2010.02.26 SNDK Investor Day- Yoram Cedar

02.26.2010 SanDisk Investor Day- Yoram Cedar
Executive Vice President, OEM & Corporate Engineering

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

[Slide 68 Yoram Cedar]

As Sanjay said, my name is Yoram Cedar and I am responsible for OEM and corporate engineering. My focus today is going to be on the OEM side as well as providing some insight of how corporate engineering with the system capability really is playing a big role in us being able to address these OEM markets.

My theme today is OEM offers us tremendous growth. I think you saw some of these estimates from Eli and Sanjay and I am going to put some more color on it. But really a tremendous growth opportunity in the OEM space. I think and I believe that we are very uniquely positioned to exploit that.

You saw in Sanjay’s charts of how we are addressing different markets. I’ll address that and actually put some more color on how we do it.

So Eli and Sanjay were talking about the fact that in early 2009 we essentially reorganized or restructured the company along the lines of retail and OEM. Until that time I headed the mobile effort, both OEM and retail at SanDisk. And also corporate engineering.

Early 2009 I moved the mobile retail portion to Shuki who now now heads the combined retail organization for the company. In that time also Shuki handed to me some of the legacy business, OEM business that he had- which is really the imaging and gaming business that we have been servicing that market for quite some time and really engaging with all the OEMs- making sure that they integrate the slots into the different types of consumer devices- while we sell the retail product in the retail channel.

So I will talk about the imaging-gaming. We are now addressing that more as an OEM. From the point of our OEM, I think we see that as a huge growth opportunity for us in the future.

I’ll also address the new channels that we talked about.  Sanjay talked about the private label- that’s the private label and component business that appears on the bottom of the slide.  Also a new business for us that just started in 2009.

And of course the Mobile- the big market that is now fueling the growth of this company and in the near future, you heard from Eli, the mobile internet, and so on. We think that’s a megamarket that is going to fuel us for the next few years.

And of course the computing. The SSD products that are coming our way- I’ll show you what we have at this point.

[Slide 70 SanDisk’s OEM Portfolio]
[Imaging & Gaming, Mobile, Computing, and Private Label & Component Business]

So this is a consolidated view. A consolidated OEM business which we took across the company. Put it under one umbrella and really started driving it as a cohesive approach starting in January of 2009.

[Slide 71 SanDisk’s 2009 OEM Revenue Mix]

I’m very happy to give you these results. At the end of 2009, the combined revenue from this market [OEM] was about $1 billion dollars. We ended 2009 with about 50% growth- 1.5 billion dollars. That was done of course. Eli was talking about the fact that the markets and the pricing was good.

Yes it was good, but it wasn’t only [that]. We grew units and petabytes (PBs) dramatically in order to achieve this $1.5B result. I just want to say that I am very proud of these results. This is not that I stand here in front of you as a representative of this OEM, but this was as Sanjay and Eli were talking about- the vertical integration capability- This was an effort across the whole company.

The whole company rallied around this and really focused from- operations, engineering, technology, marketing, sales, finance. HR. Everybody. It took the whole company really to get this kind of result. A really tremendous effort.

You can see also in this pie chart here representing the different segments of the OEM organization or the OEM business. Mobile Handset Vendors by far the largest segment of it- 52% of that.

That is addressing both the cards, bundled cards that we are providing into the handset vendors such as Nokia, Motorola, Sony Ericsson, Samsung and so on.

And of course the embedded, the new growth engine of embedded that I will address. Further later on after me, Dan Inbar who manages this business he will come up and focus more on this market segment. This is a great market- the embedded area.

Also part of the mobile area is the MNO [separate pie slice], the Mobile Network Operators. We have been focusing specifically about those channels. This market segment is headed by Daniel Schreiber. Daniel Schreiber will not be here with us. He is in Israel right now. But Eliot Broadwin will come up here later on and present that market segment.

And of course, the Imaging and Gaming, the legacy products that are growing nicely. A lot of opportunity in that area.

Private Label and Components also- the newly emerged business. I will talk about that and the small portion yet this year- the computing, but as Sanjay and Eli said this is still early in this cycle and we are very well focused there to take advantage of that business.

