Overview
Sandisk is the world’s largest supplier of removable high density
flash-memory storage products. The company designs, develops and
markets several product lines used in a wide variety of electronic
devices including digital cameras, laptops, cell-phones, PDAs, MP3 players, audio
recorders and digital video cameras. The company was founded in 1988 by Dr. Eli
Harari, who is a noted innovator and patent-holder in non-volatile memory
technology.
In 1999 the company sold over 5 million product units under its own name and
notable OEMs which include Canon, Cisco, Hewlett-Packard, Kodak, Lucent,
Motorola, Nokia and Panasonic. This year according to News.com, the company
is on track to produce 15 million units.
As the market leader, Sandisk played a key role in setting the major standards in
the industry and was the first to produce flash cards, CompactFlash cards and
removable MMC cards. According to the company, Sandisk has a 28%
market-share in the removable high-density flash memory market.
Sandisk holds over 100 key U.S. patents on flash memory and many more
pending. Consequently the company has lucrative cross-licensing agreements with
Intel, Sharp, Hitachi, Samsung, Toshiba, Silicon Storage Technology and TDK.
Until recently the company was “fab-less”, relying on outsourcing manufacturing to
Taiwan's United Microelectronics. However the company is starting to invest in fab
plants through partnerships with Toshiba and Tower Semiconductor to guarantee
future flash memory supply and production priority.
Opportunity
Dr. Harari, Sandisk’s CEO, at the recent shareholder’s meeting in early May of
2000 characterized flash memory as a “Tornado”, the symbol Geoffrey Moore
used in his book The Gorilla Game for truly disruptive technologies.
The three major trends he mentioned were:
1) Flash memory forcing the obsolescence of traditional 35mm film
2) Flash memory replacing CDs and Minidiscs for music storage
3) Flash memory replacing 8mm as the media of choice for digital
video cameras
Flash memory excels in mobile applications where the key characteristics of
durability, form factor and power consumption conservation are critical. According
to recent independent market forecasts on CNET, the market for flash memory
was $2.5 billion in 1998, $4.5 billion in 1999 and is expected to grow to $10 billion
this year.
Sandisk is in the sweet spot as the high-density removable flash memory leader and
as the industry standard setter. As a result of the three trends above, the demand
and growth for removable flash memory products has the potential to be
exponential in the coming years.
Personal Primary Research
Two months ago I bought a Fuji MX1200 digital camera, which uses SanDisk flash
memory cards. Along with the camera I added a 32 megabyte card and a Sandisk
USB card reader. I simply love it and have taken hundreds of pictures on it thus far.
The spacious card let’s me take 50 high resolution pictures and upload them onto
my PC faster than you can say “flash memory.” It’s true plug n’ play and a breeze
to use. The combination of flash memory and new mobile digital applications is
revolutionary.
The USB reader works so well that the “postage stamp” 2-gram 32 megabyte card
can even replace the old Iomega zip drive as the removable media of choice.
Moreover as the standard, the Sandisk card is usable and interchangeable with the
flash memory slot on my Diamond Rio500 MP3 player.......Product Lines
The company produces five major product lines, which are available in over
20,000 retail outlets.
1) CompactFlash (CF) - up to 192 megabytes in capacity and is
compatible with PCMCIA Type II slots using an adaptor card.
Common in digital cameras, handheld PCs, Mp3 players and PDAs,
audio recorders. As the standard, 160 member companies are in the
CompactFlash Association
2) PC Cards - PCMCIA storage cards available in capacities up to
1.2-1.6 gigabytes
3) MultiMediaCard (MMC) - the world’s smallest solid state storage
device. Weighs an incredible 2 grams and is the size of a small
postage stamp. Common in mobile phones, digital video cameras.
