2010.02.26 SNDK Investor Day- Sanjay

02.26.2010 SanDisk Investor Day- Sanjay

[This transcription is not complete. I transcribed the portions that seemed most interesting.]

Sanjay Mehrotra
President & Chief Operating Officer

[Slide 34 2009 Agenda]

2009 was a transformational year for SanDisk. We had solid performance and we delivered strong financial results. The strategic actions that we decided upon late 2008 and that we implemented in course of 2009 produced not only good results for 2009 but also positioned us well for driving the growth of our business in 2010 and beyond.

This is the Agenda here. I will go through the market opportunities ahead and how we are driving innovation for those markets. I will talk about the leadership in technology and cost that is a key competitive advantage for SanDisk. I will also address the scale of our operations and how that has enabled strong execution across the board for our business.

During my presentation and the rest of the presenters during the day, you will notice a common underlying theme and that is that our vertically integrated structure and diversified OEM and retail business is working well for SanDisk and positioning us well for the future.

First about market opportunities and innovation

[Slide 35 2009 Strategic Shift]

2009 was a transformational year for SanDisk. The strategic shift to extend and grow the OEM business and diversify while continuing to drive the retail front aggressively as well was an important aspect of this transformation.

In 2008 our OEM business represented approximately 36% of the business of our product revenue and retail was about 64%. As a result of the success of our initiatives in expanding the OEM business, in 2009 while we grew our total revenues, OEM became 50% of the business and retail, the other half.

I would just like to emphasize again, that as part of growing OEM, we also continued to grow retail business and we are driving that business full steam ahead on both fronts.

In terms of OEM, we made the strategic decision to begin to supply our cards to private label brands and also begin to sell wafers and components. By selling our products to the private label brands, we are able to capture the market share that is there, some part of the market share for some of these private label brands in terms of the product that is out there on the shelves that is not SanDisk brand.

Of course, SanDisk brand is the global leader and has #1 position in our global markets.   So through private label brands in OEMs as well as selling wafers and components we extended our global reach and diversified our business.

We also focused on SanDisk-branded retail to continue to expand the reach. You will hear from Shuki later in his presentation that we diversified more into the emerging markets and increased our penetration there.

So with the focus on expanding our OEM as well as creating new opportunities in retail we significantly expanded our global reach.

[Slide 36 Global Reach Stronger Than Ever]

In fact our global reach is the strongest ever. In our SanDisk branded retail portion of the business, we sell our products through almost a quarter million retail storefronts worldwide.

In OEM, we expanded the reach of our product sales through private label brands, but also we continued to build upon our traditional mobile handset business. The traditional mobile handset business, supplying cards and embedded solutions to those customers. In fact we are now engaged with all leading handset manufacturers in the world.

Also five out of the top ten customers of SanDisk in 2009 were the mobile handset manufacturers. As a result of our efforts, we also increased our revenue contributions from the emerging markets or BRIC, SE Asia, and Eastern Europe.

Our revenue contributions selling to the customers in these regions or those that supply to these regions, grew from 2008 from single percentage of our revenue to mid teens in 2009. Again as a percentage of our revenue. So this really represented more than doubling as a percentage on a year over year basis in terms of contribution of our revenue coming from selling to those supplying to emerging markets and to the customers in emerging markets.

So our diversified OEM and retail business is working well for us. The momentum that we have built in 2009 in driving the business on both fronts will do well and continue to build in 2010 and beyond as well.

[Slide 37 We Are In the Early Stage of Flash in Mobile and Computing Mega-Markets]

So, the opportunities that these OEM and retail business themes are driving for us are huge as Eli shared with you earlier.

You can see here that Gartner projects, and as Eli also highlighted, that total PB demand grows from about 6000 PB in 2009 to about 75,000 PB by 2013. So that is a factor of more than 12 increase. Very substantial growth in our markets.

That growth continues in the legacy markets- USB, Imaging, MP3, etc, but also really the big drivers are in the mobile space and the emerging market of SSDs.

In fact by 2013, the Gartner projection shows that Mobile is the single biggest market for flash- representing about 1/3 of the total PB demand requirements in that timeframe.

