2008.02.25 Eli Harari SanDisk Analyst Day

SanDisk Analyst Day 02.25.2008
Slides on file on the SanDIsk site

Eli Harari
Founder, Chairman and CEO

[Slide 4 Eli Harari]

Good morning everybody. Its a pleasure to have you all here on the tail of a big storm over the weekend. I really appreciate Sanjay coming out here from the East Coast. When we started the company, just short of 20 years ago. I started working on the company March 1, 1988 and was soon joined by Sanjay Mehrotra and Jack Yuan.

That was 20 years ago. Never in our wildest dreams did we think that we would be standing here today 20 years later heading a $4 billion company. Having really been a very pivotal company in the creation of major new markets in mobile storage in consumer electronics and talking about the future of the industry.

During all that time we have had tremendous highs and some lows. It is quite natural for our industry to go through cycles and I really want to thank those of you who have been with us through these up and down cycles, patiently following our progress and to every milestone we eventually met. Sometimes taking a little bit longer than we had hoped, but the vector’s direction has always upward. And today even though we are very much in the midst of a down cycle for the flash industry, that started over a year ago, I am as optimistic as I have ever been about the future of our industry and particularly about the future of SanDisk in our industry over the next decade.

So today we are going to discuss the factors that go into this optimism and our view of the current [environment] and the future and you will get a hand full of information. We have tried as much as possible to be transparent with our business to give you as good an ability as we possibly can. Please understand that our competitors are also listening to these webcasts, but we will be inundating you with data and I just hope that it also ends up being a little bit of a fun day with all that data.

[Slide 5 Agenda] So starting with what I plan to cover. First a brief amount of time on the current environment. Focus on what we really see as the future trends. Our strategy in our markets and really spend a lot more time on technology, technology challenges, competition and then end up with IP which I know is a very very important subject to many of you and of course to us.

[Slide 6 Our Mission] The mission of the company has not changed. really since day one, “To enable people everywhere to carry around and manage their life’s memories and personal content.” And this has been captured by our motto, “Store Your World in Ours.”

We feel that this is what is driving us. The passion to take a great semiconductor technology and convert it into a very valuable capability, asset, if you will, that is now fueling so many different markets.

[Slide 7 SanDisk Revenues 2002 – 2007] If you look at over the last 6 years [chart shows 5 years] the growth of the company, in terms of revenues, has been consistent and very nice, despite good or bad times, in spite of a very difficult and very highly competitive market. I would say that the NAND flash industry probably is now the most competitive industry in the semiconductor market, in the semiconductor field. I do not know of any market that is more highly competitive than what we have.

We have thrived on competition. We have actually become stronger through it.

A year ago I was standing here and talking about a very very difficult first quarter in 2007. And indeed it was a very difficult quarter that was really a result of the industry finally arriving at MLC and the market was being flooded at a time with a lot of capacity that was unable to be absorbed. But I told you a year ago that I was very optimistic that during the year things would improve, the demand would grow, and consume the output and that the pricing would moderate. And in fact, that is what happened in the second and third quarter of last year and even into the fourth quarter. Pricing actually trended up and then towards the end of the year, we ended up with excess supply again and a significant price reduction that we see basically contributing to the first quarter.

[Slide 8 SanDisk Earnings Per Share 2002 – 2007] And that basically has been the reason for what you see here. The earnings per share in 2007 broke a very steady climb in earnings per share and we were basically unable to meet the price reductions in the market. And I will talk about that, even though our cost reductions during the year had been phenomenally good. Really very very good.

[Slide 9 SanDisk Scorecard] So as I look at SanDisk’s scorecard for 2007. I think we reacted very quickly last year. In February we had 10% reduction in force and cutting of salaries. Delaying of promotions and so on. Really becoming very very frugal and not spending and I believe that as a result we exited the year significantly stronger and you will see from Judy’s data that every quarter became stronger.

Mobile during the year became our number one business and it looks like it is set to grow at a very very quick pace over the next several years and of course in 2008 as well.

International, we said last year, would be a major focus for us and you will see Tsipi, who is heading our international sales, progress thathas been made during the year. Very very encouraging.

IP licensing grew.

Very importantly, our focus on manufacturing cost reduction, in fab 3 and bringing up fab 4 late in last year, late in 2007, put us in a very strong position. We believe that on the cost side and capacity, for 2008 and for 2009. I will discuss some of that as well as Sanjay.

