2008.01.28 SanDisk Q4 Conference Call

28 January 2008 SanDisk Q4 Conference Call

Eli Harari, Chairman of the Board, and CEO
Judy Bruner, Executive Vice President, and Administration & CFO
Sanjay Mehrotra, President, and COO
Lori Barker Padon, Senior Director of IR

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Lori Barker, Senior Director of Investor Relations:  Thank you.  Good afternoon and welcome to the financial teleconference for SanDisk Corporation for the fourth quarter of 2007.  I’m Lori Barker, SanDisk’s Senior Director of Investor Relations.  Joining me is Dr. Eli Harari, Chairman and CEO of SanDisk, Sanjay Mehrotra, President and COO, and Judy Bruner, Executive Vice President of Administration and CFO.

The agenda for today’s teleconference is as follows: Eli will start with an update on the industry and SanDisk’s overall strategy, Sanjay will follow with operational and business updates and Judy will end with our fourth quarter financial results and future guidance.  We will conclude the teleconference with your questions for Eli, Sanjay and Judy.

[Safe Harbor]

Now I’d like to turn the call over to our CEO, Eli Harari.

Eli Harari, Chairman and Chief Executive Officer:  Thank you Lori.

We emerged from a challenging 2007 as a stronger SanDisk.  Despite a 60% price decline for the year we were able to increase annual revenues by 20% and improve non-GAAP operating margins throughout the year from 6% in the first quarter to 18% in Q4.  We successfully completed the integration of our msystems acquisition, we grew our international sales, and we expanded our mobile business to be our number one revenue contributor.  Our investments in leading-edge captive flash capacity and technology went well during the year and we believe we are positioned to deliver a highly competitive cost structure in 2008.

Now I want to share with you our thoughts for 2008.  The beginning of 2008 is looking a lot like the beginning of 2007, with excess supply pressuring pricing.  The current uncertainties in the U.S. economy were felt in slower Q4 holiday sales and could well be a factor in the first quarter.  However, there are also strong catalysts for growth in 2008, particularly in mobile storage and in our international sales.  Flash has become a key ingredient in the mobile consumer revolution, and this should continue to fuel rapid growth in demand for our products in the coming years.  The booming global mobile handset market has become our #1 driver for growth in 2008 and beyond.  This market is young and healthy and we believe that it has the capacity to soak up a disproportionately large percentage of the new Flash capacity coming on stream in 2008.  International sales already account for the majority of our sales, and we expect international growth in 2008 to outpace the U.S. growth, with APAC (Asia/Pacific) getting an extra boost from the Summer Olympics.

Our OEM revenues have become a significant revenue contributor and demand in this channel appears healthy for 2008.

On the supply outlook, some of the factors that weighed on 2007 are fading in 2008.  For example, 200 millimeter (mm) fab capacity is becoming far less relevant and DRAM to NAND capacity conversions are impractical for the forty x (4x, ranging from 48nm to 41 nm) nanometer (nm) NAND technology generation.  In 2008 the major suppliers are counting on technology transitions to 4x nanometer NAND MLC.  This technology node is expected to be more challenging than previous generations and this may slow down the rate of industry wide capacity additions in the second half of 2008.  Current NAND MLC component pricing is aggressive, and this is dragging down industry-wide profitability.  Notwithstanding continuing cost reductions, margin pressures will persist until industry-wide demand comes into balance with supply, which we currently expect will occur later in 2008.  For ourselves, we expect our captive supply, including the ramping output from Fab 4, to be insufficient to meet our customers’ projected demand in the second half, which will require us to continue supplementing with non-captive purchases.

At our coming annual analyst conference on February 25th, we plan to discuss our business in more detail.  For now, I can say that the 2008 guidance that you will hear today from Judy reflects our current near-term caution, given the broader economic uncertainties.  Although we are tightening our spending growth, we plan to continue to invest for the long-term in strategic technology, innovative products, new markets and our brand.  We are managing for the-long term, and aim to emerge stronger relative to competition.  We believe our opportunity for the future is huge, and we remain optimistic and energized.

I will now turn it over to Sanjay.

Sanjay Mehrotra, President and Chief Operating Officer: Thank you, Eli.  Good afternoon everyone.

Mobile business was SanDisk’s highlight of 2007 and our largest revenue generator by end market.  Accounting for 35% of our total revenue, mobile product unit sales more than doubled year-over-year led by continued strength in our microSD cards in the retail and OEM channels.  In addition, the average capacity of our mobile cards nearly doubled due to increasing storage requirements in mobile phones, and we began shipments of our high capacity 8GB microSD and 8GB Memory Stick Micro M2 mobile cards.  In Q4 alone, we sold a record 51 million mobile units.

Unit sales of our imaging cards grew nicely in 2007, in part due to resurgence in the digital camera market, and our high-performance Extreme and Ultra card unit sales nearly doubled year-over-year.  We made substantial gains in the portable navigation device market as sales of iNAND, our embedded flash product line, grew significantly in the fourth quarter.  In our audio/video business, our strategy of focusing on the sub-$100 price range was successful as we saw strong unit sales of Sansa Clip MP3 players during the holiday season.