So now I will go over those different market segments, and later I will approach also why we are so uniquely positioned to address these market segments with our technology and all our capabilities.

[Slide 72 SanDisk’s 2009 OEM Revenue Mix (emphasis Imaging & Gaming)]
[Slide 73 Imaging and Gaming]

This is the Imaging and Gaming. As I said this is our legacy products. We have always been very focused in this market segment and we can see here another trend that is happening in this channel in this market segment- The video cameras, the SLR high definition video cameras that were using tapes are now migrating very aggressively to use flash- either by using cards- our SD cards. Here you see the 64 GB high capacity HDHC. I’m sure Shuki is going to address it in his area.

But there is also a market segment that is building those SLR cameras using embedded products. These are very high capacity and these are high definition video. You need to capture a lot of video and that’s great and they require 16, 32 and 64GB type of memory.

That is probably the last stronghold as Eli indicated that are still using some type of magnetic media and that’s migrating right now to flash.

[Slide 74 Imaging and Gaming]

Another aspect, another trend that we are seeing in this market is the convergence mobile gaming and PMP [portable media player- like iPod] into a single multimedia device. Again, we are seeing the migration from optical disk to flash. There are still some optical disks being used out there, but we believe that as these devices are very small they want to enjoy the intrinsic value of flash which is low power, small size and really have a thin device in your hand, that you can consume all the media- video games, listen to music, look at video- that will converge very rapidly to flash. The appetite for better consumer devices are coming up.

So in this imaging and gaming to summarize this portion, we see good growth in this area, very high average capacity, and a good transition to flash across the board. Essentially flash disrupting this ecosystem by providing a better user experience.

[Slide 75 SanDisk’s 2009 OEM Revenue Mix (emphasis Private Label Cards & Components)]

The second market segment that I am going to talk about is the private label cards and components. This is a market segment that exists. It is a large TAM [total available market]. Sanjay talked about it in his presentation about the fact that we are now approaching the private label companies and are essentially addressing the same after market that we are addressing through our branded products.

We are providing them non-branded cards- microSD and SD cards and they essentially resell that as their own brand in the channel. That is a big market that is out there. We started addressing that early in 2009 and it grew very rapidly to become 13% of our revenue [OEM revenue] in 2009.

Some of those PLC customers, private label customers is what we call them. They prefer to build their own products. That is perfectly OK with us. We provide them our components either in the TSOP format or VGA format, or even in the wafer format, if they want to take it and build their own products.

Many of them build their own USB products. Its not necessarily that they want to build their own cards. But they want to build their own USB, so we supply them with the wafers and components and they take it to the next step.

So we are addressing that market. Very focused. We think that there is a lot of growth in that market. We service them very well. We have established good relationships with them. And they have a footprint in some places that we don’t and that’s fine and we service them and build our business.

[Slide 77 SanDisk’s 2009 OEM Revenue Mix (emphasis MNO & Mobile Handset Vendors)]

The third market segment that I am going to talk about is the mobile. As I have said, the mobile is composed of two major segments. One of them is the mobile handset vender and the other one is the mobile network operator.

As I said the mobile handset vender will be addressed by Dan and the mobile network operator later on is going to be addressed by Eliot.

I think here is one. This is real exciting growth as you can see in this market. It is a tremendous market for us.  This is a market that we really, as a company, initiated or drove it from the beginning.

Eli and Sanjay asked me in the pre-mobile time, they asked me to create what we call an emerging market business- that was before everybody thought that actually there would be such a large deployment of flash or slots in the handset.

We started working on this format, which is a microSD, at that time we called it Transflash or some of the people called it T-flash. And we evangelized that in the market for many years and grew that market.

[Slide 78 Mobile Storage Growth]

So you can see that although the total handset is growing very nicely, the slotted phones are also growing very nicely and with them of course the cards that are supplied into these slots.

[Slide 79 Mobile Storage Growth]

So essentially for every ten slots that are being added in the market, there are six more cards sold. Either it is bundled in the handset, either it is sold at the point of sale with the handset itself, or through the retail, through the after-market in the channel. So this is growing very nicely. This is mostly or dominated by microSD. There is still some M2 pro out there, but that is pretty much with Sony Ericsson converting to microSD essentially every segment or every model that is using slots is using microSD.

