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

To: broozer who wrote (27103)	12/7/2004 8:52:37 AM
From: Dave	Read Replies (2) \| Respond to of 60323

Broozer, And inventory is piling up. I think that is one reason why we are already seeing such aggressive pricing. Re: Inventory Levels Yes, you are correct that Inventories have been building up, but I would take a stab in the dark that SNDK gets a little more revenue in the 4th Quarter when compared to other quarters given the Holiday season and retailers ensuring they have enough inventory to sell so when a user buys a digital camera (for example) they will have extra flash available to sell. Looking at it on a historical basis, in Q2 2003, inventories were at 74.5m and in Q3 2003, inventories were at 94.8m; therefore, sequentially, inventories increased about 27%. In Q2 04, inventories were at 163.5m and Q3 04 181.3m and inventories increased about 10.9%. Sales, looking at Q3 04 v. Q3 03 also increased about 40%. As such, I wouldn't focus too much on the inventory issue given this is somewhat of a retail product which I'd reckon sells the most in Q4 and some sales go into Q1 of the next fiscal year. Moreover, on a YoY basis, sales have increased substantially and SNDK in view of increasing sales will carry more inventory on their balance sheet. Inventories have increased about 100% YoY and, of course, I'd watch inventory levels, but I have a feeling that when they report Q4 numbers, inventory levels will fall. Re: Pricing I believe that the decline in flash prices is not attributed to the increase in inventory, but rather the production of a "commodity-like" product. As Art has stated on numerous occassions and I will repeat here, when you produce a commodity product it is imperative that you are the lowest cost producer. Furthermore, the decline in pricing was also simple economics. SNDK was enjoying outstanding returns selling Flash and their DRAM counterparts were seeing this and planned to enter the market. SNDK took the step to reduce agressively their pricing in order to lower their overall returns and, also, send a signal to their DRAM "cousins". In effect, the signal that SNDK is sending is that they will protect their turf using any means necessary and make the business of producing flash economically unfeasible unless one can enter with full economies of scale. RE: dilution I do not consider a secondary offering as "dilutive" since existing shareholders can always sell the stock. While one will face "ownership dilution", they do not face "economic dilution". Economic Dilution occurs when MGMT doles out stock options (in excess of course) to themselves and their employees. Later, Dave

To: broozer who wrote (27103)	12/7/2004 10:26:11 AM
From: Art Bechhoefer	Respond to of 60323

Broozer, the dilution of common share earnings mentioned in your post needs further discussion. SanDisk has issued both common and convertible shares in order to raise capital. The last issue of common was at a price near $27.50, split adjusted. The convertible preferred provided a yield less than a straight bond, owing to its convertibility, but didn't dilute the shares until it was actually called. The methods employed by SanDisk to raise capital, given the available alternatives, look to me to be the least cost alternatives. When you make an investment in new plant and equipment, you look for the lowest method of financing, and the methods chosen by SNDK seem to fulfill this criteria. In the end, the shareholders BENEFIT from these choices, especially from what results in a very clean balance sheet with increasing assets and very low debt. From the time I first began monitoring SNDK, in 1998, the company has had one of the best looking, most conservative balance sheets, with enough cash on hand to cover business expansion. The balance sheet is so much better than that for dozens of other tech companies that one wonders why there is any interest in other, often precariously financed companies. An example is Sirius, currently going sky high, despite the fact that this satellite radio company is losing more and more money as it gains subscribers. It is committed to so many high payout contracts that one may question whether it will ever show a profit in the next five years. As to the notion of excess inventory, my own attempts to buy the Photo Album have been frustrating. None of the major retailers I have contacted have supplies of this apparently hot selling item. I have also looked for the Ultra II compact flash cards in higher capacities and have found mainly empty racks at places like Circuit City (Rochester NY area). Either CC misjudged demand or they can't replenish their supplies. As Dave mentioned, if there was an inventory buildup, it was done to assure adequate seasonal supplies at the retail level. Art