On the SSD front, we continue to see this as a major new growth market for us in future years.  I am pleased to announce that HP will include our 16 Gigabyte SSDs in the dc7800 line of business desktop personal computers.  HP also has indicated that it expects to incorporate higher capacity SSDs in the future.  The significance of this design win is that it represents early adoption of SSD for local storage in business desktop applications working in tandem with corporate central servers.  The benefits are significant power savings, faster boot-up and immunity from disk crashes.  As for our internal development of MLC based SSD, we have shifted our efforts to the 43nm technology since the 56nm technology node will be retired from production in early 2009.  We now expect to sample 43nm MLC SSD products late in 2008.

Our international growth strategy began to pay off in 2007.  In EMEA, we outgrew the market in both cards and USB drives and our combined retail market share in that region grew by about 4 percentage points year-over-year through November.  In the highly-fragmented APAC market, our market share continued to grow throughout 2007, and we currently hold the number one retail market share for cards and USB drives combined, according to GFK, an independent market research firm.  In Japan, we grew our share and achieved a clear number one position against entrenched competitors.  Our strategy of gaining new international customers on a country by country basis worked well in 2007 and this will remain a priority for us in 2008.

In the fourth quarter we implemented product focused advertising campaigns.  For example, we initiated a “Go Take Pictures” campaign for our imaging products in select U.S. markets and in the U.K., France, and Germany.  We also kicked off a “Wake Up Your Phone” campaign to educate consumers about what they can do with a SanDisk mobile card in their phones.  Targeted initiatives such as the Ducati campaign and TV advertising for the Sansa Shaker reflect our commitment to further enhance the SanDisk brand.

From technology and operations standpoint, we achieved consistent excellent yields on our 56nm manufacturing technology and Fab4 continued to ramp well.  During the quarter, our overall cost declines exceeded ASP declines on a per megabyte basis with 56nm production exceeding two thirds of our quarterly bit production.  We are on track to begin the production of 3 bits/cell on 56nm in the March/April timeframe and 43nm 2 bits/cell technology in the Q2 time frame.
Ramping these technologies will be a major focus in 2008 as we continue to drive aggressive memory manufacturing cost reductions  Furthermore, we effectively leveraged our Shanghai assembly and test factory for developing industry leading nine die stack assembly technology which we utilized to build our 8GB microSD and 8GB Memory Stick Micro cards.

As Eli mentioned earlier, tremendous growth lies ahead for SanDisk in the mobile market. Furthermore, there are other new exciting opportunities as well such as SSDs, new media players, smart Cruzer drives, and video storage in an increasing number of digital cameras and flash-based digital camcorders.  These will be huge drivers of demand for high-capacity flash storage.  The team at SanDisk is focused on maximizing our opportunity in these markets and growing our business profitably in 2008 and beyond.

I will now turn the call to Judy.

Judy Bruner, Executive Vice President, Administration and CFO: Thank you Sanjay and Eli and good afternoon everyone.

Our performance in Q4 demonstrated continued improvement in gross margin and operating margin, delivering a respectable 2007 with 20% revenue growth and 13% non-GAAP operating margin.

Our fourth quarter revenue performance of $1.25 billion was in line with our expectations, although it reflected lower price decline and lower megabyte growth than we had forecasted.  The lower sequential price decline of 11% was primarily the result of deferred pricing actions in U.S. retail and a favorable mix of product sales.  A larger percentage of our sales came from products that carry a higher than average ASP per megabyte, such as high performance cards.  We believe our sequential megabyte growth of 37%, below the 45-60% guidance we provided last quarter, was primarily the result of weak U.S. consumer spending during the holiday period and somewhat tight supply in the first half of the quarter, which limited our ability to meet demand for some customers.

Overall, our Q4 retail revenue was $727 million or 65% of our product revenue. Q4 retail revenue grew 20% sequentially and 2% compared to Q4 of 2006.  The year-over-year retail growth of 2% stems from a steep annual decline in ASP per megabyte coupled with weaker than normal year-over-year growth in U.S. unit sales, offset by very strong international unit sales growth.  On a year-over-year basis, fourth quarter U.S. retail revenue was down 13% and international retail revenue was up 32%.

Our fourth quarter OEM revenue of $391 million grew 26% sequentially driven by microSD and iNand products sold to mobile handset vendors.  We also saw nice sequential growth in the GPS market, and in the industrial market.  Compared to the fourth quarter of 2006, OEM revenue grew 7%, with strong growth in the Mobile market partially offset by our decision to de-emphasize sales of white label USB drives and exit the Twinsys joint venture.

For the full year of 2007, our revenue grew 20%, with product revenue up 18% and license and royalty revenue up 36%.  Product revenue for the year reflected unit growth of 75%, megabyte growth of 190% and ASP per megabyte decline of 60%.  Our 2007 retail revenue grew 9% over 2006, with very robust international retail growth offsetting a slight decline in North America retail revenue.  Our OEM revenue for the full year 2007 grew by 33% over 2006.

