and that’s kind of slowed down the absorption of DRAM. I think that that is going to change.

We do believe very strongly that this market is self-correcting. I’ll show you a chart. Every time in the past, it has corrected itself. We are seeing encouraging signs that DRAM suppliers are shifting capacity from NAND back to DRAM. Unfortunately DRAM pricing has also not been created so that’s not good because then they don’t have any other place to run to. But we do think that with NAND components, the way that they are priced today, and I emphasize components because we do not sell components. We think that there is a big difference between selling a component and selling an extreme 3.0 card or an MP3 player or a Sansa Connect. At the component level if you recall two years ago or three years ago, or even one year ago, NAND was supposed to be the savior of the DRAM guys. DRAM was always a commodity and if you wanted to bring up new capacity and have a terrific GM, you went and built a NAND fab. Well that clearly is not the case today. If anything NAND is the most competitive and the most challenging by far the most difficult market to be a winner in. So we think that that by itself will slow down the new capacity add and will give some players pause before their next major investment.

The markets are elastic. We see no reason why they shouldn’t be the case. In fact we think that we’re going to go through a step function in the use of flash in terms of the MBs sold per device. And basically the fact that we have cut a year or so off the normal price reductions. Basically we just accelerated by a year the introductions of new markets. So by the end of the day, there is a silver lining in here and that is the acceleration. Because we are very early we believe in the creation of these markets and everything that accelerates them is good news though in the near term it hurts because it has tremendous pressure on margins. Again, I am not talking specifically about SanDisk, but about the whole industry and SanDisk is definitely part of that industry.

We’ve shown the charts of the industry. Basically a 43% annual ASP/MB decline trend line over the last 7 years has been remarkably true and there is an arrow there that I am showing you around 2001 which was the last major down cycle. That was about 4 quarters where the price decline was substantially below the 43% mark. If you look at 2006, you see that in fact the pricing indeed was significantly below the 43% price decline. In fact for us it was about 58%. For some of our competitors it was about 50%. And if you recall at the end of Q3, I told you that the industry cannot entertain another 60% in 2007 because there is no cost reduction that will allow you to do that. Particularly after going through 60% in one year, followed by another 60% in one year. Basically it has happened. It didn’t take a year for this to happen. It took 90 days. This is really the current situation. The bottom line.

However at this stage we do believe it will correct itself and that we will get back to above the line. The question is when? We really today don’t know. I can tell you that the current situation as far as cost structure, there is not much room to give in terms of cost relative to the current price at the component level in 2007 because not every fab is going to convert to 50 nm and you are not going to convert 100% of your output and your yields are not going to be all there all at once, so the combination of all those says that the current situation is very painful and that should be enough for a correction factor. But quite honestly nobody knows. Where we are today was not supposed to be. I have always said that guys like Samsung have such a large market share that they would suffer most from this kind of price move, but you see that we still have those kind of price moves. So not always does [pause] they are all kind of factors frankly it is very complex. Over the long term we believe that this will self correct.

For the second half of the year, these are our expectations. I admit that some of it is hopeful or wishful thinking but I will tell you that at the beginning of 2005 everybody said that for 2H:05 there will be too much capacity. Apple introduced the iPod nano and totally changed the picture. If they did the same this year with the iPod video frankly I think that you could have a repeat of 2005 2H. But I think there are a whole number of factors a couple if you will for the 2H.

I think that elasticity will kick in and will absorb a significant amount of flash. The handset market by sheer volume and by going to match the iPhone with 4 to 8 GB in either embedded or removable. We introduced a 4 GB microSD at 3GSM last week and an 8 GB iNAND. We have seen a tremendous amount of interest. So we think that cell phones are going to start moving up to 4 to 8 GB.

Vista in 2H should accelerate introduction. I think that it is inevitable that video will go from microdrives to flash, hopefully in 2H of this year, but certainly in the next 12 to 18 months.

SSDs are definitely getting a tremendous boost once we can move it from SLC to MLC. I think will see SSD becoming a significant accelerating the consumption of flash memory. My gut feel really from my experiences of the last 18 years is that price declines should really slow down if reason prevails or potentially flatten out. But this is a forward looking statement and my experience looking backwards rather than anything else.

As far as we are concerned, we have accepted the reality of the situation. We view this as a huge opportunity for us to improve our position in the market. We are very focussed on 56 nm conversion because we believe that that is really where the cost reductions are going to be major. We are are undertaking on early on substantial cost/expense reductions. Expense controls and so on. I’ll talk a little bit about that.