Integration of msystems that started last year is complete. We are very very pleased with the integration. We feel that msystems brought to us a tremendous addition to our bench strength: in the area of mobile, with their embedded understanding, in the area of USB, where they were a pioneer, in audio/video where some of their very innovative concepts are being implemented, and of course international sales. In addition to that, msystems brought to us a significant strengthening of our IP portfolio, including x4, 4 bits per cell technology which gave us a significant head start as well as the head start that they brought to us with SSDs.

On the other hand, the disappointment was abandonment by us, the decision to not pursue the white label business, primarily USB which accounted for about half of their revenues. By the time that we, in the first quarter of last year, the combination of the very very depressed pricing in the market with the fact that, this business in the first place was a low margin business, we concluded that we would be better off, basically, allocating our assets, our human assets and our energies to build our own brand rather than to pursue a very low margin business. So in a way it was a disappointment as far as the revenues, but I believe it was the right strategic decision.

We have continued to invest during the year in our global brand. We expect to continue that in 2008 and beyond. We have seen very good results and the brand is definitely becoming very well known worldwide.

Despite 60% ASP erosion during the year. Actually the second year of 60% ASP decline. We have been able to [continue to be] profitable. Again, Judy will show you. The fourth quarter was definitely a good culmination of a year that started on a pretty severe down note – the first quarter of last year.

[Slide 10 SanDisk Relentless Cost Reduction Focus] If you take a look at industry price reduction and cost reduction, what I am showing here is our cost reduction, SanDisk’s cost reduction in cost/MB and that is the red line there. And what you see here is that in 2005 SanDisk was able to bring our costs down by 55%, in 2006 56%, and in 2007 56%.

This is a phenomenal accomplishment. To be able three years in a row to achieve that kind of cost reduction while ramping up volume is really phenomenal and I believe is unmatched by any one of our competitors. And this is what has given us, I believe the industries’ lowest cost.

On the other hand our pricing in the market which is shown in the brown [yellow] line where, pricing was down 52% in 2005, 58% in 2006, and 60% in 2007. So you can see while we gained ground in 2005, in fact you can see that below for the GM went up to 35%, we lost ground in 2006 and in 2007. You can see that our GMs in 2006 were down to 32%, and in 2007 24%, even though in the fourth quarter it was 29.6 %.

So we follow this very very carefully and you can see there is tremendous leverage on the cost side vs the price. Of course the price we do not control. It is controlled by the market. Typically mostly controlled by the demand supply imbalance, one way or the other. But cost is what we can control and that is what we focus on. And I am really very very proud that the tremendous accomplishment and dedication and execution of our team on cost reduction and this continues to be the focus of our company. It emanates from our core competencies in flash memory, technology transitions, manufacturing together with our partner Toshiba.

[Slide 11 Current NAND Flash Environment] The current Environment is basically demand continues to grow at a very rapid pace for flash memory. Flash is everywhere. It is extremely pervasive. It is growing most rapidly in the mobile environment, the mobile space, and for us also in international where there are many territories that are catching up to the United States.

On the supply side, supply too is growing at a very rapid rate driven primarily by MLC output. On the other hand its somewhat slowing down by the 200mm to 300mm conversion. Actually it is not a conversion, its a retirement of a significant amount of 200mm capacity and its replacement by new 300mm capacity that has to be put in place. So this is actually positive from the point of view of NAND supply. It does reduce the supply side.

And another factor that we believe that is going to start slowing down the supply side is the transition from the 50nm technology to the 40nm. When I say 40nm, it could be 41nm, 42, 43, 45. The difference between the two is that at the 50nm node, 56, 57nm, still can be implemented, although right on the borderline, with what what we call dry lithography, dry scanners where the 40nm requires leading edge immersion scanners. This technology on 300mm is new to all the players. SanDisk and Toshiba have the advantage that we have implemented it sooner than we needed to at our 56nm technology, so moving to the 43, we already have that, if you will, behind us, conquered.

But apart from the lithography aspects, we do believe that flash memory is beginning to slow down and will continue to slow down because of Moore’s law, scaling difficulties, and exquisiteness that you need in manufacturing in order to yield those products.