License and royalty revenue for the fourth quarter of $128 million was higher than we had projected primarily due to higher than forecasted licensee pricing in the third quarter.  For the full year, our license and royalty revenue of $450 million was 12% of our total revenue, increasing from 10% of revenue in 2006 largely due to the addition of a new licensee.

Q4 non-GAAP product gross margin improved to 29.7% from 26.4% in Q3.  This improvement was driven by an increased proportion of 56nm memory in our revenue and relatively modest price decline, partially offset by higher Fab 4 start- up costs.  Our shipments for Q4 and for the full year included approximately 5% non-captive memory.

Non-GAAP operating expenses of $237 million were up $39 million sequentially with $34 million of the increase in sales and marketing, primarily due to seasonal advertising and merchandising.

Non-GAAP operating income for Q4 of $223 million was up 37% from the third quarter and at 17.9% of revenue was well within our 15-20% target financial model.  For the full year 2007, non-GAAP operating income was $507 million, or 13.0% of revenue.  While operating income was lower in 2007 than in 2006, we believe we performed well in a year of 60% price decline, continuing to invest in technology, products and channel footprint, and we believe we improved our competitive position.

Our Other Income for Q4 was $18 million, which is net of a $10 million impairment charge for the estimated cost to SanDisk of winding down our investment in the 200mm FlashVision joint venture.  This reflects our expectation that we will receive less than our investment book value as we close out our position in FlashVision.

Our non-GAAP tax rate was 32.9% for Q4 and 34.2% for the year, bringing non-GAAP EPS to $0.69 for Q4 and $1.73 for 2007.

On the balance sheet, cash and short and long-term investments decreased sequentially by $334 million to a total of $2.9 billion.  Cash flow from operations was a positive $149 million for Q4, and was offset by investments of $202 million in repurchasing our shares, $203 million in Fab 3 and Fab 4, and $79 million in capital equipment.  For the full year, we are pleased that our cash flow from operations was $653 million, up from $598 million in 2006.

Accounts receivable and inventory both increased sequentially very slightly in dollars, and both came down in terms of days of sales.  Accounts receivable ended the year at 38 days of sales and inventory was 64 days of sales.  Channel inventory ended the year at 6 weeks, the same level that existed at the end of 2006.

In summary for 2007, it was clearly a challenging year for SanDisk, but we believe that we executed very well, staying the course on our strategic investments in technology, products and geographic expansion, while at the same time proactively reducing expenses when necessary.  I believe our balanced financial management contributed to improving our competitive position in terms of both market share and cost advantage.  As we enter 2008, there are similarities to early 2007 in terms of the NAND supply/demand balance and the impact this has on pricing.  And at the same time, the macroeconomic environment is uncertain.  As a result, we are cautious in our outlook, however, we believe that we can use these challenging times to our advantage as we did in 2007, and we are focused on delivering 2008 performance that is an improvement over 2007.

I’ll start with our outlook for the first quarter and then provide a summary for the year.  We are forecasting first quarter total revenue, including both product revenue and license and royalty revenue, to be between $775 million and $875 million, compared to the $786 million reported in Q1 of 2007, which included $53 million from the consolidation of the Twinsys joint venture.  This Q1 revenue estimate reflects a sequential decline similar to the decline experienced last year. Within this total revenue, we expect license & royalty revenue to be between $115 million and $125 million.  We expect product revenue to reflect fairly aggressive first quarter price declines and a sequential decline in megabytes sold.

We expect first quarter non-GAAP product gross margin to be in the range of 23% to 26%, with price declines and lower volumes being partially mitigated by continued expansion of 56nm memory mix.  Non-GAAP operating expenses are forecasted at $215 to $220 million in Q1, and interest income is forecasted to be approximately $25 million.  We forecast our non-GAAP tax rate for 2008 at approximately 34%.  Q1 charges to our GAAP results for stock compensation and amortization of acquisition related intangibles are expected to be similar to the Q4 levels.  On the balance sheet, we expect inventory dollars to increase and Q1 investments in the Flash joint ventures to be less than $50 million.

Now I’ll provide a few comments on the full year 2008.  We are currently forecasting total revenue growth of 15% to 25%.  This assumes continued softness in consumer demand, but continued progress in growing our international market share and continued momentum in the mobile market.  We expect both our megabyte growth and price declines to be more moderate in 2008 than in 2007.  Within our total revenue forecast, we expect license and royalty revenue to be between $450 million and $500 million.  Non-GAAP product gross margin for 2008 is expected to be 24% to 28%, compared to 24% in 2007, and this assumes usage of 5-10% non-captive memory.  We have significantly slowed down hiring based on our assessment of the current NAND pricing environment and worldwide economic conditions.  We will actively manage our expense profile based upon market conditions and the key investments required for the future.  Balancing all of these factors, we are forecasting our full year non-GAAP operating margin at 13- 16%, compared to 13% in 2007.

We will now open the call for your questions.

Q&A

Vijay Rakesh, Oppenheimer: Hi guys. Just a couple of questions on the quarter. You had said in your press release that eight companies have signed up for the cross-license agreements. I just want to get a little bit more color on how that’s going and who they are.