Innovation and new products are the key. We are going to grow our way out of this thing. And expanding our presence in global markets particularly outside the USA. [missed words] overseas.

00:28:47 As far as flash trends in the next 5 years, we believe that moving forward, 40 to 50% annual price reductions are sustainable over the next 4 to 5 years but will require absolute tremendous focus and frankly just the top tier players are going to be able to execute to that level. But it is certainly not continuous 60%. Continuous 60% over the next 4 to 5 years would be very unattractive. 40 to 50% is very attractive, but only if you can maintain leading edge cost structure.

We are expecting relatively smooth transitions to the 56 nm this year and to the 43 nm, I say 43 but it could be 40, 41, 42 or 43, along that range, the next generation that will really dominate manufacturing in 2008 2H and 2009. That is really very good, very positive.

Moving below 40 nm, the technology transitions become very very complex, very difficult. There are two contenders, the floating gate, FG, and the charge trapping flash. I will talk some more about that. Transitions at the 32 nm, again 35 to 32, will be very difficult because to the lithography and scaling. 22 nm and beyond that, even more difficult.

Because of the difficulty of the technology scaling we feel that it is a systems solution and again will become very critical and that is where x3, three bits per cell and x4, four bits per cell will become critical for competitiveness. In our assumptions, we are assuming that those technologies, for us, will become mainstream certainly in the next two to three years. And we are certainly putting a lot of effort into them.

200 mm NAND fabs are no longer competitive basically these price moves have made those 200 mm capacity not competitive except for the low densities. Low densities 128 MB, 256 MB 512 MB are still very important for MCPs but at the high densities 200 mm fabs can’t compete.

On the positive side, in the next 1 to 2 years we do believe capacities will grow dramatically. You are going to see a lot of applications store to 32 GBs up from 512 MBs to 2 GBs. That is going to be a huge change in the market.

And over the next 3- 5 years the cumulative effect of all these continuous cost reductions is going to be very dramatic, very disruptive and we believe that we will ultimately, the industry, will begin to displace DVDs and HDDs in any kind of mobile portable application. Certainly smart phones which are really going to start pushing out. Some of the notebook applications will all use flash memory. Many of the notebooks will use SSDs.

So pretty positive picture outlook.

00:32:13 In the current environment, we believe that our formidable channel strength, our competitive costs, and our balance sheet will allow us to weather the current down cycle and emerge stronger. Currently the longer this down cycle the stronger we will emerge out of it because we are continuing full steam on our strategic programs. It (?) will allow us to do so even though we are becoming very frugal and we are eliminating some programs. Definitely looking at synergies and avoiding duplication.

On March 1 at the end of this week, we are implementing an approximately 10% reduction in force across the company, salary freeze across the company, employees are due their annual pay raise in March and we are not going to do that, executives are going to take quite substantial pay cuts until the situation improves. Pretty draconian expense controls.

We are doing so because again we have no idea how long this thing is going to last. Hopefully it is going to start improving in 2H 2007 and be over before the 1H of 2008. I am not saying that is the case, but for full years planning we have to assume all kinds of possibilities.

Our margins I believe will remain under pressure through 2007. The history of this industry is not that prices want to go down, go up. I’m not even advocating that that is positive. I think that it would be very good and very healthy if the prices kept declining and allow the market to take advantage of this baseline

We believe absolutely that fab 3 and in 2008 and 2009, fab 4, are critical for executing our strategy. You cannot be a 4, 5, 6, 7, $8 B company in the next three years or so, buying components from another company. You can do that when you are a $500 M company, but the recprd of the $500 M companies that were buying from non-captive sources is that they are no longer around. You just cannot go into Nokia and quote them in Q3 pricing on embedded components when you don’t know what your costs are going to be in the first quarter. We know what our costs are going to be in Q3. For the kind of volumes that Nokia or MOT or Sony Ericsson or Samsung Mobile need. You got to have the ability to back up your quote.

Then of course audio/video and SSD, so its not like we are building capacity and then figuring out OK what are we going to do with all this. It is the other way around. We have customers that we believe will need the product and we will need to in place capacity. We are still pretty committed to our 70/30 model because we think long term that is the right model. We are today, not of course in the 70/30 because our fabs are ramping up, but long term. Even in 2H of this year we believe that under some pretty realistic scenarios, that we will become a major consumer of non-captive [flash] in 2H.