So because of these and despite the fact that clearly there are some recessionary fears in the United States that probably impacted December sales and to a certain extent first quarter in the United States. So far we have not seen that spill over to Europe and other countries, other geographies. But of course this is one of those factors that we have very little control over.

In any event, we expect the situation for NAND supply to improve during the rest of the year and we expect the current condition will be more or less what we have seen last year.

[Slide 12 2008 Industry TB Growth Rate Slowing] You can see in some of the market reports. This is a compilation of Gartner, IDC and iSupply. All three are projecting that in 2008, output, NAND MB output, will grow at a lower rate than in the last 3 years. Part of that is because we are talking very large numbers. At a certain point in time you just can’t grow at 190 – 200% increase every year when the base becomes larger and larger.

But on the other hand, this, I believe, does reflect the self-correcting nature of the current situation and the fact that I will talk about later of the need, the amount of capital that is required to bring new capacity to bear is limiting the number of players that can actually play in this.

So in the years ahead, we do expect the MB increase in the market to decline from all players. We’ve had some announcements already by some of the current suppliers that they are cutting their Capex in 2008.

[Slide 13 NAND Flash Demand Drivers] On the other hand, demand is projected to continue to increase at an exponential rate. The industry sold last year, 2007, just under 2000 petabytes, 2 hexabytes of flash memory. Its a very large number. Gartner projects that by 2011 the industry consumption will be 20 times that, close to 40,000 petabytes, 40 hexabytes. Again a very very large number. And you can see where it is coming from.

Sanjay and Tsipi and Daniel will talk about some of these constituents. By the way every single one of the market organizations has over the last 3 to 4 years underestimated the market. If you look at their charts, every one of those years, is lower in the previous year than it is in the current year.

And the reason is because of new markets. That slide did not come out of nowhere and did so because we hit new price points. In fact one of the real silver linings of two years in a row of 60% price declines is that we are kind of at least a year ahead of where we thought we would be in terms of pricing and that has definitely given an acceleration to new markets.

That is very difficult to forecast. For example, only two years ago no one would have forecasted that GPS, car navigation systems, personal navigation devices, would move 100% to flash memory. That is absolutely due to this very accelerated price reduction.

When I look at this chart, and really you can argue if it is accurate to plus or minus 50% for all I care, and I do not believe it is off by 50%, but lets say, these numbers require a huge amount of new capacity to come onboard and more important than even that, this chart more than any other chart explains the difference between flash as a commodity and DRAM as a commodity.

DRAM does not have that kind of a growth chart. Does not have that kind of demand chart. And doesn’t have the challenges of bringing the capacity that NAND has in terms of technology, technology scaling and manufacturing investment.

It takes now for a mega-fab, a NAND mega-fab, which I would define as 200,000 wafers a month, 300mm, operating at the leading edge, the most advanced technologies. 200,000 wafers per month is a $7 to $8 billion investment. BTW, it needs to be over time upgraded as you go to 32nm and 22nm and so on. You need about 6 new fabs of that magnitude to meet the demand in 2011, that Gartner is calling for.

Not too many companies out there can have either the right technology, the right IP or the $8B per pop or the focus and execution to make that kind of investment and generate the right return on investment and that is really very very critical. So I think that there is a major difference between DRAM and NAND. NAND through its pervasiveness and through its being such a pivotal role of the consumer revolution and mobility has really a tremendous range of opportunities.

Frankly it is these opportunities that states (?) SanDisk’s strategy. If we thought that the market was not going to grow at that kind of rate, our strategy would be very different, but it is this that really drives many of the things that we do, including a very heavy investment for a company our size in the future technologies and creating markets and driving demand.

[Slide 14 Big Picture Trends in Coming Decade] As we look at the big picture. This is the big picture for the industry as a whole. We’ve seen blurring boundaries between consumer electronics, mobile handsets, computing, and web. For us we see mobile, personal content moving to people’s pockets. Basically to your handset to your popular convergent device.

Basically you have, honestly a situation of unpredictability or what at Google, they call chaos. Very rapidly changing landscape. Where was Apple as a consumer electronics company ten years ago. Nokia was a relatively small player still 10 years ago. Google didn’t even exist ten years ago.

So who are going to be the consumer electronics leaders ten years from now is very very much a question which I believe no one can answer today.

We see that as a major opportunity for SanDisk. The reason for that is that we see flash storage becoming very pivotal in the consumer electronics convergence. Basically it is strategic. It is enabling. It is just at the center of things.

