Hi Rex,
I'm sorry for all your troubles with your internet accounts. I hope everything gets better today.
Here's my report again.
Here's my prose : (sorry there's no more bold font for titles)
SANDISK CORP. - Company write-up
Company description :
The Company was founded in 1988 to develop and market flash data storage systems, it is now the world's largest supplier of flash data storage products, it designs, manufactures and markets industry-standard, solid-state data, image and audio storage products using patented, high density flash memory and controller technology. Flash memory is a non volatile data storage media, meaning that it does not need power to retain data. The Company sells its products to the consumer electronics and industrial/communications markets. SanDisk has strategic alliances with Seagate Technology, Matsushita Electronic Corp., NEC Corp. and LG Semicon. Seagate holds a 25 percent equity stake in SanDisk.
Major events of 1997 :
Until Spring 1997, several standards for flash storage were competing for the digital camera market; OEMs were floundering with the decision of which technology to adopt. Products introductions were thus delayed. But SanDisk imposed itself and won most design wins. Since then the market has exploded. SanDisk's Compact Flash clearly emerges as a de facto standard for digital consumer appliances. 35 digital cameras sold at Christmas will use SanDisk's digital films. SanDisk revamps sales operations and invests $45M in a joint-venture semiconductor manufacturing facility in Taiwan. Major flash memory manufacturers (Samsung, Toshiba and Hitachi - in addition to Intel and Sharp) licence SanDisk's technology in market-wide recognition of SanDisk superior technology. Stock goes from $10 to $40 and drops to $22 as a result of record revenues ($.27 instead of $.18 estimate, a +50% surprise) and overly conservative CEO comments, rights offering announcement and severe market correction.
[Exposure to South East Asia???? I've read the 10Q but do not find whether they have asian customers, I suspect it's the case. Still we know they have Japanese customers. You could ask this on Wednesday to Cindy.]
Market Size : [do you know IDC, Dataquest, In-Stat numbers? they should be shown, maybe on a no names basis]
Competition : Intel and M-Systems, Toshiba, Sony, Iomega
Market presence :
Sandisk owns the digital cam market (35 cameras ,i.e. 90% according to the CEO)
Sandisk almost owns the HPC market (good timing with Windows CE)
Sandisk will own the digital mobile phones and pagers markets.
Sandisk has lost the hi-tech embedded system market : WebTV and Internet set-top box market, game consoles market,...
Cross licencing agreements : Intel, Sharp, Hitachi, Samsung, Toshiba
Sequential Growth (i.e. from 2nd Q to 3rd Q): revenues (+32%) are growing one third faster then costs (+23%) and twice faster then operating expenses (+16%) thanks to dramatic increase of royalties (+77%). This enables gross profit to grow 46% and operating income to jump 113%. As a result net income per share is up 80%.
These figures are a result of a very strong 3rd Q : the company made several design wins, OEMs are ordering for the Christmas season, three major cross-licence agreements add directly to the earnings.
Long-term trends : from a more distant perspective, i.e. comparing 9 months ended Sep 30 1996 to 9 months ended Sep 30 1997, more important trends can be inferred :
Product revenues : while product revenues were up slightly (+7%), royalties were up 236%. Total revenues are up 19%. This shows continuously falling prices, especially in the high volume, low capacity lower margin Flash Cards in which the company is active. Price competition is thus fierce and is likely to continue through 1998 and beyond. Hopefully licence fees are increasing dramatically. From 5% of total revenues as at Sep 30, 1996 it tripled to 15% of total revenues as at Sep 30, 1997. This is a strong proof of the quality of Sandisk's patent portfolio (38), the largest in the industry. Royalties are thus a critical source of revenues to Sandisk and it should continue to grow in the future. Of course, this strength is also Sandisk's weakness as technology evolves.
Cost of sales and gross profit : costs remained under control through 97 increasing 14% thanks to continued product cost reductions. It fell from 61% of revenues to 58% of revenues. Gross profit grew 27% thanks principally to increased royalties, in terms of percentage of total revenues it grew from 39% to 42%. This is not likely to continue as several factors will prevent from reducing costs for the 1st two quaters of `98.