We will continue to invest through this period in the rapid transitions of technology because that is critical for lowering costs and infrastructure to support our growth in the years ahead. We will pursue growth opportunities not only in handsets but also in new markets for video, SSD, you will hear a lot about that today, and in the new geographies

00:35:08 Moving to technologies. So really in the near term, I’d say in the next 3 years or so, we believe there are really only two potential technologies. Both of them are NAND. One of them is a floating gate [FG] and one is a charge trapping flash [CTF]. They are both NAND. In one case you trap charge in a floating gate. This technology has been around for 35 years and if you know how to manage it, it is basically very very well known. All of its difficulties, all of its idiosyncrasies are well understood and we certainly understand them.

Charge trapping flash is basically eliminate the floating gate because of the interference between adjacent floating gates you eliminate that and of course you are into new territory with no prior record and [missed words], basically which risk do you want to take?

We believe FG is scalable to around 20 nm from what we see today. This is new. There’s been a lot of people who say that FG was not scalable below 50 nm. I don’t know, based on what, but this is not clearly not the case. We are pretty confident that we can scale the technology down to 20 nm. It is not going to be easy, but nothing is easy. That’s the beauty of this thing.

For us, and for the industry, we believe that X3 will become mainstream by 2009. Some sooner and for some later. For us, we are working on it and expect to have product in 2008 and by 2009 we expect that this will become a significant portion of our output.

x4 is very sophisticated and a difficult challenging technology. msystems has been working on it for the last 4 to 5 years. In fact when we acquired them they already had working systems on 70 nm, x4 with an x4 controller. We think that that technology needs to move to a leading edge technology and that is really what we are working on. We expect to start seeing that on a more advanced technology than 70 nm in 2008. It will become over the next 5 years, really a very very important part of the cost reduction. Initially we expect to target it to audio/visual markets.

CTF NAND, primarily pursued by Samsung and Hynix for going below 40 nm. And again the main reason is because Samsung has had significant difficulties managing the interference between one floating gate and adjacent floating gate as they get closer together as you scale you find a more serious problem. We’ve said ten years ago that problem can not be solved at the chip level, at the [missed word] level. At the system level, you need to have a controller that understands these interferences and works around them and compensates for them. That is what has allowed us to scale. We believe and will allow the technology to continue to scale.

Any way, CTF is a planar structure. It has definitely scaling advantages. A planar structure is always easier to manufacture. But it is an unknown, it has its own risks. The biggest unknown is how will it handle x3 and x4. If it can only do 2 bits per cell, and FG can go to 3 or 4 bits/cell then clearly CTF will be at a disadvantage.

39:00 Now 3D R/W which is the technology 3 dimensional layered memory which we acquired with Matrix Semiconductor. We have seen significant increased development activity in the industry in basic 3D because of the recognition that eventually that is one of the most likely ways to go. We think that that has long term potential to disrupt and displace NAND where NAND comes to the end of its road and disk drives as well, we need lead to the develop the read/write switching mechanism. There is a huge amount of work that is going on in the industry and internally and I am confident that over the next 3 years or so the technology solution will become available.

NROM. NROM quadbit pioneered by Saifun, my good friend Boaz Eitan, is a very competitive technology with NOR. Their entire premise was we are going to be scalable below 50 nm and NAND flash is not going to be scalable below [50 nm]. Both premises are wrong [?]. They have never proven that they can be scalable below 60 nm and I believe we don’t have any issues. We have challenges sure, but we will be able to scale our technology. So frankly we don’t see them as a threat to either NAND. Frankly the entire industry is not moving in that direction. All the forces out there are very much pushing NAND.

Phase change memory [PCM], MRAM, Nanotubes and so on. There has been a lot of progress in PCM. These are primarily technologies that are focused on replacing NOR or DRAM or SRAM and really don’t have the cost structure to displace NAND.

And all of these frankly require system level solutions.

[Slide 16] As far as competition, Samsung of course is the big one, the big competitor. Their new strategy what they call fusion, which is flash plus logic plus software, basically is selling cards instead of selling components. It moves towards our cards and system model.

Of course [Samsung is] a very formidable manufacturing machine. I would say probably the best manufacturer in the world. They have taken surprisingly long to move to MLC again as I said, because it is a system solution.

They have been a very positive force. Their president and CEO [of semiconductor business) , Dr Hwang is a visionary in driving new markets and using his power, their power, in manufacturing and pricing to accelerate markets. The iPod nano really was driven by Samsung through their pricing to Apple. SSDs even though they are definitely not the first. Msystems is in their 5th generation SSD. Samsung is pretty committed to making a major market with SSD. And that’s going to come.