Eli Harari: We have eight companies so far signing. We are in serious negotiations with a number of other of the companies that have been cited by us. I think we made one press announcement concerning the cross-license that we signed with PNY. We have not made separate announcements for the other cross-licenses that were signed.

Vijay Rakesh, Oppenheimer: And do you think this will be — these will be multi-year agreements, right?

Eli Harari: Yes, these are multi-year agreements.

Vijay Rakesh, Oppenheimer: Ok, that’s good. And going back to the 43nm and the X3, do you think 43nm could get to 10% of your output by Q3, since you are already starting it in, late Q2, let’s say?

Sanjay Mehrotra: The 40nm production output will start in the Q2 timeframe and in terms of the ramp up of bit production output, it will follow a similar ramp as 56nm technology did in 2007. So in the Q3 timeframe, it will be more than 10% and will continue to increase in Q4 as well.

Vijay Rakesh, Oppenheimer: Got it. So somewhere in the 10%, 15% in Q3 and probably going higher in Q4 is the way to look at it?

Sanjay Mehrotra: You know, as I said, we expect it to be similar to 56nm ramp-up during 2007. 56nm output in Q4 was about two-thirds of our bit production. 43nm will be about the same in Q4 2008 timeframe.

Vijay Rakesh – Oppenheimer: Ok. Thanks for the clarity. On x3, how should we be looking at that?

Sanjay Mehrotra: The majority of our bit production in 2008, a vast majority of that will be 43nm, will be two bit per cell technology. I take that back, I didn’t mean to say 43nm. I meant to say it will be two bit per cell technology in terms of bit production in 2008.

And with respect to three bit per cell, as we have said before, we have that product in 56nm. We will start that production output in the March/April timeframe. Since 43nm two bit per cell technology is lower cost than 56-nanometer three bit per cell, the vast majority of our output in 2008 will remain two bit per cell.

So three bit per cell will constitute a relatively small percentage of our output in 2008. But in 2009 timeframe, we’ll be applying three bit per cell technology to 43-nanometer and that’s when we expect to significantly increase three bit per cell contribution to our total bit output.

Vijay Rakesh, Oppenheimer: Ok. One last question. You said your captive supply of Fab4 was insufficient to meet demand. Do you think non-captive mix goes back to 15%, 20% in ’08 or do you think you will still keep it in the 10%, under range in 2008? That should be it.

Judy Bruner: Actually, I said in my prepared remarks that we’re assuming that we’ll be about 5 to 10% non-captive in 2008.

Vijay Rakesh, Oppenheimer: Ok, great. Thanks a lot, guys. Good quarter.

Paul Coster, J.P. Morgan: Can you just help us understand what lead indicators you are looking at to underpin your guidance? You mentioned for instance the six weeks of channel inventory. That doesn’t sound very excessive. Many of us would be looking at some of the wholesale NAND prices. They don’t look like they are deteriorating rapidly at this instance, so what is it that you are seeing that is causing you to be so conservative about the first half guidance?

Judy Bruner: Paul, actually our guidance for revenue in the first quarter, if you compare it to the fourth quarter, is a similar type of Q4-to-Q1 decline as we experienced last year but some of the leading indicators or indicators that we look at are of course we look at sell-through data. We get weekly sell-through data from all of our key customers around the world and we look at the pricing environment in terms of competitive pricing in the marketplace. So those are the key things that we look at.

Paul Coster, J.P. Morgan: Do you think that NAND-based memory has just kind of run out of steam, or is this truly something to do with people’s pocketbooks? Can you just sort of help us understand what’s behind this?

Eli Harari: I’m sorry, Paul. What are you saying, NAND has run out of steam?

Paul Coster, J.P. Morgan: Well, I’m sure that you don’t agree with that but what I’m trying to figure out is why are things slowing down? Is it because the consumer is just not turning up in retail at all, or are they turning to other products? What is going on there, do you think?

Judy Bruner: We think there is some caution right now in terms of consumer buying habits in the marketplace and that has contributed to our guidance for the first quarter. But again, the overall decline from Q4 to Q1 in our guidance is similar to the decline Q4 to Q1 last year.

Eli Harari: Let me say the average price of our products now is well within the discretionary spending abilities of the U.S. and EMEA (Europe, Middle East, Africa) consumers, so that’s not the issue. Now, if people don’t show up to the store to buy the big screen television, yeah that will impact the purchases of memory cards. But I think there is certainly uncertainty here in the U.S. market. We have not seen any signs so far of leakage into EMEA or Asia-Pacific. We do think there will be a pick-up from Asia-Pacific for the Olympics, and we think that this is, you know, there is uncertainty. People don’t know about the package, the economy (?) package. Hopefully that will start getting back consumers coming back into the market.

But overall, we think that there are healthy markets out there. The cell-phone market is a global market and the demand there continues strong. We think that we have a tremendous upside in international markets as far as market share. The OEM business is very healthy.

So overall [pause] and you know, price elasticity eventually kicks in. Pricing now is extremely attractive and I think people are going to start moving to the 2 and 4GB capacity. And in fact phone applications, video applications, as well as music driving the capacity requirements to the 4, 8, and 16GB.