And SSD is a nice opportunity, just starting to take off, and expected to be strong driver of growth over the next 3 years as well.

So talking about mobile, SanDisk actually recognized this opportunity years ago. We worked with the OEMs, the hand set vendors in enabling solutions for flash in mobile phones. We in fact pioneered the creation of standards such as microSD which now has become a defacto standard in the space.

[Slide 38 Mobile: SanDisk’s Primary Growth Driver]

As a result of the strong engagement with the OEM community in the mobile space we actually grew our business to 41% of our total revenue in 2009. Of course part of that revenue also is from the retail mobile business as well.

You can see that this has grown substantially over the last few years.

Imaging and USB continued to be strong parts of our business. Both are staying at in terms of percentage contributions at similar levels for the last few years. 35% or so for imaging and about 13 to 14% of our revenue contributions for USB flash drives.

So we are well positioned with this track record of driving the growth in mobile to continue to leverage the opportunities in the future as well.

[Slide 39 Smartphones: Catalyst for Growth in Mobile Flash Demand]

Eli talked about mobile internet being big, and we all know its getting bigger and bigger and supposed to be a huge opportunity in the future. At the very heart of this internet mobile revolution are the smart phones.

The smart phones enable not only multimedia capabilities such as music, pictures, video, but they also enable the mobile internet experience. Basically that is requiring a lot of content. Content that is being either downloaded, being generated, shared, consumed, and also the mobile internet is driving lots of services and applications.

So the trend in smartphone is to really provide a strong experience of mobile internet higher and higher capacities of flash are required. Already today and in the future, its expected that even higher capacities of flash will be required for these phones.

In fact Gartner projects that today the amount of flash in a smartphone is ten times that in other feature phones. So what is exciting about this opportunity is that smartphones require large amounts of flash whether embedded or in card form and you will see later in Shuki’s presentation the strong presence on both sides and the embedded side is continuing to grow nicely for us.

Number one, the smartphones require high capacity flash and number two the unit growth in smartphones is expected to be very rapid and represent a very large part of the mobile phones total market.

We just took an average of the various industry estimates and they point to on an average basis of those estimates- a doubling of the opportunity over four years.

In fact some estimates point to more than tripling and project that there will be more than 700 million smartphones in the 2013 timeframe. An estimate of 700 million smartphones in that timeframe is almost half of the mobile phone story worldwide every year will be smartphones.

This combination of higher capacity per smartphone and very large growth in terms of total units ultimately translates to very large petabyte requirements and eventually making smartphone flash as the biggest end market that we showed you earlier.

So this is really the largest category growth for the flash industry over the next two years.

[Slide 40 SanDisk Mobile Points of Engagement: Best in the Industry]

So of course it takes strong products, both on the embedded side and on the card side, but it also takes much more than that to really be a leader in this market. The customer value chain in mobile consists of the handset vendors, the network operators, and the retailers.

SanDisk is, in this space, best positioned across the entire customer value chain. With the handset vendors we have a long traditional relationship of supplying our product to them. On the SanDisk branded retail side we have the vast majority of the market share on a global basis.

But what is exciting is that in recent times we have developed relationships and business with mobile network operators. You are going to hear a lot about this later on in the presentations as well. And we see that as a nice emerging opportunity for us. And of course as I mentioned earlier on the global retail side in addition to selling SanDisk brands, we are also supplying that mobile card to private label brands.

So we really have the most complete coverage, if you will, in terms of points of engagement anywhere on the mobile customer chain.

To the handset vendors, we are supplying embedded solutions as well as cards. To the mobile network operators we are supplying them cards for them to bundle with the phones or to sell in their retail stores.

And of course to the global retail channel, whether under the SanDisk brand or under the private label brand, we are supplying cards.

So SanDisk has the strongest penetration here and why is that? It is really because that our vertical integration strategy is appreciated by these customers. Vertical integration in terms of being able to deliver leading edge innovative solutions. Being able to produce them in a cost-effective and high volume fashion. And being able to supply them with customer satisfaction.

