Overview of the 2001 Shareholders Meeting. Note, these are my cryptic notes. My purpose is to convey as much information as possible as if you were at the meeting, but the risk is that I may have misunderstood Dr. Harari. His presentation was divided into different topics, then he opened the floor for questions. I will provide my notes from the presentation, then answers to questions from both the presentation and some to various SNDK employees who I talked with before and after the presentation.
The lawyers required Dr. Harari to start his presentation with a slide referring to “forward looking statements ….” So refer to the company’s most recent SEC filings for its official statements regarding the status of its current operations…..blah blah blah
Dr. Harari provided an overview of the company: 13 years old, 850 employees, 140 patents issued, 20,000 retail storefronts worldwide, 10,000 in US.
The company’s mission is to be the #1 company in Flash data storage (not flash code storage—which I understand to mean the lower capacity flash sold by SSTI).
****2000 Operations overview
In 2000, SNDK had 31.3% of the Flash card market (up from 27% in 1999). The total flash card market was $1.676 billion in 2000. Other market leaders include Toshiba at 20.5%, Sony at 13.8% (up from almost zero in 1999), Hitachi at 8.7%, and Samsung at 7.9%.
Dr. Harari expects SNDK is holding, and maybe increasing market share in 2001.
Growth area, mobile phones, just barely scratched the surface of this market.
Manufacturing SmartMedia now, so no longer just re-labeling Toshiba’s product.
Most of the growth was MMC, CF, SmartMedia and now SD.
Strategy: SNDK’s competitive edge will be driving its costs lower. Partnership with Toshiba is the key to drive technology and manufacturing development to become the lowest cost producer of data storage flash.
Moore’s law turbocharged: Expect Average Selling Price (ASP) to go from $100 (in 2000) to @20 (in 2003)
The market is extremely elastic, so the lower the ASP for flash, the more demand there will be.
****FLASHVISION/DOMINION FAB--The joint venture with Toshiba
Dr. Harari is extremely pleased. The production is on schedule, maybe a little ahead of schedule. Now producing NAND flash, 512 megabit wafers, using .16 micron.
From this fab, SNDK will be able to sell the most technologically advanced and cost effective flash cards and flash components. IMPORTANT: selling NAND flash components is a new market for SNDK, versus selling just removable flash cards. Thus, some NAND flash will be sold into the embedded memory space.
Dr. Harari expects lower margins Q3/Q4 due to production ramp-up (4-6 month lag). Common situation when bringing new manufacturing online.
Optimum capacity to be achieved in 1st half of 2002.
This will be the most advanced Fab of its kind in the world, for next 5-7 years. It will start production at .16 micro, then .13 micron, and then .10 micron, each step having a doubling effect in efficiency.
Dr. Harari showed a slide comparing a new 512 Mbit NAND at .16 micron and current 256 Mbit at .21 micron.
Important, the new 512 Mbit NAND flash chipset being produced now is already designed with the circuitry for MLC technology (2 bits per cell), which doubles the capacity of the card.
****SD CARD
SD Card Association has 275 members.
Dr. Harari showcases the Palm m505 with a SD card. He also showed a slide with a picture of future third party products utilizing the SD card slot, such as a MP3 player, modem, camera, GPS, BarCode scanner, and bluetooth. These I/O products use the SD platform.
Palm’s adoption of removable media is “very significant”. Dr. Harari thinks the PDA’s will continue to take off and that the removable memory platform will increase the functionality of the PDAs. Pocket PC PDA’s already use the CF platform.
Dr. Harari showed a slide from IDC which showed the projected growth in the removable memory cards market, and the MMC/SD platform will exceed all (CF, SM, Memory Stick) by 2003, and SNDK will be selling 80% of the platforms (all but Sony’s Memory Stick which will have 20% of the market).
****Photo Kiosks
The joint venture will provide kiosks to support all platforms, including cd-roms and floppy disks. The JV has the CEO in place, an experienced executive from Kodak.
The Kiosks will be placed initially in camera outlets.
