Spot market pricing of NAND flash memory chips have stabilized at about the $2/GB level, more than twice the price at the December quarter bottom, SanDisk (SNDK) CEO Eli Harari said today in an interview with Tech Trader Daily.
Harari says prices have been stable throughout April and May. He says the recent price moves, with a sharp, sustained climb after a precipitous drop, is an unprecedented development, and “a major improvement for the industry.”
Harari says the biggest factor in the stabilization of pricing has been the voluntary reduction in capacity utilization rates by Samsung, Toshiba and SanDisk, which together control at least 80% of global NAND flash production. Harari notes that both SanDisk and Toshiba cut capacity utilization by 30%, with Samsung reducing output as well, though without specifying how much. Harari says the results is that supply and demand have come into balance, with very little if any excess inventory legt inthe channel.
Meanwhile, on the demand side of the equation, Harari ntoes that SanDisk had a “surprisingly robust” first quarter, selling a record number of MB of memory, more than expected for the typically seasonally soft March quarter. He says the strength continued into April. Areas of strength, he says, include flash drives used by students for school, digital memory cards for cameras and mobile phones, where the market is growing as consumers adopt smartphones. Still mostly on the horizon, he says, is an eventual jump in the solid-state drive market.
Harari concedes that some of the idle capacity could be back on line in two months, if demand required it, and he thinks some of it will come back in the second half as the market heads into the back-to-school selling season. But he also says that some capacity, particularly lines based on 8-inch wafers, has been permanently closed. He says most of the players in the industry are still buying equipment to upgrade output to smaller line widths, but that the odds are against anyone inn the foreseeable future spending the $5 billion or $6 billion it would take to build a new flash fab from scratch.
Harari declined to to give a forecast for the June quarter, but he did say that gross margins - which were negative 7% in the first quarter - are moving in the right direction with prices stable and costs dropping. A key factor on margins will be the company’s perceptions on Q3 NAND pricing, which affects the way the company values inventory.
Harari remains bullish on the prospects for SSDs, and in particular think they offer an ideal storage solution for netbooks. But he also notes that at $2/GB they aren’t competitive yet with hard drives. Harari notes that you can buy an 80 GB HDD for $30-$35. That same $30 would only get you 15 GB of flash. He contends 32 GB of storage is probably enough for many netbook applications; to be competitive with hard drives, Harari says, the flash industry will have to be able to sell at $1/GB while maintaining profitability. That’s not possible at the current 42-43 nm process technology now used for manufacturing flash, he says. But it should be possible at 24 nm, or two generations ahead of the current technology. He thinks usage of SSDs will start to pick up in this year’s second half, hitting Main Street in a big way in 2011 “as Moore’s law gets us to the right cost range.”
As for last year’s flirtation with Samsung, which tried to acquire SanDisk, he says that the situation is now long since over. Harari says Samsung wanted SanDisk for its patent portfolio and its know-how in multi-level cell memory technology. He says SanDisk declined to provide them full access to proprietary information unless and until Samsung signed a renewal of their IP cross-licensing deal. But he says Samsung refused, and they withdrew their bid. Meanwhile, Harari notes that the licensing agreement with Samsung expires in August; he says both sides expect a deal to be cut before expiration. Harari noted that he has previously said a revised agreement will likely result in a reduced royalty rate from Samsung. As Harari notes, royalty income was about 15% of SanDisk’s revenue last year, with a higher proportion of net income given the very high margins from IP licensing.
Finally, Harari says he’s particularly excited about the growth of the smartphone market. Apple (NASDAQ:AAPL), he says, has started a “huge trend,” and provided a “major catalyst,” but that it will be not be the only company moving the segment forward, adding “I would not say that Apple has won the war.” He contends there will be “huge innovation in non-Apple platforms that will hit the market in the next 6-12 months, from Research In Motion (RIMM), Motorola (MOT), Nokia (NYSE:NOK) and others. The smartphone trend overall, he says, should drive “immense use of flash storage.” SanDisk isn’t that picky about who dominates the smartphone business - as long it keeps showing healthy growth.
SNDK Thursday is off 36 cents, or 2.6%, to $13.35.