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Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Sam who wrote (6363)	7/18/1999 1:21:00 AM
From: Ausdauer	Respond to of 60323

Sam and Thread, I wanted to give my interpretation of some of the information given in the conference call based on some notes I had taken. *First, I wanted to say that I am not at all surprised by the run-up of last week. We were dry tinder just waiting to be set on fire. As I alluded to earlier, Dr. Harari conservatively advised during the Q1 conference call that Q2 results mirror Q1. I think the company's performance exceeded his projections. With the company beating the numbers handily and with Dr. Harari confidently describing the consumer market that will drive future flash memory sales we ended up with some big upward movement. That was the spark that we needed. I guess I expected the worst that would happen was we would meet estimates for the quarter and end up trading flat for the remainder of the week. That was not the case. techstocks.com I trust that by this time everyone has had a chance to review the accounting. The analysts were concerned about ASP's, but overall a shift toward higher capacity cards (average unit capacity of 15 MB) evened up gross margins for the quarter. There was talk about increased general and administrative costs and these related to recruitment efforts, pay raises, and a new employee health plan. There was some increase in doubtful accounts as well. I thought unit shipment growth, top line growth and profitability were respectable and will not go into detailed comparisons here either Q-over-Q or year-over-year. Breakdown of Revenue Streams* CompactFlash 56% Flash Drives 28% MMC 6% (tripled from Q1) *Breakdown of Markets Served* Eonsumer Electronics 70% Industrial & Telecom 30% *The Balance Sheet remains very strong. One important point I noted is that MMC is 1 to 2 quarters ahead of anticipated growth with tripling in sales revenues vs. Q1 (6% of total Q2 revenues), a significant backlog of 32 MB MMC orders, anticipated growth in MMC revenues that could cross-over CF revenues (exceed as a percentage of total product revenues) some time in 2000, sixty (yes, 60!!!) announced or planned MMC design-ins (including some newer digital cameras), and a potential demand from the mp3 market that could "dwarf" digital camera sales in the next few years. Eli talked about keeping price points for mp3 memory at 40% or so of device cost. Some lower end players will likely show up under $100.00, but the better devices sell for $159.99 to $199.99 currently. MMC (and not CF) will be the storage of choice with the Thomson/RCA announcement being the notable exception. Wafer is in high demand now and production is consumed almost immediately leading to inventory shortages as I suspected. They are transitioning to 128 Mbit technology with a 50/50 mix of 64Mbit and 128Mbit products in Q3 and a dominant 128 Mbit presence by Q4. Dr. Harari talked about ongoing needs, the importance of not letting down partners by coming up short with product, and the possibility of extending manufacturing beyond Taiwan and China. No specifics were mentioned. There was a substantial gain in royalty and licensing revenues to $10.2 million for the quarter and predicted revenues of $9.0 to $9.5 million per quarter for the next 4 quarters. That will be approximately $1.35 per share annualized if my math is correct. Several licensees make payments twice yearly, so there was a bit of an overshoot this quarter. I am impressed by the fact that the projections for upcoming royalty revenue is a revision from the $8.0 to $8.5 million/quarter predicted in Q3 or 1998. Royalties appear to be linked roughly to demand for chipsets produced by the likes of Toshiba, Samsung and Hitachi which are then shipped to various card assemblers or other manufacturers/finishers. The Lexar suit litigation should conclude in August and a mandatory settlement has been requested by that date. A motion to dismiss Lexar's countersuit is being filed as it is considered baseless. Needless to say, that is not news to any of us on this thread. Another interesting tidbit is that the USIC joint venture may be consolidated with other UMC adventures. If regulatory approval and anti-trust requirements are satisfied, SanDisk will have approximately 111 million shares of UMC as a result of the merger. These shares have a paper value of $330 million based on the current share price in Taiwan. Dr. Harari feels that the USIC investment will lead to a several fold increase in the original $51 million dollar start-up costs they invested originally. The Target national retail stores have been added as SNDK outlets. That is a big shot in the arm. Current retail outlets now number 10,000 world wide. I detected a high degree of enthusiasm in Eli's voice when he spoke of the MultiMediaCard. He plans to let the market decide which flash solution will end up in which devices and he has no intention of playing them off against each other or making artificial price points for entry. He suggested that some digital cameras may begin to use MMC slots. Again, no specifics were given. Eli remains very happy with wafer output and quality. The foundry is working on 128 Mbit pilot production and this geometry should be dominant in Q4 as the 64 Mbit technology is phased out. Expect some 256 Mbit product to hit the market in Q4. Eli is also very happy about Celestica's work which has been outstanding. The company is in "patient" mode waiting for parts from suppliers. There is a big backlog of 32 MB MMC's which are presumably being bundled with mp3 players as we speak. The 32 MB cards require 2 stacked chips which is technically demanding due to the height of MMC. I believe that the 256 Mbit technology will allow for a single chip in a 32 MB card. If 64 MB MMC cards are required this will presumably require stacking of two 256 Mbit chips. The engineers are devoting a significant amount of time to these concerns. There is unrestricted shipment of 96 MB CompactFlash currently. SanDisk has a headstart w/r/t MMC and the only competitor will be Hitachi who will begin releasing a card in Q4. Atmel is producing a "low performance interface" MMC which will not compete in the same markets SNDK is targeting. Dr. Harari predicted that flash memory cards will obsolete standard 35 mm film in 5 years or so. *Dr. Harari felt that the strength of consumer markets could lead to SanDisk attaining $1 Billion in revenues in the future. Respectfully, Ausdauer (looking forward to our two strongest quarters on a seasonable basis)