Paul Coster, J.P. Morgan: Ok, my last question: are you still supply constrained going into this first quarter?

Sanjay Mehrotra: At this point, we are not supply constrained in the first quarter. During the first half of Q4, we had certain supply constraints. We resolved those in the second half and we are for Q1 in reasonable balance with respect to our demand requirements, and the supply that we have to supply to that demand.

Paul Coster: J.P. Morgan: Thank you.

Harlan Sur, Morgan Stanley: Thank you. Good afternoon. Just curious, on the 43nm technology, I know that you are going to start to ramp in Q2 but I’m just wanting to know where are yields and are defect densities now relative to your targets?

Sanjay Mehrotra: Our results on 43nm at this stage look pretty encouraging but as always, as you ramp up production, that’s when you really find out all the issues and we are at this point on plan with our expectations for 43nm technology.

Eli Harari: I’d say one other thing, a very important factor, and that is that we, together with Toshiba, decided to move to immersion lithography at the 56nm technology. A number of our competitors have basically pushed non-immersion lithography, dry lithography, if you will, as far as they could. We made the transition at the 56nm. We have very high volume experience with that.

So the move to 43nm at least in that regard, we have, I believe significantly more experience than the competition.

Harlan Sur, Morgan Stanley: Very good to hear. And then on the retail side, card capacity grew about 60% in ’07. I’m just wondering how much you expect that to increase here in 2008?

Sanjay Mehrotra: The card capacities in general continue to increase nicely and we would expect in our mobile market the card capacities on the retail side to get in somewhat in excess of 2GB. The OEM capacity as well on the mobile front will continue to increase nicely, and on the imaging side, particularly with video continuing to increase, will also continue to drive elasticity and drive the demand, resulting in average capacity increases. So all in all, the average capacities, roughly speaking, I mean in the range of 80% to 100% increase year over year.

Eli Harari: I’d like to add one other point here. In handsets, unlike, for example, digital cameras, in digital cameras in the early days, digital camera manufacturers limited the bundled card capacity to the minimum that they could get away with, knowing full well that people would buy additional cards when they buy the camera. In mobile phones, multimedia cell phones, we are seeing a different trend, in that the bundled cards or the bundled embedded, in order to enable a music function really has to compete with an iPhone 8-GB like baseline and we see that driving both the bundled cards moving up quite rapidly and the embedded moving up to 8 and 16GB.

Harlan Sur, Morgan Stanley: And my final question, you’ve done a great job in terms of market share. I know two specific geographical markets you’re focused on this year are Eastern Europe and Latin America. The question is for the team, what are you doing in those markets to increase penetration rate and market share?

Sanjay Mehrotra: To increase our penetration rate and market share in these markets, we are basically really protecting it from multiple fronts. We have expanded our distribution network. We have more feet on the ground, more sales people. Of course, in certain cases, having products that are tailored toward the local needs of the regions, as well as really doing some targeted advertising and marketing to grow our share.

And of course, as the output from our captive factories increases, it gives us increasing capability to supply the needs for the demand for our products on a global basis.

Harlan Sur, Morgan Stanley: Thank you very much.

Krishna Shankar, JMP Securities: Yes, can you give us a sense how you see the adoption of SSDs rolling out through 2008, please?

Sanjay Mehrotra: We are very excited about the opportunities that SSD presents to us and just today earlier in the call, we mentioned that the HP enterprise desktop computer will have solid state disk drives as well, so we are continuing to have momentum building up, strong design wins. We expect our business in 2008 in SSDs to increase substantially compared to 2007 and we plan to supply most of this business in 2008 with the SLC memory and as we look ahead at 2009, we plan to supply the product with MLC memory.

So we are excited about the opportunities and excited about the product lineup that we have for SSD products.

Krishna Shankar, JMP Securities: So by 2009, would you anticipate that the SSD market could overtake the MP3 player market in terms of unit bit consumption? What do you see [pause] I’m trying to get a sense for the ramp of this market of the demand driver versus say the iPod or the MP3 player market between ’04 through ’07.

Eli Harari: The dynamics of the two markets are very, very different. I think it’s a very good question. The potential of SSD in computing is very, very large. By 2009 we’ll be into our third year, the industry will be into the third year of the adoption cycle and once we hit the right price point with MLC and with performance, I think that this market could take off at a very steep trajectory.

The MP3 market, on the other hand, is moving towards video and a lot of that market is being subsumed in cell-phones, multimedia cell-phones. So there is a different kind of dynamics going on for the MP3 players and our direction is to focus on the MP3 players on the lower cost, which is also not pushing like 64GB type densities but also driving for innovative new products that are in the pipeline right now.

I’d say that we are very excited about both but we look at them differently. I believe eventually, let’s say by 2011, the solid state disk market ought to be the number two market after handsets. Basically it will be the solid state disk that goes into the handset and the solid state disk that goes into your notebook or desktop except it will have a different plastic around them.