[Slide 15 Flash Storage is Pivotal in CE Convergence] In consumer electronics, you store your pictures, you store your tunes, you store your video, you video games, your GPS maps all on flash memory either in embedded or in cards.

In mobile we have a campaign, that you will hear more about, “Wake up your phone.” Basically it takes an 8GB card or 8GB embedded or 16 GB or 32 GB or in the future 128 GB to make that phone into a smart PC or a smart work device that contains all of your personal content.

And we see the beginning of the same trend in computing in SSDs, in smart USB. And then beyond that we think there is a nice opportunity in secure enterprise. This technology has not yet entered or made a dent in enterprise. I think that that will change.

[Slide 16 Our Future Role in Consumer Electronics] So companies that can exploit this chaos will emerge king of the mountain in the next ten years. We believe that we are uniquely positioned to be a major player in this revolution.

If you look at what role we play. People have asked me, last year, what kind of consumer electronics powerhouse do you want to be? What do you mean by consumer electronics powerhouse? Are you going to be another Sony? Should we give you the multiple of a Sony? or of an Apple?

I think that it is really important that I explain. In the previous chart, pictures, video, USB, and so on. The commonality in all of these is content, mobile content. I would say that content is moving into people’s pocket which means it is truly moving anywhere. Content really is when you think about it at the center of the convergence revolution.

That is why Nokia just spent $8 billion buying a GPS navigational company, basically a mapping company. Its just content and it going to be mobile content.

Personal content equally important that you carry with you. This is your life’s memories. And premium content basically requires storage media. Storage media that is today, a CD or DVD, Blu-ray, has no place in your pocket. Has no place. It doesn’t fit.

Its much more like MicroSD or M2 type devices. So content needs storage media and this is our opportunity. We need to also provide the infrastructure for this open system that allows you commonality of moving your content with you from one environment to another. That is why over the last several of years we have been talking about TrustedFlash that is a secure environment. We showed a three years ago, Gruvi, with the Rolling Stones. And you really have not heard very much about Gruvi since. But I assure you that Gruvi, and its successors, are constantly being developed as part of an infrastructure to deliver content.

This year we had a beta for FanFare. FanFare again we view as part of, not being a content company, which we never want to be, but accelerating the creation of the infrastructure for delivering of content in an open environment which is what we call the 4 screen strategy which I will very briefly touch on.

Two years ago when we started talking about this consumer electronics powerhouse, I think I got ourselves in a bit of trouble, but I do want to say first of all, that portable storage will actively remain at the core of everything we do.

This is our core competency. It is our heart and soul. It is what we are very very good at. It is really what drives me for one as a technology. This is where I think our greater value is captured in the underlying technology, that means IP, technology implementations and manufacturing that technology in high volume.

And we plan to remain, best in class in memory, memory systems, IP and in the creation of new standards. That is not an easy task. And we can’t do it on a dime. It requires substantial investments in R&D and this is our strategic commitment.

What we do want to be is we want to be a real powerhouse in storage-centric products where we are the enabler or where we deliver the products themselves. And I want to really give you two examples. One from the past and one into the future, what we think is possible.

Here I have a product, a pcmcia (?) card which was used with digital cameras and computers. It is 4 MB, 10 MB card. I think we sold these two products for around $200. This is the first retail film. This was sold about 14 years ago.

13 to 14 years ago Kodak was the number one film company in the world and we were basically a totally unknown company. We were actually still a private company. Last year we were selling over a million cards a day. We have around 50%, one in every two film cards in the US is a SanDisk card, and Kodak is becoming a printer company.

So SanDisk over 14 years has engineered not just a transformation of an industry has been a major an enabler, but has become a premier digital film company. This is the past, what about the future?

We heard last week about the demise of HD DVD. The total victory for Blu-ray. I can tell you that sometime in the next 10 years, our technology, be it NAND or 3D or another technology will come down in cost to the point that it will be the disruptive technology that will replace the Blu-ray DVD.

Blu-ray DVD’s too needs to go into your pocket. Its contents. When that happens, I think that SanDisk will be as well positioned as any company to be the company that will with partners, because we don’t think that we want to do this thing alone. We have a track record of working and developing major standards, global standards, with very strong partners, but it is driven by the core technology and the core understanding and the core IP of the company that can make this thing happen.

