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

To: Hands Off who wrote (17582)	12/23/2000 10:15:14 AM
From: Ausdauer	Respond to of 60323

Lexar C.C. Lexar is getting hurt because Kodak has a declining market share or is not growing market share in proportion to the overall growth of digital photography. Reimer indicated indirectly that the low capacity bundled card business is decidedly low margin and that they would prefer to sell controllers to Kodak and let Kodak find a card assembler to make finished goods. It was also suggested that Lexar's best attributes are not trumpeted once private labelled by Kodak. Again it seemed to me that Reimer believes that Lexar will succeed by selling a premium product sold at a premium price. I am not sure most consumers exhibit purchasing behavior that reflects this goal. Also, Lexar continues to lure consumers by bundling a "free" card reader and stated that the Nikon bundles also include a free JumpShot cable. Reimer stated camera sales in Japan are brisk. During a recent trip there he said a major electronics retailer was selling a camera "every 30 or 40 seconds" and "people were lined up like they were buying groceries". Despite this, Olympus has decreased orders for the Japanese market (I'm still unsure what Olympus does with CompactFlash anyway!!!). Lexar has had a slow launch of their retail efforts, but has garnered 14% of the Japanese market despite the slow start. Also, Lexar can funnel infringing CF product to Japan and avoid the associated royalty to SanDisk as the '987 patent is not enforced there. Lexar stated that flash memory chips have decreased in price at 30% per annum and another 10 to 20% reduction was anticipated in Q1 of 2001. This clearly lowers their card manufacturing cost, but they suggested they have a large inventory of CF cards that is sitting idle that they will need to move in order to make further flash chip purchases from Toshiba and Samsung. The message that I interpreted is that they do have cash they could use to buy raw chipsets, but if retail channels for Lexar's products remain constipated they could end up with a big stockpile of unsold cards. Thus, the goal would be to sell inventory to acquire cash needed for subsequent raw flash purchases. Lexar paid SanDisk $6 million in cash this month. They have a new and improved controller that began shipping with new product in mid-December. I still find this hard to believe given the inventory backlog that needs to be moved first and the fact that this controller was fast-tracked at an unbelievable speed. In any case they avoid paying further royalties to SanDisk as the new design is provisionally approved as non-infringing. It is my understanding that SanDisk still has to review the final product to be certain it conforms to the blueprints/specs that were previously made available. Lexar hopes to build their business by getting into the controller market and by selling licenses. They clearly want to get out low margin OEM bundles based on the comments about Kodak. Thus, competing card manufacturers could chose to license from either SanDisk or Lexar. If one recalls the original court testimony, Lexar stated that SanDisk was somehow forcing potential licensees to buy components from specific vendors. These vendors were never stated by name. I suspect that one of two scenarios is possible. First, SanDisk may have encouraged CF licensees to buy flash from Toshiba or FlashVision. SanDisk may have encouraged potential licensees to buy from other SanDisk licensees (Hitachi). SanDisk could have encouraged potential licensees to buy controllers from a specific vendor such as Hitachi (the C5 controller) and arranged a separate contract with Hitachi to collect a royalty directly at the time of the sale of the controller (making the SanDisk license less visible to the licensee). There are any number of alternative scenarios. In any case, SanDisk may have ways of extracting '987 licensing fees from component sales rather than an additional fee paid by individual card assemblers. This is all just speculation. Please come to your own conclusions. Discussion during the Lexar c.c. stated that SanDisk was resorting to pricing "tactics" that make Lexar's products uncompetitive from a pricing standpoint which forced them into a rebate scheme which will greatly impact Lexar's Q4 margins. My biggest fear is that SanDisk reacted to pricing pressure from Kingston or Simple Technology or Viking rather than taking a lead here. This could spell trouble for SNDK if the price breaks were unplanned. In any case I have not noted prices falling at retail, but e-tail pricing has dropped substantially compared to last year. Aus

To: Hands Off who wrote (17582)	12/23/2000 11:28:15 AM
From: Ausdauer	Read Replies (1) \| Respond to of 60323

"Price Protection" What does that mean exactly? I think that means that Lexar was selling at a loss. On Amazon.com you will see that even out of stock items are penetrating the Top 100 electronics items with sold out flash cards appearing with regularity the last few days. Despite the fact that Viking is sold out with upto 2 weeks waits they continue to sell... CompactFlash 128 MB = $199.99 CompactFlash 64 MB = $119.99 CompactFlash 48 MB = $ 93.94 Very hard to believe there is not a profit to be had at these prices. Aus