Chaz,
I could try but I just ran across an old article that explains it in laymans. Judging by the performance of the company, the agreement with Qualcomm, and the several large wafer fab companies licensing their technology, I'd say SanDisk has a near equal. Asdauer makes a good case and certainly knows the territory better than a newbie like me to GG. I'd liken this to a Rambus advantage over other DRAM solutions.
forbes.com
08.25.99 by Om Malik
The Sunnyvale, Calif., campus of nonvolatile flash memory maker Silicon Storage Technology (nasdaq: SSTI) could easily be mistaken for a warehouse or a price club. Sitting in the shadow of more glamorous companies such as National Semiconductor (nyse: NSM), SST is one of those Silicon Valley companies that hardly ever attract any attention.
Yet nearly ten years after CEO and Chairman Bing Yeh left a cushy job at Intel (nasdaq: INTC) to found SST, its campus is abuzz with excitement.
Such excitement is not normally part of the boring industry segment SST plays in. The flash memory chip business is one of low margins, unpredictable demand and intense price-cutting by giants such as Intel, Advanced Micro Devices (nyse: AMD), Hyundai and Samsung. But puny little SST, with only $69 million in 1998 sales, has tenaciously competed with the big dogs and is now poised for some glory days of its own.
"Everything seems to be going in their favor these days," says Dan Scovel, semiconductor analyst at Fahnestock & Co., a N.Y.-based brokerage. Scovel is one of only two analysts who follow this often-ignored company. According to Phoenix, Ariz.-based market research firm Semico Research, flash memory is going to be the second-fastest growth category in the chip business for the next three years, with annual growth approaching 30%. Scovel thinks SST will be on the fast track in the coming years. "It has been hard to convince investors about this company's potential, a lot of hard work," he says.
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The stock, which was stuck under $5 a share up until June 1999, is up approximately 260% to $18 a share.
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The stock, which was stuck under $5 a share up until June 1999, is up approximately 260% to $18 a share. A big contract with Qualcomm (nasdaq: QCOM) and better-than-expected earnings have propelled the stock higher. Some investors have built up large positions in the company as a result. Analysts see the stock hitting $30 a share within the next 12 months. This is of course welcome news because SST has had its share of hard times.
The type of memory chips SST makes are quite different from those made by companies like Micron Technology (nyse: MU). There are two kinds of memories, volatile and nonvolatile. With volatile memory, known also as Random Access Memory (RAM), the chip loses all data stored on it once the power is turned off. With nonvolatile memory, the chip retains all data even if the power is turned off.
RAM chips--whether Dynamic Random Access Memory (DRAM) or Static Random Access Memory (SRAM)--have been traditionally used in personal computers in high volume. Until recently, the nonvolatile flash memory chips have found use in personal computers in PC BIOS and input/output type chipsets, though in much lower numbers.
A typical computer these days uses 64 megabytes of DRAM and 512 kilobytes of flash memory. As a result, the demand for flash memory is much smaller, and companies fight hard to squeeze profits. But SST has developed a proprietary technology called SuperFlash that gives the company an edge over its rivals.
SuperFlash allows SST to make chips that are more reliable, cheaper to produce and easier to use. For example, if conventional flash memory chips can save data for ten years, then SuperFlash memory chips can retain data for 100 years. In addition, SuperFlash allows the company to increase chip capacity. This August, the company has started selling 8-megabit chips and will soon be pushing 16-megabit products. (Eight megabits is equal to one megabyte.)
SST, a fabless chip company that used Taiwanese chip foundries as factories for its chips, bolted out of the gate strongly and went public in 1995 at a shade over $10 a share. Strong demand for flash memory helped SST quickly reach sales of $93 million in 1996. The stock doubled to $20 in May 1996.
However, by mid-1997 the demand and prices for flash memory collapsed and the company's sales and profits started shrinking. In 1998 the total market for flash memory fell to $2.49 billion from $2.7 billion in 1997, according to Semico Research.
Price-cutting by bigger rivals such as AMD, Intel, Atmel (nasdaq: ATML) and STMicroelectronics (nyse: STM) knocked the wind out of SST, which seemed to go into a tailspin. Legal troubles involving patents emerged, and soon SST was locking horns with rival Atmel and former foundry partner WinBond, a Taiwan-based chipmaker. The stock nose-dived to $3 a share in November 1998.
"We were selling a Mercedes-Benz for the price of a Volkswagen," says Yeh. It became painfully clear to Yeh that new tactics were needed if SST were to survive. So he came up with a turnaround plan: Get chips for lower prices from factories that use the very latest technology and then extend the SuperFlash technology edge into non-PC applications. The riskiest part of his strategy was licensing the SuperFlash technology to one and all in exchange for royalties in the hope that it would become the standard for the flash memory industry.
The bet seems to be paying off. So far, Acer, IBM (nyse: IBM), Motorola (nyse: MOT), Seiko-Epson, Sanyo, Taiwan Semiconductor Manufacturing (nyse: TSM) and Samsung are among the companies that have signed on as licensees. Licensing revenues have jumped from nothing in 1997 to $2.54 million in 1998. In 1999 the royalty revenues will top $5.8 million and will hit the $8.5 million mark in year 2000.
Add to this the fact that the market for flash memory is on the rise and is expected to hit $2.98 billion in 1999, according to Semico. Average selling prices are also on their way up ($3.40 versus $3.35 last year) and will continue to rise, reaching $3.60 in the year 2000, Semico predicts.
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Palm Pilots, cellular phones, portable MP3 players and digital cameras: "These are all high-growth markets, and the demand for our chips is going to increase in the future."
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Why? Because flash memory is going into devices such as Palm Pilots, cellular phones, portable MP3 players and digital cameras. "These are all high-growth markets, and the demand for our chips is going to increase in the future," says Yeh, who points to a recent deal the company signed with Qualcomm, the San Diego, Calif.-based cell-phone maker. And Yeh says nonvolatile flash memory chips are finding a home in new devices such as television set-top boxes, automobiles, digital videodisc players and networking equipment.
"We are now designing new products specifically for these new consumer and communication markets," he says. This specialized focus has helped. Broadband chipset maker Broadcom (nasdaq: BRCM) has signed on as a customer, and so have most of the major cellular phone makers. Handset makers in particular like SST's SuperFlash-based flash memory because it is cheaper, consumes much less power compared to rival products and is faster than traditional flash memory.
This strategy of branching out into other markets should prove to be a good one since Intel is planning to integrate flash memory requirements for BIOS right into a new chipset it will soon sell--cutting out players like SST. In addition, the cellular phone industry will consume $475 million worth of flash memory this year, and set-top box makers will buy $440 million worth of flash memory this year. The benefits of focusing on these markets are reflected in SST's 1999 performance. Last year SST shipped 51 million chips. By the end of July 1999 the company had already sold 40 million units.
Such strong demand should help the company see sales of $130 million in 1999 versus $69 million in 1998 sales. This ramp is going to cut losses, which stood at $17.6 million at the end of 1998 to a shade under $4 million, according to Fahnestock.
Fahnestock expects SST to reach sales of $252 million and report a hefty $38 million in profit next year. Some of that will come from new products such as Compact Flash cards, which are used in digital cameras--a market that will grow to more than $3 billion in 2002 from $500 million in 1998, according to Semico.
Yeh has shown that he can handle the tough times. Now it's time to see how he will perform during the good times.
Todd |