So we, as a result of this, are well-positioned to continue to drive the growth in this particular market segment.

[Slide 41 Solid State Drive: A Large Emerging Demand Driver]

A really large opportunity ahead, and Eli talked about this, is SSD. According to Gartner’s projections by 2012 timeframe, this is supposed to be approximately 20% of the total flash demand.

Of course the performance and the price points of flash solutions in notebooks, will be be an opportunity to begin to drive mass adoption of this and we think it is continuing to seed well in 2010, and with the cost structure enabled by the 2x technology in 2011 will probably accelerate and then continue to build from there as well.

What is exciting about flash in these kinds of applications is the unique attributes of the flash memory. It enables thin formats. It enables higher performance/ devices. It enables lower power.

All of these attributes ultimately can enable cool gadgets/ devices as you are starting to see in some netbooks as well as tablets.

As the lines blur between the netbook, the tablet, and the phones and they start evolving towards the smart phone as a PC, we think that there will be a segment of that, initially the high end of that segment and then continuing to build factors that will require the full blown functionality of SSDs to provide the complete and the strong user experience.

The SanDisk track record of history of leadership in the mobile space and our system expertise in delivering flash storage solutions, we are excited about the opportunities that would mean for SanDisk in the future.

[Slide 42 Innovation]

I have shown you that the opportunities ahead are substantial. So next I want to show you what we are doing in certain areas to drive innovation, to have different differentiated product offerings for those end markets.

[Slide 43 SanDisk Innovation Focus Areas]

I’m going to cover mobile embedded applications in this regard, the mobile network service delivery cards, SSDs as well as SanDisk leveraging technology and system expertise across our entire product portfolio.

I will give you a brief plan into these areas and you will get much more detail from other presenters during the course of the day.

[Slide 44 Pioneering New Mobile Embedded Solutions]

The memory technology, and Eli also talked about this, over time, as you scale, flash memory is getting more and more difficult to manufacture. Essentially the inherent device characteristics of the flash due to the physics degrades over time. Over time means as you scale the technology transitions over time.

The reliability degrades. The performance degrades of the flash memory device, the flash memory cells. At the same time there are increasing applications for flash and those applications are requiring more and more form specifications for the flash in terms  of requiring higher performance, more power, greater functionality from the device, such as boot capability, code storage capability, and more and more user features to enhance the user experience.

So you see there is a divergence here, between what the flash can do over time in terms of the raw flash capabilities and what the customers are requiring. And by the way this challenge only gets bigger as you go from two bits per cell to the three bits per cell memory.

[Slide 45 Pioneering New Mobile Embedded Solutions]

Thanks to the Sandisk’s vertical integration, we have pioneered adaptive flash management of what inherent [missed words] raw NAND flash and applied advanced techniques and system algorithms through the controller to ultimately deliver a solution that meets the requirements of the customer.

We are applying that in embedded flash memory solutions for the mobile space and of course these techniques can also be and are being applied in other parts of our business as well.

You will hear more on this from Yoram as well as further details from Dan.

[Slide 46 Partnering with the Mobile Network Operators: Service Discovery Cards]

Another area is the service delivery cards, service discovery cards. This is a new innovation, a recent innovation from SanDisk. If we look at traditionally how mobile network operators have used a flash card, they really have used it as an accessory, as a phone accessory, as an extension of the phone.

Now with the mobile internet explosion, they have opportunities to deliver more services, and a stronger customer experience through the network. One the one hand there is an opportunity. On the other hand there is a challenge. And the challenge is that these applications are moving a lot of content around and that ultimately is resulting in the bandwidth is needing dedication from the network.

So SanDisk has developed the service discovery card and this is very recent in the early stages of our engagement with the mobile network operators in this regard. And with you’re done on this card is implemented unique capabilities such as streaming, caching, security which will enable the network operators to provide solutions in a cost effective fashion as well as help with their network bandwidth limitations.

We are excited about the potential opportunities that this means for our business in the future. You will hear more on this from Elliot later in the day.