The Kiosks use Kodak materials, high quality performance.
{Art, in follow up questions personally with Dr. Harari about the kiosks, I learned that 20-25 are being shipped this month. There have been delays due to software revisions to make them easier to use—results from focus groups. Larger volume expected in 4-6 months.}
****Competition/Problems
In Flash memory, the competitors are Samsung, Hitachi, Toshiba and Intel, but Intel is not really competition any more, but the NAND from the FlashVision will eventually compete with Intel’s StrataFlash in the embedded memory space.
In Flash Cards, same cast of characters, Sony, Lexar, Viking, PNY, etc… Dr. Harari stated the current conditions have made it very difficult for the ‘repackagers’ (my word) to compete.
Presently, excess inventory remains, which decreases ASP and margins
Very low bookings visibility with OEMs (Lucent, Cisco, Alcatel, Nortel, etc…)
Retail volume growing, but pricing pressures (increased units, but revenue not as high because of decrease prices)
Lower sales by competitors, lower royalties
Present conditions create opportunity for increase market share
Very tough time for everybody.
2000 was a “remarkable year”, but 1st Q 2001 was a “disaster”, earnings negative
R&D is increasing, “very important to continue”
Strong Balance sheet
First lay-offs in 1st quarter.
Management is “frugal”, tight on non-revenue operations
Expenses in Sales and G&A are down
Industry – wide down cycle, “surprise”
Focusing on increasing market share, and strengthening internal operations to be a multi-billion company
Expects in 2002, demand will again exceed supply
“First inning of the World Series”
****MY SUMMARY
Dr. Harari is “bullish”, “very optimistic” about the long term. The goal for SNDK is to be a major player in the post-PC era. When a decision between short-term gain or long-term gain, the company goes with the long-term option. Same swagger from last year. My impression is that Dr. Harari is a very confident manager; very focused on long-term goals for the company, and genuinely excited about the technological edge SNDK has in the flash market.
****Questions:
Aus-SmartMedia is being produced by SNDK, so margins higher than when it just re-labeled Toshiba product, but margins are tight for all products now. Importantly, longer re-labeling. Didn’t learn how margins compare to CF and MMC/SD.
Art-P-tag, moving slower than expected, in pilot programs with some healthcare groups. Good product, but will take several years before really takes off.
Will CF be overtaken by MMC/SD? Eventually, SD will be the dominant form factor except for the Memory Stick which will continue to be used by the “Sony sphere.” CF, however, is very rugged, and Dr. Harari believes there will always be a place for it, especially in industrial and embedded applications. The PC card is clearly being replaced by CF.
Triflash is being shipped in samples. What this means, I don’t know, other than it is not fully in production.
Patent ‘987 covers MMC and SD. Not clear whether the patent covers the Memory Stick, but “SNDK gets royalties on the memory used in Memory Stick” {I recall this statement was made last year as well}and SNDK hopes Sony will be a purchaser of the NAND produced by FlashVision. SNDK wants Sony to be a good customer. But I don’t know what, if any, intellectual property the Memory Stick uses that would create royalties unless it uses NOR flash, which maybe SNDK gets royalties from. Sorry, Art, wasn’t able to learn if Lexar is paying royalties for its Memory Stick sales. {Editorial: Discussing Lexar at the SanDisk headquarters is as welcome as discussing VD at Granny’s dinner table.} Honestly, the whole Memory Stick issue vis-à-vis SNDK licensing is confusing to me.
Federal Court has not done anything on Viking injunction motion, and it will be several months before anything is happening there.
Interestingly, SNDK recently purchased a Lexar CF card in the public market which had SNDK’s patent number, so that would be a royalty owing card. The agreement with Lexar is that it must pay royalties every quarter after April 1 for card using the ‘987 controller. SNDK didn’t know the success of Lexar’s work around ‘987 controller, but is assuming Lexar is selling it. {ASIDE—what is Lexar’s burn rate and likelihood that it will be in business in a year??} |