They are very committed to a lot of r&d in all kinds of areas: NOR replacement, DRAM replacement, NAND replacement, CTF, PCM, 3D and so on. So you have to be very careful when you read about Samsung announced about this and Samsung announced about that. They do a lot of that. They have probably about, no kidding, 25 or 30 different development programs which is unmatched by anybody else. You have to be careful not to react too much to their announcements.

They do sell components: MCP, oneNAND which is basically equivalent to our MDOC, moviNAND which is equivalent to iNAND, cards: MMC really didn’t fly, SD, USB flash drives and SSDs. A very formidable competitor but also a very positive force in creating new markets.

Toshiba, excellent technology, very good partner. Excellent IP. Very focussed on NAND. We think that they (?) are very important. They sell mostly components, MCPs. cards and USB.

[Slide 17] Hynix, very strong manufacturing execution down to 60 nm. Really remarkable, however they need to catch up in 300 mm NAND production. Most of their capacity [200mm] is going to be problematic as far as competitiveness and they recognize it. They are very committed to DRAM. They are the #2 DRAM supplier and they sell components and MCPs.

Micron has a very challenging strategy. Basically they want to be a major player in DRAM, NAND, and CMOS Sensors. In reality they lost their DRAM share, they said that was part of the plan, and NAND has never been profitable for them. I am a firm believer in focus. I think you should try too [pause]. I mean we have hundreds and hundreds of engineers. Toshiba the same. Samsung the same. Focussing really on just NAND and promoting it and accelerating it. Very very difficult to do NAND and DRAM at the same time [and sensors].

They are bringing up a lot of 300 mm capacity in the second half and 2008 and they have bought Lexar so they can be in the retail channel. I expect that they will be a strong competitor. They are scruffy (?) and a very good manufacturing operation. And we’ll see. Certainly we don’t take them lightly at all.

Intel on the other hand has exited from the X-Scale and has indicated their desire to get out of their NOR flash business. I think that they should rethink their large scale investments in captive NAND. This is not what they were thinking, I don’t believe, when they entered this market. And they themselves are under margin pressure in their core business. They of course are very focused on computing applications for NAND, Robson and so on.

[Slide 18] SD Micro announced plans to spin-off their NOR and NAND. They were going to be a major player through their Hynix partnership. So far this has not panned out for them

Renesas plan indeed on exiting the market.

Qimonda decided to drop NROM and not to enter the market.

Spansion is focussed very much on the low end.

Third party assemblers and resellers, I don’t believe really have a workable model long term and particularly now that Samsung is selling cards, SD cards. That basically does out all the Taiwanese repackagers and control manufacturers.

[Slide 19] Moving now to IP. I’m running late. I’m sorry. We continue to grow very substantially the quality, the depth and the number of our patents as you can see from this chart. Everything that we have today royalty-wise is derived basically from a very small number of patents in the early years. In 1988 and 1993 and you can see there is a huge increase in the inventions here and these are not just numbers, these are not quantitative [missed word] but very qualitative.

[Slide 20] So our patent portfolio is strong. It is growing. It is becoming evermore powerful. Very deep. Very fundamental in the flash storage. Growing importance of second generation NAND flash patents. In the past eight years we have become ourselves, great experts in NAND, NAND MLC, cards, industry formats. Now with the coming of x4 and 3D, very fundamental technology that is covered by pretty fundamental patents. The growing importance of systems, cards, formats and IP.

The are two companies that invented this field: msystems and SanDisk and we are now driving common strategies and common platform.

Currently many people are very conscious of 2009 and 2014, but frankly many of our patents extend well beyond the NAND era, when there will be no more NAND in fact.

Also in the area of applications USBTV, megaSim. Actually applications in the market. Also in the packaging area which is becoming very very important. Especially in the handsets.

[Slide 21] In the licensing of IP, in addition to the flash memory IP that we’ve been very active on, we plan to enforce our controller IP, systems, cards, formats IP in the years ahead. We are currently engaged in serious licensing discussions and we hope to be able to announce some agreements this year [Hynix].

In some markets and in some technologies we may elect to avoid licensing and stay proprietary. We have reached the scale where we can in fact drive some markets on our own as a sole source supplier. And there are applications where we do not see the need to license to our competitors.