Research & Development : the amount invested in R&D is up 32% this year and represents 11% of total revenues, which is stable compared to last year. We've already seen more in hi-tech companies but it's a good average. In this respect it can be stated that their labs are quite efficient given the number of product introductions. The company has several R&D agreements with major semiconductor manufacturers, namely NEC, Hitachi,...R&D is surely Sandisk's major strength.
Sales and Marketing : they're also very good at it but it costs money, typically 9 to 10% of the company's revenues. From what its major competitor told me they are too successful given the lower quality of their product, usually using false statements about competing products. They surely know how to boast their products. Operating expenses grew slightly faster then revenues (21:19). Again, thanks to royalties, Sandisk was able to achieve 43% jump in operating income, thus strengthening the company's finances. Taxes should show a big increase next year as the company uses all its tax credit carryforwards.
Earnings : they grew 21% over the period and should gain momentum as we enter into `98. the first quater is usually weak due to seasonal constraints. Order visibility is low in this industry, this means that backlogs tend to be low at the end of each quater.
Ten reasons SanDisk is a buy :
1- Growth and size of the flash memory market through 2000 - SanDisk's leadership position.
2- SanDisk signed major licensing agreements with Hitachi, Samsung and Toshiba shortly before the end of the 3rd Q. Such activity is likely to continue. This should contribute to earnings as we go through `98 and beyond.
3- SanDisk's design win activity is gaining momentum. Several were made during the 3rdQ that should only be accretive to earnings this 4thQ.
4- SanDisk boasts $32M in deferred revenues, that's 1 full quater of revenues!
5- SanDisk has entered in the UMC joint-venture foundry up to $45 M, i.e. 1/2 of its equity, that's putting a lot of money into production capacities for a CEO who's so conservative, that why I think he's certainly more confident then what he shows.
6- SanDisk just announced the introduction of 80Mbit flash technology with NEC. That's more capacity coupled with lower prices, just what the markets wants!
7- SanDisk has announced that it is due to make a significant announcement affecting the development of mobile phones, pagers and small handheld computers, thereby appropriating that martket. Think of it in terms of financial impact. Link this to the increased fab capacity...get the picture?
8- All in all, SanDisk is a firm gaining a lot of momentum in the hi-tech industry; be ready for more and more news releases as we enter 1998.
9- Year end revenues should reach the $100M mark required for most mutual funds to invest in a company.
10- There are few shares floating, thus increasing volatility, on the upside of course!
Products using SNDK's flash memory : Kodak DC 120, Kodak DC210, Casio QV-700, Pentax, Ingram Micro, HP 320 LX, Psion Series 5, ...
Analysis of balance sheet not possible without audited annual report
No short term debt
No long term debt
Deferred revenues grew from $5,6M as at Sep 30, 1996 to $32M as at Sep 30, 1997. An increase of 570%!!!!
10Q : `Out of that, $26.3 million came primarily from the receipt of funds under patent license and royalty agreements. (...) The Company has adopted a strategy of cross-licensing its patents to other manufacturers of flash products. Under such arrangements, the Company earns license fees and royalties on terms that are individually negotiated. The timing of recognition of revenues from these payments depends on the terms of each contract, and, in some cases, on the timing of product shipments by the third parties. As a result, license and
royalty revenue has fluctuated significantly in the past and is likely to continue to fluctuate in the future.
Number of shares stable since the IPO. Rights offering in the pipeline.
Look at the 10Q dated Oct 27, 1997 : `Management believes the existing cash and cash equivalents, short term investments and available line of credit will be sufficient to meet the
Company's currently anticipated working capital and capital expenditure requirements for the next twelve months'. ??
`While the Company has no present intention to issue shares of Preferred Stock, such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult or less attractive for a third party to acquire a majority of the outstanding voting stock of the Company. Such Preferred Stock may also have other rights, including economic rights senior to the Common
Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock.'
That's not consistent with the news release, is it? |
