Shrouded in secrecy.
Damn, I am having trouble sleeping again!
I still had a couple of loose thoughts rattling around in my cranium which originated from some the discussion here. In particular, the volleys about SanDisk's business model, the interpretation of the recent flurry of legal events, and the notion of the market "discounting" Judge Breyer's decision. I am planning to stand pat on my position regarding the latter because, in general, the market's reaction to events, particular to the downside, have been proven to be contrary indicators in the past. Also, I don't believe a more solid body of due diligence exists on the Internet today as it relates to SanDisk and hope that others involved here may express an opinion that addresses this matter.
I wanted to get back to SanDisk's business model and the three pronged model for revenues. In broad brush strokes I categorize revenue streams as follows...
(This is not meant to be an exclusive or exhaustive list.)
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***direct sales (retail and OEM) of finished product
***royalty/license based on "naked" flash memory chip manufacture by direct competitors for direct competitiors
***royalty/license derived from CF assembly
see: Message 13342097;
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Although the licensing/royalty revenue issue remains shrouded in secrecy, I find it a useful exercise to lump royalties into two general categories: pre-CF and CF assembly related. It is also important to recall that the SanDisk IP encompasses some 100 patents in the discipline of flash memory and these are not restricted to inventions related to PC/mobile electronic interfaces of the PC card, CF, MMC or SDMC variety.
The earlier wranglings with industry heavyweights such as Intel, Samsung, Toshiba, Sharp,... antedate the upswing in CF sales by a significant time interval. I generally consider the revenues resulting from these settlements to be "pre-CF" and suspect that they address issues of core flash memory cell architecture and the way in which blocks of cells are configured, allocated, addressed, written, erased, monitored for fatique... The fact that these revenues have increased, at best, in a semi-linear fashion during the past several calendar years suggests that they are not directly linked to CF unit sales within the flash card industry as a whole. (This is not to say that the possibility that exponential royalty revenue growth may be concealed by front-loaded payments (received at the initiation of agreements) does not exist, but I think this remains unlikely). These revenues currently contribute significantly to total revenues. Last year about $40 million in licensing and royalty revenues was banked by SanDisk. These "pre-CF" royalties appear to relate to the segment of the SanDisk revenue stream related to "manufacture of flash chips by competitors for competitors" typified by the relationship between Toshiba and Lexar Media, for example.
The CF assembly related patents probably contribute minimally to royalty/licensing revenues presently as the 44 companies that currently manufacture CompactFlash are likely waiting the results of the Lexar Media litigation prior to sending in their checks to SanDisk. The only exception to this statement appears to be SSTI (who really specializes in code storage/PC Bios anyway) and Simple Technology (see my earlier post from last night). It is now clearer to me that the Simple Technology co-founders decided to divest the interest in Lexar Media (read "wash their hands of Lexar") before the recent upswing in demand for CF. This leaves Lexar in the uncomfortable position of explaining why the remaining employees with interest in the company appear to be primarily ex-SanDisk employees. Add to this the fact that Simple Technology has expressed understanding for SanDisk's dilemma, respects the breadth of the SanDisk IP and perceives SanDisk as "the leader in the field" and one is left with the only one conclusion; Lexar Media appears to have little support from other CF assemblers in the family of companies who possess memberships to the CompactFlash association.
To submit that the investment community at large, including analysts who claim to be experts in SanDisk (including one analyst who asked Eli to comment on the current royalties that Sony is paying for licensing technology for the Memory Stick-- to which Eli replied "I don't know where you get your information.") actually fathom the potential of the CF assembly patents is, IMHO, suspect.
The final contributor to SanDisk revenues, retail and OEM sales, is being addressed by expanding capactiy at partnered/contracted fab arrangements in Taiwan and Japan, the Toshiba/SanDisk MOU & Dominion outfitting (which is yet to be finalized), shrinking engineering process, increased cell density & multi-leveling, broadening retail distribution agreements, and branding/marketing/public relations/advertising efforts.
Well, pardon this public catharsis. Hopefully this insomnia will let up once I am purged of these odds 'n' ends...
...and I get used to the newness of this $50 haircut I am sporting.
Best to All!
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