Krishna Shankar, JMP Securities: And my final question is what is your best assessment of NAND Flash capacity addition in terms of bit supply growth versus the demand growth for ’08?

Judy Bruner: I’ll take that question. So in terms of our overall bit growth in our revenue for 2008, we are expecting it to moderate from the 190% that we reported in 2007. At the same time, we expect that we will not have enough of our own production output to satisfy the demand and that we will have to increase somewhat our non-captive purchases from 2007 to 2008.

Krishna Shankar, JMP Securities: OK. Thank you.

Craig Ellis, Citigroup: Sanjay, first a question for you, just on the international market share front, as we look out over the course of 2008, can you give us either a quantitative or qualitative view on how significant you think the share gain can be versus what you achieved in ’07?

Sanjay Mehrotra: I think we built very strong momentum in 2007 and really established the network of sales distribution in pretty much all key geographies, and we want to continue to leverage that in 2008. I would expect the gains in share in 2008 to be similar to the gains that we have made in 2007. This is our target and we will work aggressively toward achieving this.

Craig Ellis, Citigroup: And do you think you can pick up those gains both in Asia-Pac and in EMEA?

Sanjay Mehrotra: Yes, we will absolutely be targeting Asia-Pac as well as EMEA. In the Q4 timeframe, particularly because in the first half of the quarter, we had certain supply constraints and we were not able to really supply the full demand for our customers. That impacted somewhat our share in certain regions and with certain customers during the fourth quarter. We plan to gain that back and work aggressively toward that in Q1 and the rest of 2008.

Craig Ellis, Citigroup: Ok, and then the second question, maybe for Judy or Eli, it’s more of a higher level question. As we look at the 2008 guidance with moderating bit growth and moderating pricing, can you tell us, and yet with better margins this year, is there a decision by the company to choose margins over revenue growth? Or is what we are seeing just a by-product of your supply availability?

Judy Bruner: I would say Craig that it’s primarily the result of us being fairly optimistic about our product cost reduction capability in 2008 and comparing that to our anticipated full-year price decline for 2008.

Craig Ellis, Citigroup: Ok, and within that then, Judy, you’re assuming some mix of three bit per cell in the back half of the year as we think about product sales?

Judy Bruner: Yes, we are but as Sanjay described, we think the majority of our cost reduction will come from 43nm two bit per cell.

Craig Ellis, Citigroup: Ok, and then lastly, and this one is for you, with respect to the licensing guidance that you gave for the year, to what extent is licensing revenue from the eight companies that you’ve set an agreement with and some of the potential licensees that you are working on embedded in that number or not?

Judy Bruner: There is some amount, however small, in terms of just initiating these licenses. There is some amount in the $450 million to $500 million guidance but it will start out relatively small in 2008 and we believe grow from there.

Craig Ellis, Citigroup: So if you sign up additional companies, would that be incremental to the guidance that you’ve given, Judy?

Judy Bruner: At this point, we can’t predict exactly how many we will sign up and at what timeframe, so clearly we’re looking at the eight and we’re anticipating that we’ll do a little bit more than that. But there could be variability in these numbers.

Craig Ellis, Citigroup: Ok. Thanks and nice job on the margins.

Jim Covello, Goldman Sachs: Just two quick things. First, on the supply side, you referenced a couple of times during the call that the early part of ’08 looks like the early part of ’07, but ’07 got resolved in large part because so much of the capacity got moved from NAND to DRAM and given how bad DRAM is right now, it doesn’t seem like that’s a very likely outlet for some of the supply.

So how do you really think the supply side and in turn the pricing gets fixed and we find the supply demand balance, given that we’re not going to have the outlet of all the NAND capacity over to DRAM?

Eli Harari: I’m not sure that I would characterize what happened in 2007 the way you did. I think that the pricing at the beginning of 2007 was reflective of inventory liquidation and became very difficult for some of the component manufacturers. And I think the same applies today.

But there’s no question that DRAM to NAND transitions now, either way, is fading as a major factor. I think that the situation for us at SanDisk is not necessarily the same as the situation for the other Flash manufacturers that are primarily component suppliers. Although we are definitely not immune from the pricing in the commodity market, we do have the ability through going up the food chain and selling end products through our own channels, give us the ability to differentiate and retain some of the margin. And I think that a very good example of that was in fact fourth quarter where most of the component suppliers reported very severe margin pressure and we actually are very pleased with our gross margin in the fourth quarter.

I said in my prepared remarks that there’s no way that the industry can recover until there is a good balance between demand and supply. We understand the supply side coming on stream. We believe it will be less aggressive in terms of percentage growth than the industry as a whole had in 2007 and we think that the demand side will respond to the current pricing and this is a self-corrected type of situation. But for our own outlook, I think that we do not intend to in any way aggravate the component situation out there. As I said, we are not in the component market. If anything, we will be a buyer in that market. And therefore I think that our outlook for 2008 really is coming from our own confidence in the markets that we are creating and the demand that we see from our own customers. And that gives us confidence. That, together with very aggressive cost reductions.

Jim Covello, Goldman Sachs: Ok and if I could just ask one final follow-up. Anything you can share with us about an update on the Samsung royalty negotiation?