[Slide 47 SanDisk SSD Innovation Focus]

Of course SSD is expected to be a large market in the future and we will be a significant player in this market. We are focused on innovation in this area as well. In 2009 we continued to grow our pSSD, based on MLC technology for the netbooks space. This is the modular SSD.

Just recently, this week actually, earlier this week we launched our third generation SSD  with our MLC controller and with our MLC flash for the retail market. And we will continue to engage with this product on the OEM side as well.

And of course for 2011 and beyond, we are developing innovative solutions for the notebook, netbook, tablet and the smartphone markets.

[Slide 48 Leveraging Technology and System Expertise]

Next I want to just highlight here briefly our technology and system expertise in driving high performance, high capacity, and low cost solutions. In terms of performance we have leveraged our system expertise to develop our range of products that are based on segmentation from performance of those devices.

Shuki during the retail presentation will tell you more about it, but essentially we have leveraged performance capabilities through good, better, best- blue, ultra and extreme lineup of cards as well as for USB drives of blue and ultra level USB drives.

In fact our cards, in extreme pro have the highest level of performance at 90MB/sec. In terms of achieving high capacity of leveraging technology transitions to grow the capacities in the cards but also our advanced packaging technology.

An example is embedded iNAND products which we announced last week and this product uses our X3 memory and 8 flash memory die packaging and a controller chip in it to deliver our iNAND embedded solutions.

In the packaging area as well we believe we have unique capabilities particularly related to multi-die packaging.

On the memory and system side we have also used that innovation to take a lead in X3 memory. In terms of memory we actually have for performance, we have developed and pioneered the ideal (?) structure where we are using to achieve high performance from the memory and and that’s a key to delivering higher performance in X3 memory.

So using system and technology expertise, we are able to apply X3 across all of our products.

We have seen that the market opportunities, the demand drivers, are strong and with our diversified OEM and retail business as well as our vertical integration approach, we are well positioned to continue to capture those opportunities in the future.

[Slide 50 Leadership in Technology and Cost]

So now I will move to our leadership in technology as well as cost.

[Slide 51 SanDisk-Toshiba Partnership building on 10 years of NAND collaboration]

Our partnership with Toshiba. We are very proud of this relationship. This is a ten year partnership now and it has codeveloped between SanDisk and Toshiba eight generations of MLC flash and three generations of X3 memory.

We collaborate in R&D to develop the memories and of course that provides us the benefit of sharing of the talented pool of engineers as well as cost sharing of R&D expenses.

The program of R&D collaboration over the ten year timeframe has been extremely successful and in fact we extended it to the 3D memory a couple of years ago- the 3D R/W memory.

With Toshiba as you know we also have two existing joint ventures. They are located in Fab 3 and Fab 4 in Yokkaichi Japan. SanDisk and Toshiba in those joint ventures shared on about a 50 – 50 basis, but let me point out that in Q1 2009 we sold about 20% of the capacity of the joint venture to Toshiba.

And that translates to approximately a 60% of the capacity from the Yokkaichi fab of the fab 3 and fab 4 going to Toshiba and approximately 40% coming to SanDisk. Even while the joint venture portion of the wafers of capacity remains at a 50/50 level [what the heck does that mean?]

The combined scale of production of Toshiba and SanDisk is more than 4 million wafers per year. Even after the joint venture restructuring, SanDisk continues to enjoy the full benefit of the 100% of the scale.

So this is a very powerful relationship in terms of enabling advancement of technology and cost leadership.

[Slide 51 X3 Is Extremely Valuable]

Of course X3 is extremely valuable. Let me share with you why so. For 32nm if you look at the die size, of our 32 Gbit memory with X2 is about 140mm squared. If you look at the die size of our X3 memory at the same technology node, 32nm and the same capacity, 32Gbit, the die size is 113mm squared. Obviously this translates to approximately 20% more GB per wafer.

That leads to substantially lower costs [missed words] it does not require any additional capital expense over the production of X2 memory. And no additional process complexity to product the X3 memory.