There are 75 companies in the MMC association
4) IDE Flash Drive - available in capacities of 32 megabyte to 1.2
gigabytes. Fits in the traditional IDE hard drive connector
5) Secure Digital Card - similar to MMC cards, but provides digital
copyright protection for intellectual property. 90 companies have
joined the SD association
Partnerships & Recent News
August 24, 2000 - Nintendo announces their next generation video game console
with incorporate a SD-slot for Sandisk 64MB flash memory cards
August 16, 2000 - Compaq is use Sandisk MMC cards in their new iPaq PA-1
MP3 player
August 14, 2000 - Nike to use Sandisk MMC cards in PSA Play 120 MP3
player
July 4, 2000 - Sandisk announced $75 million strategic investment in Tower
Semiconductor to help build a new Israeli fab
June 27, 2000 - Palm announces it will include a Sandisk Secure Digital card slot
in future 2001 PDA models. Palm has 65% marketshare in PDAs, a market
expected to sell 2.6 million units in 2000
May 9, 2000 - Sandisk and Toshiba form a joint-venture called FlashVision, which
will renovate a flash memory fab in Virginia. The plant will start producing chips in
late 2001 and is expected to hit $1 billion in annual sales in 2002
Sandisk also has partnerships with Handspring (MP3 player), Ericsson and
Compaq.
Financial Performance
Second Quarter 2000 - Ending June 30, 2000
$143 million in total revenue. Up 174% from a year ago. Up 31.6%
sequentially from last quarter
Product revenue was $122.6 million. Up 190% from a year ago
Licensing and Royalty revenue was $21.4 million. Up 109% from a
year ago
Net income was $24.4 million. Up 326% from a year ago
Earnings came in at $0.33 per share, beating analyst estimates by
50%
According to analysts, Sandisk is meeting only 50% of potential
demand
Conference Call with CEO Eli Harari
Record bookings, overwhelmed by demand, tremendous order
backlog to Q1 2001
Product gross margins improved to 31% from 30% this quarter.
Margin guidance for ½ to 1 point improvement in both Q3 and Q4
The market is tremendously supply constrained. Expects a benign,
stable pricing environment
Expects more capacity to come online due to process wafer shrinks
and new fabs. Will move to 256 megabit products. Shrinking the
linewidth from .28 to .24 microns, which will improve yields and
increase capacity by 50%
CompactFlash 43% of revenue, MMC 22%, Flash Disk 18%, Flash
chip-set 5%
No real competition. Only Toshiba, Samsung and Hitachi (all
licensees of Sandisk) have the technology and patents to manufacture
high-capacity flash memory. 80% of SSTI’s production low-end 2
megabit cards
Projects 20% growth in Q3 and 25% growth in Q4
North America 47% of revenue, Japan 26%, Europe 18% and Asia
10%
65% of sales are in the consumer market driven by explosive demand
of MP3 players and digital cameras. Over 100 MP3 players on the
market
Seagate at one point earlier this year owned 2 to 3 million shares in Sandisk.
According to recent SEC filings, as of July 2000 Seagate has sold all of its holding
in Sandisk for a gain of $105 million. This will eliminate some of the downward
pressure the stock had earlier this year.
Competition and Risks
Sony Memory Stick - Sony will spend millions marketing this flash memory
standard. However the company has yet to get much traction for the product and
lost out on the key Palm PDA account to Sandisk
Iomega Clik! Drive - Iomega has been having a tough time getting their storage
product adopted because of size, cost, power consumption and ruggedness
factors. As a real hard drive with moving parts, it does not have the key benefits of
flash memory
Toshiba SmartMedia - comparable performance and characteristics with Sandisk
MMC media. Doesn’t have the market-share CompactFlash does. However
Sandisk private labels Smartmedia cards and sells them as the key partner with
Toshiba
Taiwan stability - Sandisk depends on fabs in Taiwan for the majority of flash
memory production. Political instability along with natural disasters such as
earthquakes are a large concern
The company is heavily dependent on the consumer market for MP3 players and
digital cameras, accounting for 65% of revenue. Lower demand from either
segment would be detrimental to the growth of Sandisk. |