Eli Harari: Not at this time. There’s really nothing I can report.

Jim Covello, Goldman Sachs: Can you tell us if it’s something that you are working on in 2008 or if you intend to let the contract go out to the term at the end of ’09?

Eli Harari: I’ve said in the past that I think it is in the interest of both companies to resolve this before the expiration of the current contract and I still stand by that.

Jim Covello, Goldman Sachs: Ok. Thank you.

Amit Kapur, Piper Jaffray: Thanks a lot. A lot of my questions have been answered but maybe if you could update us in terms of the attach rates you are seeing in mobile handset applications and how you see that trending in 2008?

Sanjay Mehrotra: With respect to attach rates, you know, it’s somewhat of a tricky question because you have to look at it both from the OEM bundling side as well as on the retail side, as well as implications of embedded Flash in the handset. But probably it would be easiest for me to just walk you through an example of this for Q4 timeframe. If you look at 2007, the industry wide estimate is that maybe about 500 million or so phones with card slots that have used flash memory in one form or another, and in Q4, if you say that of that 500 million phones in 2007, really about 150 million phones got sold in Q4 timeframe and SanDisk sold about 51 million units in the mobile space in Q4. And so if you look at that and realize that SanDisk doesn’t have all of the market, we have a majority share, a leading share, but if you take into account some of the other suppliers as well, my estimate would be the total products supplied into the market in Q4, our is 51 million, maybe the total is like 75 million. That puts the attach rate at this point at about 50% or so, and again that’s taking into account all aspects of this, the OEM bundling, as well as the retail sales.

And what we have seen is that attach rates grew nicely over the course of 2007 and we would expect the same trend in 2008: the increases in the attach rate are expected in the 2008 timeframe as well.

Amit Kapur, Piper Jaffray: Ok, so for mobile, how do you see in 2008 the mix of retail versus OEM?

Sanjay Mehrotra: The difference (?) actually continues to be strong in retail as well as OEM in terms of unit growth and in terms of percentage growth, retail obviously will realize a bigger percentage growth but the trend continues to be strong on OEM as well and the mix we believe on OEM as well as retail in mobile will continue to remain pretty healthy.

Amit Kapur, Piper Jaffray: Great. Thanks.

Gurinder Kalra, Bear Stearns: Thanks for taking my question. Just following up on your view that ’08 will be better than ’07, I suppose you are also talking about that from an earnings perspective. So how do you expect Q2 and the second half to play out in ’08 with respect to ’07, so that, we know, what do you think might come forth?

Eli Harari: You know, we’ve given you guidance for Q1 and for the year as a whole. Last year, Q2 was a strong year. Really the key question for Q2 is going to be how does the consumer market respond to government actions, to an election year? These are [pause] typically June is a very, very strong month for consumer retail. You’ve got, you know, going out of school, starting vacation. So you’ll have to give us a little bit more time before we can give you visibility of that.

Gurinder Kalra, Bear Stearns: So I guess at this moment, is your prediction based on more of a cost reductions or is it a combination of cost reductions and something you see in terms of the demand/supply balance?

Eli Harari: It’s the combination of cost reduction and our expectations for demand growth, demand coming in balance with supply, price elasticity kicking in, the government, what do you call it, not incentive package.

Judy Bruner: Rebate.

Sanjay Mehrotra: Stimulus package.

Eli Harari: Yeah, the stimulus package. You know, some of these factors are outside of our control, some are under our control, like gaining market share is definitely something we can do a lot more about than the stimulus package.

Gurinder Kalra, Bear Stearns: Thanks.

Eli Harari: I would say also one other thing and that is that the current, the December/January pricing are extending beyond the cost reduction efforts of the industry, and I’ve said that in the past that this is a difficult situation and may have some bearing on people’s ability to or desire to invest in new capacity.

Gurinder Kalra, Bear Stearns: Thanks very much.

Doug Freedman, American Technology Research: In the quarter, it appears that you’ve clearly had less pricing pressure than the rest of the industry. Can you talk a little bit about what you are seeing from your customers and their demands on the quality of the product that you are shipping and what impact that’s going to have going forward?

Sanjay Mehrotra: In terms of the quality of the product that we ship, I assume you mean the quality as in reliability of the product?

Doug Freedman, American Technology Research: Correct.

Sanjay Mehrotra: And of course, our customers fully expect us to continue to ship them the highest quality product and that is always our focus here at SanDisk and we don’t plan to deviate from that.

Doug Freedman, American Technology Research: I mean, if I look at, I guess moving on, if we look at the solid state disk drive demand, that market clearly is taking a little longer than some predicted to be adopted, largely because they are stuck using SLC devices and there’s a demand out there for a move to MLC but it appears as though the market is not willing to make that move just yet. And if you could sort of offer when you think that tipping point is that people grow comfortable offering the MLC quality levels as opposed to the SLC.

Sanjay Mehrotra: Our MLC quality levels for all of our products are pretty high and SanDisk has really pioneered MLC for many, many years now and we have several generations of NAND expertise under our belt to allow us to bring MLC products to the market.