[Slide 80 Mobile Storage Growth]

So that is one story in this ecosystem. A very strong story, but one story. But the true growth, the true growth is coming from what we are seeing with the effect of the iPhone.

As you can see. This is what is coming up right now, is the huge increase in embedded utilization or adoption in the handset.

The iPhone kind of led the way in this area. There was of course usage before that, but the iPhone led the way. We see a big segmentation in the market while everybody is going with their own iPhone, and showing off (sharing???) the product as Eli said. iPhone, we all walk with the iPhone here.

But this iPhone, while it has the same features for 8, 16 or 32GB drive, flash, and really you buy it based on what you prefer. We see a lot of demand on the 16 and 32. So this is not just a unit attachment. This is really a tremendous increase in average capacity utilization.

This is what Eli said- flash is going to be bigger than you think. This is what he meant. He meant that what we are doing right now and this is fueled by the mobile internet growth and so on. So a tremendous opportunity for us to serve this market. And we see humongous growth here in the years to come.

[Slide 81 SanDisk’s 2009 OEM Revenue Mix (emphasis computing)]
[Slide 82 You Can Never Be Too Thin (ipods)]
The next market segment that I am going to address is computing. Computing and mostly around the SSDs. This is an exciting market segment. This is really the next mega-market that we are going to see in the next years to come.

Probably going to be still small in 2010 growing in 2011 and then becoming really a major market probably in 2012 and 2013 timeframe.

As we can see and Eli talked about this meeting with Steve [Jobs] and the fact that before that he had used the HDD and then later on moved to flash. Its obvious why. You look at this screen why flash caught on. Even though average capacity was lower, it’s much thinner, its much more friendly consumer device. And people like to put it in their pockets. This is half the thickness.  A third in the weight.

The fact that you can pay much more for the GB here in this product is because it is so consumer friendly and people are willing to pay for a consumer friendly device.

[Slide 83 You Can Never Be Too Thin (netbooks)]

So that was in the past. However we see the same impact today on the netbooks. You can see here a hard drive based netbook and here you can see, I have here with me the Vaio which is a Sony device which uses our product, I’ll talk about it in a minute. This is so thin. So nice. Easily handled. Half the size of the HDD based product. I can tell you that the reason for that is that instead of putting a HDD, which is nice, it is an SSD device, in a form factor of HDD, you can put a small modular SSD which has essentially the same functionality as a HDD, the same functionality, but look at how small it is. How thin it is. And can easily be incorporated in those kind of devices.

So we really think that that is the trend. And not necessarily replacing HDDs. We think the trend that is going to happen right now is actually going to be with the introduction of many products that take advantage of the intrinsic value of flash. Lower power. High performance. Small size and so on. Introduce very very consumer friendly products.

You saw Steve announce the iPad. That’s another very thin device that will for sure consume flash and not in a hard drive bay, and is essentially going to consume just the form factor of flash.

[Slide 84 Performance and Modular SSD]

These are our two products. We actually evangelized or brought to market the modular SSD. The modular SSD is really addressing smaller and lower cost segment of the market but will expand to be also higher performance in the months to come. Right now the netbooks are mainly driven by cloud applications that do not require a lot of horse power inside the product itself but as you can see the iPad and other products that are coming out, new units that are coming out are going to be much more higher performance.

The modular SSD essentially are going to have the same performance as a full sized SSD.

We also introduced of course a full sized SSD, initially in the retail market Shuki is going to address that, but we are approaching OEMs right now. The feedback that we are getting is very positive and I’m sure that through 2010 timeframe we will get some more, you know, we will grow and adapt ourselves to their needs.

So this is a humongous opportunity that we have. Huge growth in this area and I’m showing the modular SSD and the performance SSD. The performance SSDs are the ones that are replacing HDDs and the modular SSDs are the ones that are enabling new types of form factors.

[Slide 85 SSD: Growth Is Just Starting]

I actually believe that most of the market, we believe that most of the market initially is actually going to be in modular SSD and the HDD [performance SSD] is actually going to come later.