We certainly expect to have intense negotiations leading to August 2009. Renewal of our core patent license agreement to Samsung. The two companies are very large and we have vested interests, both of us in maintaining stable markets and not to disrupt the markets which is what our customers [missed words]. But it will be difficult at times because there is a lot of money involved. We will do our best to get through that period, but this is just one event and we think that there is a lot of things going on.

Overall we are very optimistic about our IP, although at times it is bumpy and at times it is unpredictable. Some times our strategy at times turns out to be not so. The outlook for our future licensing program, we believe, is good. And definitely beyond 2009.

[Slide 22] As far as msystems’ acquisition, we are very pleased with that. We think that in the handsets I said already, we have created a major powerhouse. The two teams, msystems and SanDisk are now one team under Yoram. That integration is complete and is working beautifully.

The x4 know-how and the IP is extremely valuable. There is a very significant team and knowledge base and is now part of SanDisk’s technology team. Their knowledge of embedded systems, USB flash drives and SSD is really a jump start for us. In some cases, SSDs. We will be able to take advantage of our captive supply to leverage their existing business. That will really start kicking in in the 2H of this year.

They are phenomenally innovative. Innovation that I see from mystems is just so energizing. Their people are infusing the whole of SanDisk with a tremendous amount of energy and excitement. In fact, I’m meeting this afternoon with [pause] Sanjay and Yoram and I have spent quite a bit of time in Israel because this is a huge asset for us and we really want to make sure that we manage it properly.

The private label business basically after the acquisition, we looked at it. We could see that the [missed words] that we are spending in that relatively low margin business is better spent on promoting the SanDisk brand that is behind us. It has near term negative implications but long term it is the right decision for the company. Their staffing is relatively high relative to the revenue base and there are some duplications and synergies and reductions hence forth will be a little bit more on the msystems side than the SanDisk side even though you know we are not going to apply it uniformly. But we are not going to cut very heavily. We really value very much their capabilities.

I expect that by midyear this year I expect that the integration will be basically behind us.

51:45 Matrix 3D Status

Matrix has been with us for over a year. Last year they did $76M in sales, mostly in gaming. Still a relatively a relatively small customer base. The product is very good and they are shipping a lot of units. $76M up from $25M (in 2005). We said we expect $60M to $90M so we came in in the middle.

This year they will move from 130 nm to 80 nm. That is still not cost effective because of the NAND pricing. In parallel we are developing the 45 nm. We believe that that node, which is next year and 2009, they will become very cost effective.

This is still a one time programmable, but we expect very significant niche opportunities for OTP in consumables, content distribution and archival storage.

The big prize there of course would be a breakthrough on the read/write. If we can achieve that, we believe that you can look at 3D R/W as basically somewhere between x4 and x8 memory and very scalable. On paper at least it should be more scalable than any other semiconductor technology. It is two terminal device. If that transpires, and definitely we are optimistic and working in that direction, then we could have on our hands a true disruptor of both NAND/MLC, including x3 and x4 and HDDs.

This could could take maybe 5, 6, 7 years. We are going to be around here at that time and we want to bear the fruits of it. We have over a hundred engineers. Very very few people have left, so we have a very strong integrated technology and manufacturing team.

Today we are supplying the current customers from a foundry (likely Taiwan Semiconductor) but as the volume increases we expect we will need to emulate our 70/30 with captive supply. That’s what we have in 2008, a decision.

So in summary, 2006 was definitely our best year ever. 2007 is off to an unusually challenging start. A little reminiscent of 2001 on the competition side we expect consolidation and alliances. It is just inevitable as the scale of this business grows. If you don’t have 15 to 20% market share then you are not going to be able to stay.

So consolidation is going to be very critical. On the technology front we feel very good. We feel that we are staying right on the technology edge. The pace of change is breathtaking. On the IP, very complex, but we have a positive long-term outlook. msystems and Matrix, very good strategic moves.

Overall very bullish about our long term outlook. Sanjay is going to talk about demand creation. Innovations are key. You will see a lot of the innovations here today. Very disruptive to the existing order. I think that the world three years from now will look very different as far as the consumer powerhouses. We certainly aim to be one of the key guys. Definitely shifting our model from a semiconductor based company to really a consumer powerhouse that has a very strong semiconductor foundation.

Basically SanDisk is a unique company. I don’t believe that there is any other company out there that has our current business model or will have our current business model and that is what makes this company very exciting for us. It is definitely going to be driven by economies of scale and very large volumes, globalization and brand.

So now I want to move to demand creation and I want to invite Sanjay our COO and president. He’s the guy that makes things tick here on a day-to-day basis. Thank you.



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