I challenge you to bring me another company in the industry that can do that as well as we can. Or for that matter that has also the retail channels to sell that product worldwide.

So this is how in a way we are trying to explain what we mean by consumer electronics powerhouse. It does not mean we build televisions. It does not mean we build set-top boxes or cell phones. It means we are right at the center of how content is delivered, stored, managed by the world.

[Slide 17 Simple ,Reliable, Affordable] At CES we went through an explanation of what our products are and really what makes our products so attractive to consumers worldwide. I suppose that some of you of course attended the press conference at CES. Some of you did not. I would like to just show you three slides from that. Attributes that we want to see in our products.

Simple, Reliable, and Affordable. Simple meaning that a card that we make works in everybody’s camera and that we make sure that our competitor’s cards also works works in everybody’s cameras. Not just cameras, Also cell phones. Also defibrillators. Basically thousands of different kinds of devices. GPS systems. And that you don’t need a driver and you don’t need to be a computer scientist. It works every time. Hot insertion. Hot removal. No manual. Its great. It works. And that takes a really huge investment. A huge commitment that SanDisk has demonstrated over the last years.

On the reliable side, it is the washer/dryer test. Its got to pass that. Passing that, and really because consumers do abuse their products and we want to make sure that our products can withstand that abuse.

On the affordable, that is really Moore’s law. The ability to bring the cost down. Take the benefit of that and give it to our consumers, our customers and expand the market. This is what drives when we sit down at inception and then we are going now more to the second level of the sophistication of these products.

[Slide 17 Smart, Connected, Secure] Smart products. Connected products. And Secure products. Smart products, we will share a little bit today about a joint venture that we have with Microsoft. By the end of this year, we will start showing some very sophisticated capabilities in USB drives.

Connected, we just introduced at CES, the first USB flash drive that is automatically online backed. That becomes more and more important when you have 16, 32, 64GBs drives.

Secure. Secure again, our TrustedFlash initiative that is permeating everything that we do and in fact we have driven very hard for TrustedFlash which is the way for any device to allow secure content to be managed, no matter what DRM is being used. That we have proposed now and had adoption from the SD association and we believe it will become standard of security of the SD association and its membership.

[Slide 19 Four Screen’s Strategy] We move to the four screens’ strategy. So the idea here is very simple, that your card rather than your unique host device, the card is where you keep your content. It is secure and it plays in every environment. The four screens are the TV, the PC, the PMP and the handsets. Sounds easy. Sounds extremely obvious, but when you move away from a proprietary closed system, from the walled garden, where it is relatively easy, if you have your own TV, your own PC, your own players, you can actually, if you want to, relatively easily implement that four screen strategy.

If you are talking about everybody’s screens, everybody’s phones, everybody’s PMP, that is an enormous task. Really an enormous task and this is really what we believe consumers want worldwide. It will take several years because the infrastructure needs to be in place. Media alone is not enough. You really need the security, the connectivity and this is what we are working on.

[Slide 20 Technology and Competition] Moving on now to technology and competition.

[Slide 21 Well Positioned for 2008/ 2009] I want to show you three articles that SanDisk and Toshiba together published just this month, at the beginning of this month at the ISSCC. ISSCC stands for international solid state circuits conference. It is a once a year conference. It is always held in San Francisco. It is attended typically by about 3000 circuit designers from the world over. It is the premier conference for circuit designers. We published for the first time three very important papers on flash memory.

The first one was on 34 MB/s. I’ll explain what the significance of the red is. 34 MB/s program throughput 16 Gb MLC NAND with All Bit line Architecture (ABL). All Bit line Architecture is a design architecture that was invented by SanDisk in the last 6 to 7 years. Has been implemented in the last three generations in our MLC products. And is what gives MLC the kind of speed that we have achieved in our chips, that other people need to use SLC, single level cell. Basically gives you very high speed, very reliable MLC.

We have always said that our MLC is ahead of other people’s MLC. This is one of the main reasons why. This is the first time that we are actually publishing that concept. Of course it is highly patented.

All three papers in fact use ABL. In fact every single one of our designs today uses ABL. I’ve said in the past that SanDisk uses 98% of all the bits that we ship are MLC including Ultra and Extreme. Very high speed products that use MLC because of ABL. Its a breakthrough. We’ve kept it under wraps where now we are bringing it out.

