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

To: hueyone who wrote (13490)	8/2/2000 8:48:35 AM
From: Ausdauer	Read Replies (1) \| Respond to of 60323

Huey, we're getting pretty FAR AFIELD from the original discussion of embedded vs. removable flash Before I launch into any new discussions I wanted to summarize what we have discussed so far relating to ADC. It would appear that SSTI is going to specialize in low density code and flash-enhanced controller technology. It will contract out manufacture to a memory module assembler and leave procurement of the storage components to them. The ultra-high density products (for products like ADC and CompactFlash) will be purchased from Toshiba (FlashVision), Samsung, or Hitachi. Is this your understanding? I see products like ADC and Disk-on-Chip as being the ultimate destination of excess NAND output from the FlashVision fab once all flash card demand is met. I also suspect SanDisk will continue its NOR product line and tailor it to industry demands. Now for new territory... "I have seen the suggestion from you several times that SSTI gives their IP away for flash production* and that SST is focused on short term success. I respectfully disagree."* I actually never said they "give away" their IP. Those are your words, Huey. I stated that SSTI barters the IP in return for manufacturing considerations. Although they actually "license" technology the licensing revenues are dropping both in terms of a percentage of total revenues and in absolute dollars. Thus, the IP is used to meet near-term production quotas during this period of high demand. I see this as a shorter term strategy because as margins fall this will hit the SSTI bottom line directly. Also, adoption of SuperFlash technology by competitors does not currently lead to a secure revenue base for them. This will need to be developed in the future. To be honest I am not sure how the bartering system works. I may be totally wrong on this, but SSTI must have a relationship whereby "licensees" help them set up shop in their own fab and allot them a certain percentage of the fab wafer output. In return for these considerations the "licensees" may be given the opportunity to design SuperFlash into their own product line (at a reduced cost or without further royalty payments) or, perhaps, they may be given a guarantee that SSTI will allot a percentage of the resultant output to the "licensee". I see this more as a system of bartering than a true IP licensure arrangement. If your knowledge of this arrangement differs from mine, please help me understand it. "SST uses a model it calls a virtual integrated device manufacturer (IDM) model. Unlike traditional fabless semiconductor companies, SST does not use a foundry's standard process. Instead, SST's proprietary process is installed at its foundry partners' fabs and is only used to manufacture devices for SST and its authorized licensees. We believe this is a distinct advantage for the company as it benefits from not having to invest in building an expensive wafer fabrication facility while maintaining competitive advantages through the use of proprietary manufacturing technologies. Further, the company maintains control of its most valuable intellectual property -its SuperFlash technology." SanDisk's fabless charter also allows for VIDM. Dr. Harari mentioned "virtual manufacturing" several times during the annual meeting in May (see my notes). I interpret this to mean that the SanDisk engineers, in a partnership with the engineering talent at the fab, design a new process for manufacture...say MLC. They then implement this custom process in a portion of the fab. The fab partner may have a number of processes that enhance yields and economize on manufacturing steps, but the actual design of the IC is SanDisk's. The fab may even be able to recommend processes that have been used successfully by other fabless companies who have subcontracted services. To say that SSTI is unique in this regard is a bit of a stretch. SanDisk has used this close relationship with its fabs to produce it rapidly changing flash technology. The transitioned from 64 Mbit to 256 Mbit densities with MLC in a little over a year. In order to get this type of service SanDisk took an equity interest in the USIC fab which was later purchased by UMC. This investment indicated to UMC that SanDisk was a serious partner and willing to share risk in the outfitting of the fab. The fab, in return, receives the bulk of SanDisk's production requirements on a regular basis. This helps the fab plan for the long term and guarantees SanDisk, a customer and investor, output to meet their production quotas. In this situation SSTI may barter the IP in lieu of a cash investment or stock purchase. That is the point I was trying to make. SanDisk's IP, on the other hand, is licensed to competitors in return for a percentage of revenues from production. Thus, as world-wide capacity increases, so do royalty payments. SanDisk, in return, has cash flow to finance an independently owned and operated fab (like Dominion). I see this arrangement as planning for the long term. It is more capital intensive at the onset, but it positions SanDisk for the explosive growth that many anticipate for flash storage products in the coming years. You stated that SSTI is intent on... "1. Dominating low density flash, 2. Dominating all code storage, and then 3. Dominating data storage. Admittedly, this would be a gargantuan task to pull off... I would say that "2" and "3" will be gargantuan tasks indeed for a fabless company. Also, the low density flash market is primarily code storage, so "1" and "2" are really the same. I can't profess to tell you exactly how SST's business model works with respect to recognition and classification of revenues. Admittedly SST's reported revenues in the royalty category is low. However, I can tell you that the bottom line for SST, EPS, is growing at a faster rate than any other stock I own... I would never profess to know the SSTI business model. I don't own stock in the company, so my knowledge is gained by listening and reading and the making comparisons with models like SNDK. 2000 is a banner year for SSTI. 2001 is shaping up to be even better. Again, I feel they have concentrated on near-term manufacturing considerations that have produced spectacular product revenues and gross margins. Further leveraging of the IP is something they will need to work on. Thanks for providing the reference to the July 25 press release regarding SST's investment in Apacer. I only had the original July 17 press release. You seem to be trying to speculate about the nature of SST's investment in Apacer and then contrasting it to SNDK's investment in Tower and UMC. I don't know enough about the circumstances surrounding these equity investments to intelligently comment about why or why not the investments were made." I think a call to SSTI management to learn of details of the Apacer investment is fair game. Perhaps someone on the SSTI thread has already done that. Best, Aus