I think this is going to be a very large market as more and more thin devices are going to come out using the [SATA??] interface and so on that are part of the SSD or the HDD type of environment.

So again flash is bigger than you think.

[Slide 86 of the 10 Top Netbook Makers Use SanDisk Modular SSD]

We are now supplying already to 8 of the 10 top netbook makers that use modular SSD. I showed the four of them here. The rest at this point we cannot announce, but when they come out with their product, I’m sure that we will have joint press releases with them and [missed word] their product when they come out.

Again a huge opportunity. We will engage with it and we are building the market. Making sure that it is a win-win situation from the point of view of when we engage, what we replace, which market we address, and not just go blankly and try to replace the HDD at very low cost. That just doesn’t make sense at this point.

I talked about OEM as a tremendous opportunity. So I think that between the imaging, gaming, huge mobile market, the private label and the SSDs that are going to come later. I think that the opportunity is very big and again flash is bigger than you think.

[Slide 87 OEM offers tremendous growth opportunities which SanDisk is uniquely positioned to exploit.]

Now I will go a little bit into what we are talking about. Why are we so successful approaching this and what is really the core capability that we have that enables that.
[Slide 89 System Design at SanDisk’s Core]

And Sanjay talked about the vertical integration which is so powerful in this company. We essentially have world class in memory fabrication, memory design, system assembly, retail and OEM. We are world in class at that.

But we are also very good in system design. We are also very good in system design. We can take any one of our technologies and adapt it to different markets. And make sure that whatever is the best technology- that we’ll provide it. The best cost-effective technology that we will provide. We’ll drive it to that market and make sure that we satisfy the needs of that market.

And that entails in this and especially as it is related to X3 and also X2, it drives us more bits, more performance and ultimately more revenue per wafer- more GMs per wafer. And that is really our core capability. As Eli said and I think he said in this meeting, is that not all X3 are equal.

Well they are not. Maybe they are equal- I don’t think they are even on the wafer level, but definitely when you put it into the product with our system capabilities that X3 becomes a very very competitive product in the market and will satisfy all the customer’s needs.

[Slide 89 SanDisk Drives Evolution of Leading Flash Formats]

The system architecture that we have is really contributing in two major segments. One is the introduction of new standards. Introduction of new form factors.

This is what SanDisk led the way from the initial time. Initial time when Eli and Sanjay created this company, we have introduced new form factors. Flash did not exist in any one of those markets in the mass storage.

The first one was PC Cards. Later was Compact Flash which was very successful- really built up the imaging industry and replaced film. So many types of applications.

Later on MMC and SD. Smaller form factors that came in. SD became a widespread platform/product in the market. And really it is building up right now as a major portion of the imaging business- GPS, gaming and so forth.

Also UFD. Another type of flash-based device replaces sketch [??].  I don’t know if anyone of you still remembers that, but we did have the sketch [??].

This was actually at one time introduced by msystems [UFD] which is part of our company. And another innovation that drove utilization of flash into a new market segment. Again opening up a new market and then driving into it flash added growth.

Memory Stick. MiniSD, smaller form factor, but then the microSD. The microSD by far outpaced or became the largest unit volume, revenue in the market as a removable product. Very large and very small. Small in size. Very large in volume.

We also have introductions of MDOC in embedded. We now have just focussed on the removable area. There was also the introduction of embedded devices. Eli talked about the fact that we are dealing with standardization. MDOC was really a product, kind of a unique product at SanDisk-Msystems. But later on we introduced the iNAND. The iNAND was built mainly on the SD interface. SD and MMC interface. Later on we went on to standardize that. We became the eMMC. Our version of that is the iNAND. Dan Inbar is going to talk about it later on in his presentation. Really focus on that market segment.

Later on also Eliot is going to talk about the SDC. As you can see the SDC is a microSD. So it is a new format. Not a [new] physical format, but it is still a new format. It takes away from just being an accessory device or expanding the internal memory of the mobile device, but now adds a new dimension. New dimension of loading content. Loading applications and essentially delivering service delivery cards into those slots that are out there. So what we are doing really here is, if you would like, monetizing those huge amounts of slots in building another type of product from an existing mechanical form factor, but expanding it to more applications. Eliot is going to talk about how this works very well with the mobile network operators and how that is building on their needs in order for them to address their challenges in their markets.