120 square mm 16 Gb MLC NAND on 43nm. This is going into production as we speak and we are expecting revenues building up in the second quarter and it will become a very significant part of our revenue in the second half of the year. This is a significantly smaller chip than anybody else. We think that the rest of the industry is going to have some challenges getting into that kind of technology. 120mm sq chip compares with the industry’s smallest today is about 169 or 170mm square.

The third paper is the industry’s first commercial 3 bit/cell NAND and that too is a SanDisk design in cooperation of course with Toshiba. That technology too is going into production as we speak now and uses ABL. If you don’t use ABL architecture in 3 bits per cell, your chip will be very slow. That means that you can only use it at reduced capability part. [note slide shows 3b/cell NAND in 56nm with 8 MB/s write rate.]

So those three papers really talk about technology that is going into production imminently and is influencing the results of our fab 3 and fab 4 this year. This is quite different than the ISSCC typically, people publish at ISSCC papers that describe chips that may be working but maybe 12 to 24 months away from production.

So I think that these chips really demonstrate very very succinctly SanDisk’s tremendous focus and the success that the SanDisk/Toshiba team have achieved.

[Slide 22 NAND Competitor Landscape] Now talking about the competition, people again are always saying, well why can’t [pause] if NAND is going to be the same as DRAM, all the Taiwanese companies that are in the DRAM business are going to come into NAND. Why aren’t we going to see a replay of the DRAM business?

Again, I want to [missed words] I think the demand picture, the demand profile is very very different than that of DRAM. NAND also has very significant challenges in terms of IP; technology complexity is great- you have endurance limitations, cycling limitations. You can yield the part and it looks OK coming out of the line, but in certain applications, it will not work very well. Understanding what its limitations are is very very important.

System know-how is becoming ever more important. We believe that as we get to 32nm, you cannot sell a chip without a controller. The controller itself needs to be very sophisticated and you certainly can’t sell a 3 bits or 4 bits/cell without a controller. It is really a system solution.

The fact that the industry has been growing at a rapid pace, breakneck pace really in technology transitions, makes it very difficult for newcomers. 300mm megafabs, as I told you are really very very costly and really need to be operated at maximum capacity. You cannot put a huge fab in place and not be able to ramp it at the rate that it needs to ramp. So for example, for fab 4, we just started production in the fourth quarter of 2007 and we said in the second half of this year, it will be at 110,000 wafers/month. So this is really a phenomenal ramp rate, and that is what is necessary if you want to achieve the economies of scale.

Finally if you do the analysis, and this is not specific to SanDisk or to any company, if you do the analysis on the next several generations of technology in the next three to four years going from 50 to 40 to 30 to 20nm nodes. If you just use [missed word] calculation that is [missed words] that you are perfectly scaled, that your wafer costs go up from one generation to the next by 5 to 10%, that you achieve maximum yield in lets say three quarters, that you can achieve 15 months/ technology transition and that you can use maybe 50% of your output with 3 bits/cell, maybe 10% at 4 bits/cell, you do this kind of analysis and you come to the conclusion that NAND cannot cannot come down in cost for anybody under those assumptions which are kind of best case, by more than 30% to 40% a year over the next four years.

60%/year price reduction, I have said in the last two years is not sustainable by cost reduction. We have seen what a relatively small difference between cost reduction and price reduction can do to GMs. So in this game, frankly, if you are not at the leading edge and not executing with the kind of ferocity and focus that I believe we and Toshiba are, it is very difficult to make this a profitable business. So I think that this is really presenting a very severe challenge for not just the entrenched players, but for newcomers, I would say that if you are not in this thing now, it is probably too late, to enter this market.

As far as competition, Samsung of course is the number one market share and their share is eroding. They are very strong in R&D, very committed to this business.

Toshiba and SanDisk, I believe are the technology leader. In 300mm, I think we are toe to toe with Samsung.

Hynix is behind and 300mm is their biggest challenge and they also need to catch up in technology.

Micron and Intel, it is tough to be number 4 in a rough neighborhood, but they are hanging in there and I would certainly not minimize their ability to be a competitor. It is somewhat questionable why Intel needs to be in this business. Particularly since they are not really happy with the kind of margins that they are seeing today from that partnership and frankly Intel can get all the flash they can get, just as Apple and Nokia can without owning the fab.