On top of that SanDisk’s system expertise is able to leverage X3 in the product meeting the specs, specifications, that are delivered by others, in similar products using X2. So clearly we can price our products that use X3 at levels similar to the products that are supplied by competitors with X2.

So essentially the pricing is alike between our X3 products and competitor’s X2 products. So this leads to the obvious gross margin expansion for SanDisk due to being able to maintain pricing with the ability to reduce costs and provide the highest ROI on our flash memory production.

[Slide 52 … If You Can Deploy It]

X3 is extremely valuable, if you are really able to deploy it in large volumes. So for Q4 2009, I’m showing you here Gartner’s projections of X3 bit production by various suppliers. So you can see here that SanDisk has a significant lead over others.

In fact Toshiba our R&D partner as I told you , but in the fab output [??] of X3 we have significantly over them as well. And the rest of the players for X3 production output in 2009 Q4 timeframe are extremely small.

Again I want to point out that its not only about designing the X3 memory. It is the system that goes with that X3 memory with all the algorithms to manage the performance, to manage the reliability, to ultimately make it a product that meets the specifications that the market requires.

[Slide 53 SanDisk Utilizing X3 in All Major End Markets]

SanDisk has applied X3 across all of our end markets. Of course across all our products  addressing our major end markets. So in terms of Mobile for Q4 2009, approximately 50% of our bits came from X3. In terms of Imaging also approximately 50% and in USB drives approaching 85 to 90% range.

There are certain products, such as lower capacity products, some embedded products, as well as products like SSDs and high performance cards such as Extreme cards, the highest performance cards that do not yet utilize [X3] because of the requirements of those applications.

So we have really optimally applied X3 as aggressively as we can across our multiple product platforms. We have started to apply X3 in our embedded products as well, some of the embedded products, such as some iNAND products.

[Slide 54 SanDisk NAND Roadmap]
[Note that 1x nm starts in the second half of 2012- just when fab 5 will be ramping]

On our technology roadmap you see that X3 is an integral part of each technology generation. Moving from 32nm, ramping it up, into production with X2 and X3 and continuing to drive aggressively utilization [??] of X3 to 24nm coming on production in late 2010 in Q4, the timeframe.

And of course we have X3 in the 24nm transition as well. And then we are working on the 1x flash memory and that is targeted at this time for production some time in the second half of 2012.

[Slide 55 Continued Rapid Technology Transitions]

What you can also see here is that the technology nodes continue to move fairly fast. So its not just that we move the technology transitions fast. We also deploy it in volume production fast. And that requires not just transitioning the fabs, continue technology nodes, it also requires a lot of the internal qualifications so we can use the new technology across the product lines that we provide and it also requires customers, particularly on the OEM side, to do those qualifications.

The ability to aggressively transition technology transitions again highlights our vertical integration working well. The memory fabs to systems engineers supplying it across products, to the supply chain leveraging the new technology through assembly and test for the products and of course, working with the customers- retail and OEM with a very broad lineup of products to get them to accept those products for volume production.

[Slide 56 5th Consecutive Year of >50% Cost Reduction]

The technology transitions have enabled aggressive cost reduction and have been a key part of the cost reduction on a per GB basis over the last five years. We are very proud of our achievements here, that we have been able to reduce our memory cost by more than 50% [each year] over the five year time frame.

It’s not only the memory, that we continue to aggressively drive in terms of reducing costs. It’s also the non-memory portion of our products, such as cards and USB drives, that we work very hard to drive the cost lower.

In 2009 our cost reduction was 52%. And let me point out that this 52% cost reduction takes into account the fact that [fabs] 3 and 4 running under-utilized in the first half of 2009.

So this 52%, 40% was contributed by memory. And an additional 12% of the 52 was contributed by non-memory add-ons [??].

So let me first provide you some color on the memory cost reduction. As you can see in the pie charts ] more than 50% of the reductions was the memory cost reduction and came from technology transitions. Again I’m showing this on a year-over-year basis.

2008 was 56nm technology as the workhorse. 2009 was 43nm. More than 50% came from technology transitions of the memory cost reductions and approximately 20% came from transitions to X3 and X4 memory in 2009 compared to 2008.