Again you can see throughout this type of history that we have, that we have been working with the ecosystem.

[Slide 90 SanDisk Drives Evolution of Leading Flash Formats (with chart showing slotted handsets)]

I can show you here the microSD, as I talked about it before, and you can see from 2004 to 2010 how many slotted handsets were produced or shipped with the microSD slot. So we have been working with the ecosystem- with the mobile handset vendors, with the MNOs to actually grow that market continuously and we are doing it right now.

This is not a done deal [as in the end of the growth]. This is just early on in this market. There are going to be more and more types of innovations in this area that will expand and build the market. Create more volume for flash. And we are relentlessly going after this market and making sure that we address every need or at least look at any need that are going to come later on in the market.

And we have a lot of other ideas that are coming down the pike.

So this is one area where the system capability, our understanding of what the market needs is really being addressed by our system capability and adapting the flash to that market need. So that’s applications.

After you build that market capability. You build the interfaces, you build the way the APRs [APIs??] are working and so on. You need now to make sure that the flash will actually match the needs of that market.

[Slide 91 Application- Adaptive Flash Management]

Sanjay talked about the fact that the core, the raw flash, is very good from the point of view of cost per bit- that’s being relentlessly driven down the cost curve. And you can see here the cost per bit- for every generation the cost per bit improves. That is really what we are trying to achieve with the raw memory. That’s why we are going on every node, we are introducing X2 and X3.

X3 gives us better cost- 20% better cost per bit than an X2 on that existing technology. And we will continue with that.

But then unfortunately, but that’s physics, the other parameters of the flash, are actually getting a little bit worse from each technology. It’s becoming more difficult to manage that flash. It’s not easy. Eli talked about that. It’s just not easy.

Data Retention becomes worse. Endurance becomes worse. Sequential Write [R/W] becomes worse and random Write [R/W]. And we can see right now that if you are looking at the mobile phone that is becoming a PC, like Eli said- its the next PC- it will require more and more performance, more and more elements to make sure that you can actually use that flash and get the right user experience. Run applications on it. Make sure that the OS works OK with it, and so on.

So this is where our adaptive flash management comes in and it’s true for everything. It’s not just for mobile handsets or embedded. It’s also true for cards. It’s used for solid state drives. For any segment. USBs in certain market segments where they need a lot of performance.

[Slide 92 Application- Adaptive Flash Management]

And then we introduce our adaptive flash management and we get an effect of essentially expanding the core raw memory to meet the requirements of the application of the target specs.

This is why not every X3 is created equal. Because we know how to innovate that. We drive that kind of a system capability and that has been at the heart of our capability and the fact that we are vertically integrated and we talk to the device and talk to the partners, we have all the consumer engineers, we have the architects. We have all that under one roof. This is what gives us the kind of capability I am talking about.

[Slide 93 The Key to X3 is Adoption]

As Sanjay showed us in his actual slides, it actually translates to adoption in the market. You can see here that X2- we had adopted already in 2003. You can see the start representing 50% adoption. It took the industry probably another 3 or 4 years to reach the same point. As that time we moved to X3

[Slide 94 The Key to X3 is Adoption]

So moving very rapidly to X3. And you can see that already in 2009 we had adopted X3 to 50% while the rest of the industry on an average is much less than that.

[Slide 95 The Key to X3 is Adoption]

In 2010 on an average across all players there will be about 10% while we’ll exceed 50%. That’s what it translates to.

[Slide 94 SanDisk’s 2009 OEM Revenue Mix]

Building those markets, building these new channels, building these new applications and then bringing up our crown jewel, our ability to have more bits per cell on the technology and addressing those markets, making sure that we give the right solution to each one of those markets.

That’s really where SanDisk shines.

I’ve actually summarized my presentation. As part of the OEM portion I will now pass the baton to Dan to talk about the mobile handset vendor segment mainly focusing on the embedded side. Dan, and later on Elliot will come back and talk about the mobile network operators. Thank you. Appreciate it.


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