On the other hand, Intel’s investments in flash are I believe long term positive for the industry from the point of view that Intel is committed to creating new applications in the computing space for flash memory that will accelerate the adoption of NAND. So there are two sides to that coin.

But you see today no Taiwanese major presence in NAND flash. No one from China. SMIC tried to some efforts with Spansion. Not Spansion- Saifun technology. No Europe really. ST Micro is not really a significant player. Quimonda never really got into this business. So it is these four players that are very formidable and clearly very committed to this business.

[Slide 23 NVM Technology Contenders in the Next 5 Years] Now moving on to other technologies. I’m don’t want to spend a lot of time on this. I would say that Phase Change memory was at the ISSCC paper at the end of February. A good paper from Intel and ST Micro talking about using MLC in phase change memory. And that makes that technology more attractive than of course SLC, but still really at the very early stages for their technology and they are targeting primarily a replacement of NOR flash. It doesn’t have the cost structure or the scalability, I believe that NAND does and I don’t think it will be a replacement threat for NAND. Certainly not in the next 5 years.

Probe storage. This is the millipede technology. The only thing positive about this technology is that it does not require lithography. That is something I would love to have not to have. To depend on extreme LV carrying us through 2011 or 2012 or so. But other than that it has its own challenges. I don’t really think it is going to be a main threat.

I would say that I honestly do not lose sleep over any one of these technologies as far as replacing NAND flash with the exception of the last one which is the 3D read/write (R/W) either transistor or diode which I believe very likely will be the replacement for NAND. I think I would focus very very much on announcements in this field.

[Slide 24 3D R/W Technology Options] On 3D R/W technology there are really three options that the industry is pursuing. The first one is stacked layers of NAND arrays on epitaxial silicon. This is a technology that Samsung is developing. They reported two layers of NAND on epi built on glass. I think the benefit of that is that it is NAND technology so it is familiar, but it is very difficult to build epitaxial layers outside of silicon and quite expensive.

Stacked layers of NAND arrays, not on epitaxial silicon, but on polysilicon, very much a technology that was first described by Matrix Semiconductor and in fact they have some of the basic patents on that. That is being pursued by several other companies including Toshiba which has a paper on that.

The third approach is stacked arrays of diodes, diode arrays. A diode is a two terminal device with either a fuse element or a switching element. This is what Matrix has done and what we have adopted since our acquisition of Matrix semiconductor.

SanDisk we believe has pretty fundamental patents, just about the major fundamental IP in 3D technology. By now over 200 patents and over 100 engineers that we acquired with Matrix Semiconductor two and half years ago. Of course a lot of trade secrets and know-how. This was a very very very good acquisition. Of course a technology acquisition, but I think very prescient, because I think that in the next several years it will start paying off.

[Slide 25 SanDisk’s 3D status] I do want to talk about 3D R/W, still the challenges. As far as the status here at SanDisk, we are actually increasing our spending on 3D OTP and 3D R/W. They share the same diode technology, so whatever you develop for one, is beneficial for the other. The difference between them fuse- OTP and R/W switchable. Read/Write, Read/Write, Read/Write, Write/Array, Write/Array. if you will.

So the 3D ramp-up technology has now from 130nm to 80nm. It is qualified at TSMC. 80nm technology is more competitive than 130nm but it is not really competitive with NAND, because NAND has moved so fast.

The next generation 45nm 3D OTP, we are conducting R&D at TSMC. Then in parallel we have significant activity in 3D R/W. That technology really focusses on scaling the diodes so we can move them to 32nm/ 22nm. So that is one part of it.

The other part is developing the switching element that will allow us cycling. That is a very very difficult challenge and although we have some interesting progress, actually quite a lot of progress on a number of fronts, I would not say that we have a manufacturing technology at this point.

We do think that we will need to bring on board some captive manufacturing capacity in the 2010 timeframe and Judy will show you how we plan to do so through some capital investments in dedicated capacity. This is in addition to TSMC. Just as with NAND, we feel that we need to have mostly captive and some non-captive.

In 3D, it is getting to the point that we feel that by 2010 our volume will get to the point that we will need to have it in-house.

[Slide 26 IP licensing] I will move now to the last topic which is IP. IP is of course the third leg of SanDisk. The technology and manufacturing, the products and the channels, and the IP. IP has been extremely valuable to us. Very very powerful generator of GMs and funder of technology and marketing.