In 2008 if you recall our X3 and X4 utilization for the year was around 10% of the bits. In 2009 X3 and X4 utilization was approximately 50%. So that is how the rate of utilization drives costs lower and contributed about 20% of the memory cost reduction.

The next piece of that memory cost reduction is the economies of scale and the productivity improvements in our fabs,

Let me just explain the economy of scale benefits. Remind you that in 2008 we were continuing to ramp up fab 4 and in 2009 there was no new wafer capacity added. In fact fab 2009 was underutilized in the first half. As a result even after that underutilization, there was more wafer production in 2009 than in 2008. So that higher level of production provided the economies of scale benefits and produced lower wafer costs.

And in addition we had the productivity improvements in the fab that also contributed to wafer cost reductions.

So really very solid effort in terms of across the board driving our memory cost reductions.

[Slide 57 Non-memory Costs Declined Even Faster Than Memory Costs]

Now let’s look at non-memory cost reductions. Non-memory cost reductions is also [missed word??] relatively and I am going to highlight that through this example of a 4 GB card.

The BOM cost of a 4GB microSD in this case, from 2008 to 2009 reduced by 52%. The memory went from 77% of the BOM in 2008 to approximately 80% of the BOM. So with memory reduction which I showed you earlier on an earlier slide of 40%, and memory becoming a larger proportion of the BOM in 2009, it clearly shows that the non-memory cost reductions were even greater than 52%.

Across the board in the company we continue to work very hard on reducing costs. Whether it is on the controller side, advancing controller technology roadmap to give us lower costs of the controllers, assembly and test lowering the cost and realizing capital avoidance in the process as well, all the materials that were used, building the card or the USB flash drive or an embedded solution as well as even things like retail packaging. We continue to reduce the costs there.

So across the board we work on that and in 2009, we of course also got the benefit of a higher number of units of production, and that enabled lower per unit cost contribution as well.

So in terms of cost both from the memory and non-memory side, we are continuing to do very well and the examples I showed you of the non-memory cost reduction, again points to our vertical integration strengths in realizing lower costs.

[Slide 58 2010 Cost Reduction Outlook]

Looking ahead at 2010, we expect the cost/GB reduction to be in the range of 30 to 40%. X3 contribution, production output, is expected to be greater than 50%. And the key driver of cost reduction in 2010 will be the 32nm transition.

We expect the 32nm transition as we are ramping up during the course of this year and expect to achieve complete transition to 32nm by the end of the year. We expect that transition to yield us about 70% of our total bit production in the year coming from 32nm.  So that will be a driver for cost reduction during 2010 and of course continuing to drive lower non-memory [missed word- average??] costs as well.

[Slide 59 Agenda Scalable Operations, Solid Execution]

In terms of technology and cost we believe we are in a good position. With respect to X3 we are leading the industry and it provides key and very significant competitive advantage for SanDisk.

Next I would like to talk about the scale of our operations. And again how this is really enabling our solid execution both in the retail and the OEM side of our business.

[Slide 60 SanDisk Scale Approaching 1.5 Million Units Per Day]

SanDisk has grown its scale of business hugely over the course of the last few years. 2004 our production was at the rate of 100,000 units per day. 2009, the production was at the rate of at an average 1.2 million units per day. And 2010 looking at 1.4 to 1.5 million units per day.

So this is really a growth that SanDisk has managed through its supply chain network, the fab and the back end operations of more than 15 times over the course of 6 years.

In fact this scaling of our business and scaling of our entire supply chain operations is now leading to a scale of about 500 million units for 2010.

[Slide 61 Joint Venture Fabs: Industry Leading Scale and Efficiency]

The scale really starts first at the fab. Fab 3 and Fab 4 before. Our production of wafers from these fabs in 2009 was 1.5 million wafers approximately and that included the effect of the under-utilization of the fab in the first half.

Our bit growth in 2009 was 38%. Remember we sold approximately 20% of our capacity to Toshiba in Q1, so that is included to reflect this bit growth estimate as well as our 43nm transition was an important part of that bit growth and of course the increasing mix of X3. Approximately 50% in 2009.