And of course, this experience of memory technology and MLC will clearly benefit us in SSD as well as is really a key differentiator, I believe, for us.

Our own MLC SSD as I said, we’ll be sampling late this year. The SSD market itself, we will continue to see it well into 2008 with SLC. And MLC, yes, certainly is challenging to implement in terms of the reliability, the endurance, the performance. But we really have the wherewithal to apply that and that’s what plays to our benefit, I believe, on the SSD  side.

So again, we will absolutely make sure that the product that ships is a robust product that meets the application requirements across multiple platforms and has of course high quality that can pass the rigors of the OEM customer qualification.

Doug Freedman, American Technology Research: Ok. If we move on and talk a little bit about the mobile space, can you talk a little bit about what you are seeing from a design-in perspective as far as how many phones you are seeing internal slots versus external slots and what you are seeing there as far as the add-in market for the phone market?

Sanjay Mehrotra: In terms of the handset market, in terms of new design-ins, clearly the slot is really the dominant part of the business so far and will continue to be the dominant part of the mobile business. Of course, it is an increased trend, especially following on the heels of the Apple iPhone, that is providing some increase in the handset models with embedded Flash.

So during 2008, we do expect some increased number of models of phones with embedded Flash but by and large, the card slots we believe will continue to dominate. I would just like to point out that on the embedded side, we have strong product offering and good design penetration with our iNAND lineup of product.

Daniel Amir, Lazard Capital Markets: Thanks a lot. Thank you taking my question. A couple of questions here; first of all, do you have any clear plan on your 200 millimeter fabs? I mean, other companies in the industry have kind of started commenting on that. And related to that, do you believe that you will be outgrowing the bit growth of the industry here in 2008?

Eli Harari: On the 200 millimeter, I think that we, again, Toshiba and SanDisk decided not to push 200 millimeter beyond 70nm MLC and I think that was a good decision, so all of our investments have been in 300 millimeters for the last three years, really.

There’s very little 200 millimeter capacity that we have. Judy gave you a number of the, our impairment, $10 million is very very little, really, in the scheme of things. We will during 2008 really just use the remaining 200 millimeter capacity on 70nm really for very low density parts. We have some requirements for that, particularly for multi-chip packages but other than that, it’s really not a big factor.

What was your second question, please?

Daniel Amir, Lazard Capital Markets: On the bit growth of the industry and your comparison to whether you’ll be outgrowing the industry or not?

Judy Bruner: Well, I think that there’s a variety of third-party industry growth rate predictions out there. Most of the ones [pause]

Eli Harari: Yeah, I have it here, so — basically if you take a look at Gardner, iSupply, and Merrill Lynch, they are all predicting that 2008 the industry growth in bits rate of growth will be down by about, I’m just eyeing the numbers, approximately 10% less growth rate. We have not really given a guidance on our bit growth, except it’s going to be more moderate than last year.

Judy Bruner: Right, but I think if you look at most of the third party estimates, they range in the neighborhood of maybe 140% to 160% growth rate is the estimate for the industry. As we said, we expect that our growth rate will moderate from the 190% that we predicted, or that we reported, excuse me, for 2007.

Daniel Amir, Lazard Capital Markets: Ok. Thanks a lot.

Bob Gujavarty, Deutsche Bank: Thanks. Thanks for squeezing me in guys. The question I had is you mentioned international is doing better than North America. Can you talk a little bit about different trends maybe? I mean, I noticed the average capacity in retail has started to, I mean, the growth has clearly decelerated. Is that just a function of international versus North America, or could you give us flavor of the different trends?

Eli Harari: International has one thing, a much more advanced market for handsets than the United States, particularly multimedia handsets. If you go in London or Paris, you see very, very many phone wearers actually use it as their MP3 player. Now, in addition to that, Europe is really booming in many countries. We hear always about England and France but there’s, Russia is booming, Poland is booming, Scandinavia a big part of that, and of course the Middle East, at least the Middle East that’s producing oil, not counting some of the trouble areas.

We see very, very strong demand for our products and it’s just a question of having enough people, enough distribution, enough sales people to grow and nurture that demand.

Japan, we have really broke through in 2007. We’ve gone from about 10% market share in Japan to close to 30%. That’s a very competitive market and we’ve had to really take share from Matsushita, Panasonic, Sony, you know, highly entrenched suppliers. And I think that we are on a real roll in Japan.

Asia-Pac is very, very price competitive and there it’s just a question of market share versus margin. This is Craig Ellis’ earlier question. I think it was Craig Ellis. Anyway, so we do have flexibility on, sometimes we frankly passed on market share if pricing is going to be unacceptable. But we have the ability now to move product around the world to areas where we can maximize our impact and our gross margin contribution.

Bob Gujavarty, Deutsche Bank: Great. Thank you.

Eli Harari: I just want to end it here. Despite our near term caution due to the current market uncertainties we are optimistic about 2008 and beyond.  Flash storage is now pivotal to the mobile consumer revolution, and we believe we are well positioned to play a leading role in the years to come.  I’d like to thank everyone here for listening today. Thank you very much.

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