In 2007 we signed a license and supply agreement with Hynix. We broadened our reach with card licenses and system licenses, signing license agreements with Ritek, PNY, Trek and 7 other card licensees. We undertook action against 25 card manufacturers that have so far had not paid us royalties.

[Slide 27 SanDisk System Level Patents at ITC Case] Our card and system patents I believe are very very strong. I’m showing you here the 5 patents that we are bringing at the ITC case. I’m not going to go through all of them. Actually, I am not going to go through any of them, except to point out that they are system level and card level patents. They are not flash-based patents, but they are multi-generic to flash cards, and removable storage. Expiration dates ranging from 2011 to 2021.

In addition to that, we think that our IP portfolio is appreciating in value at a very fast pace. For one thing as I pointed out the acquisition of msystems with their significant IP portfolio and the acquisition of Matrix Semiconductor with the acquisition of their very substantial 3D portfolio.

But in addition to that, through our intensive pursuit of NAND with Toshiba over the last 9 years, as you’ve seen with ABL, with 3 bits/cell, we have developed a very very important patent portfolio that will be very valuable in the years ahead as well as x4 technology and the interference between adjacent cells and things of that nature.

The SSD patents, both our own and reinforced by legacy msystems patents deal with wear-out leveling and things of that nature. Of course the card patents that we keep adding to. The TrustedFlash, the security, the mobile content. Tremendous amount of IP. Tremendous amount of new patents that are being filed. I think we filed over 300 patents in the year, this year alone, that are very very much planted on the usage of flash in these applications and of course stacked-packaging, a lot of technology that is directly related to what we are doing.

So overall, I am pretty optimistic about the outlook for our IP affiliation (?) as an important part of our strategy.

[Slide 28 August 2009 IP License Renewal] I want to move now to the thing that I know is engaging a lot of you, and that is our 2009 August patent renewal with our largest licensee. Basically we see, this should not be a big surprise to any of you, but let me just state it there are two options that we have in front of us.

The first one, option A, is to achieve a negotiated renewal settlement. That would have to be under reduced royalty rates. That would be signed by August 2009. It would have to be under reduced royalty rates because if you want to settle rather than fight, both sides need to be flexible and both sides need to accept terms that are less than what they would like to have. Also it has to reflect the current market conditions and the changes that have happened from 2002 to 2009.

The other option is that we cannot come to an agreement and if so you can expect a very vigorous, protracted, costly litigation. But we are very confident that in the end, if we have to take that path, we will prevail. I believe that today both parties prefer option A., the settlement, even though as I said, it would require comprise from both sides. But it would maintain market equilibrium, avoid disruption to the parties, to their customers and to the industry.

That leaves you with a little [missed words] now in our model in 2009 and 2010. 2009 basically is what it is. Judy will talk about that. 2010 of course depends on the outcome of option A or option B. We are committed as a management team to drive our business, to manage our business, even if necessary to make cuts, to drive the business to the same operating margin level in 2010 as we achieved in 2007 or better, which means no matter what happens on the royalty side, we will adjust on the other operations in 2010 we are going to be a 7 or 8 billion dollar company and we expect that we will have the ability to manage the base on that.

Now it will not be easy. It will require a substantial cut, but at the end of the day, we have done this before and [pause] if nothing else, SanDisk has demonstrated in the past our ability to be flexible and to adjust to whatever the market dishes to us. That is really all I can say about this subject.

[Slide 29 Summary] So moving on now to our summary. We started the year as I said, in a pretty challenging environment. We ended much much stronger. GMs came very close to our model, 29.4% in the fourth quarter. I am very excited about where we are in terms of the markets we address and the opportunities that we have. Tremendous growth markets ahead. I have really tremendous confidence both in those markets being there and our ability to accelerate some of these markets and become major players. As I’ve shown we have very strong and deep IP that is actually ascending in value.

We are building a great company for the future. This is really a very strategic drive that looks at this once in a lifetime opportunity that very few companies ever have been given. This is really what drives us, motivates us and frankly it is still giving us a lot of fun coming to work every morning. [missed words]

So with that I want to I want to pass it on now to Sanjay Mehrotra, my co-founder, and he’s the guy that makes things happen every day here. Thank you.

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