So all of that added up to about 38% bit growth in 2009.

[Slide 62 2010 Supply Growth Aligned with Demand]

Looking ahead at 2010. We expect our memory supply, our captive memory supply bit growth from fab 3 and fab 4 to be up to 70%. And that is coming from the 32nm transition during the year primarily as well as we had announced before planning to add some new capacity. Approximately 10% of the monthly wafer production capacity coming on line in the 2nd half of the year.

So the combination of both, with the 32nm being the primary driver will lead to up to 70% supply bit growth during the year.

We think that our demand requirements will be greater than 70%.

So we plan to maintain and potentially grow market share through our captive supply as well as through improved management of our inventory and potentially utilizing some non-captive on a need basis.

In terms of scale, the fabs continue to provide us the scale of addressing the market opportunities and continuing to deliver units in high volume and lower and lower costs.

[Slide 63 SanDisk Shanghai Assembly/Test Facility: Another Competitive Advantage]

But another important factor of scale, as I mentioned earlier is our back-end supply chain operations. And here I would like to highlight the success of our Shanghai Assembly and Test factory. This factory has really become a very key competitive advantage for SanDisk.

It provides us the benefits of lower cost, it provides us the benefit of faster cycle time leading to wafer customer responsiveness as well as provides us the benefit of advanced technology development and faster time to market of those technologies.

We are continuing to leverage and execute very well in this factory. I am very pleased with our team at this factory and how passionate they are in terms of continuing to drive the support of our business there.

In 2007 this factory represented a small portion of our total production. In 2009, the total units increased and this factory provided more than a third of our total unit production.

I would like to point out that our subcontract partners are also a very important part of our supply chain. They are very important partners and we are very thankful to them for the support that they continue to provide to meet the requirements in terms of continuing to scale our business and to meet the requirements in a flexible fashion.

The key is the mix that we have between our Shanghai factory and the subcontractors and we plan to continue to maintain a reasonable, meaningful mix in this regard in the future as well.

[Slide 64 Record 2H09 Unit Sales: Outstanding Execution]

…[in regards??] the supply chain going from the fabs to the back-end assembly and test and operations is a huge increase in units that I mentioned earlier. And we are showing you that in terms of quarterly units sold. So what you see here is that in the second half of 2009 compared to the first half of 2009 our demand that we supplied was 56% more.

I think that points to the benefits that the Shanghai factory has contributed to our business. As well as points to the flexibility, responsiveness and scalability of our supply chain.

[Slide 65 Focused Organization, Vertical Integration Strategy]
I have mentioned several times during my presentation that vertical integration is an important part and a key competitive advantage for SanDisk. Restructuring the organization in 2009, we have reflected that vertical integration strategy in our organization as well.

The Retail and the OEM business teams see the market opportunities and make sure that the right products are defined to meet the requirements of the end-markets and that engineering  and the rest of the business deliver those products.

The systems engineering group which is part of the OEM team, the memory technology team, and the fab work together to make sure that the most cost effective solutions through technology transitions, through a better mix of X3 are being developed for those end markets.

The Fab as well as our supply chain operations will make sure that these requirements of the marketplace are being delivered in volume. with high quality, and with high customer satisfaction and responsiveness.

Not only did this restructuring help us contribute to our getting a [sense??] reduction, but it has really helped us to sharpen our focus on executing our vertical integration strategy and maximizing the opportunities for our business in a profitable fashion.

[Slide 66 Summary]

In summary we see strong demand drivers ahead in legacy markets but the biggest drivers are really in the mobile market. It’s the biggest driver for the future and an emerging strong driver on the SSD side.

With a diversified OEM and retail business and our vertical integration structure, we are well positioned to continue to drive this business on both fronts in a very strong fashion with focus on profitability.

We are continuing to build on core competencies and delivering as well in the area of innovations, in the area of cost reduction as well as in the area of high volume operations.

Across the board, SanDisk is executing well and has established a strong track record of execution. With all of that, we think that SanDisk is best positioned to drive future growth.

Thank you.

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