SanDisk Corp. - Shareholder/Analyst Call

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SanDisk Corporation (SNDK)

June 12, 2013 11:00 am ET


Michael E. Marks - Chairman and Chairman of Nominating & Governance Committee

Sanjay Mehrotra - Co-Founder, Chief Executive Officer, President, Director and Member of Special Option Committee

Michael E. Marks

Okay. So we have some people online for the webcast for the -- this part of the meeting. I'm going to go really quickly. Anybody who wants me to slow down, let me know, but I think everybody knows what's happening here. Okay. Welcome to the SanDisk Corporation 2013 Annual Stockholders' Meeting. My name is Michael Marks, Chairman of the Board at SanDisk, and it's my privilege to preside at this meeting with assistance if necessary from Eric Whitaker, the company's Senior Vice President and Chief Legal Officer. As you entered the meeting room, you should have received an agenda of the rules which will govern the meeting. We request you to adhere to these rules. This meeting and the presentation that will immediately following the meeting will be webcast. I've been advised by the inspector of elections that a quorum is present in person or by proxy for the transaction of business. So we may proceed with the business of the meeting.

To begin with, I'd to like introduce our other directors who were present today and together with myself are standing for reelection: Kevin DeNuccio, Irwin Federman, Steven Gomo, Eddy Hartenstein, Dr. Chenming Hu, Catherine Lego and Sanjay Mehrotra, our SanDisk Co-Founder and its President and Chief Executive Officer. In addition to Sanjay and Eric, the Executive Officers present today are Judy Bruner and Sumit Sadana. Mr. Mark Sacro [ph], our partner from Ernst & Young, the company's public independent public accounting firm is also present today and will be available to respond to appropriate questions.

Our agenda will proceed as follows: First, the formal business of the 2013 Annual Stockholders Meeting will be conducted. At the end of the formal business, we will adjourn the Annual Meeting. Immediately following the Annual Meeting, Mr. Mehrotra will review the operations of the company and take questions and comments regarding the company's business, which will be webcast. Please hold all questions concerning the company's business until this time.

We're now proceeding to the formal business portion of the meeting. Mr. Whitaker will officiate as Secretary of the meeting. Mr. Sandovico [ph], a representative of BroadRidge Financial Solutions, will serve as the inspector of elections of this meeting and will tabulate results of the voting.

The board said April 15, 2013, is the record date for the meeting. We have, at this meeting, a complete list of the holders of the company's common stock as of record date. We began distributing the notice of Internet availability of proxy materials and made the proxy materials available on or about April 26.

Mr. Whitaker has the affidavit attached to the mailing to the stockholders of record. These materials are available at the meeting by request. Mr. Sacro has reported to me that more than majority of the total number of shares entitled to vote are present, either in person or by proxy, at this meeting, constituting a quorum. With a quorum being present, the meeting will now proceed with its business.

First proposal to be considered to this meeting is the election of members of SanDisk's Board of Directors for the ensuing year and until their successors are duly elected and qualified. Proxy statement sets forth the background of each of the nominees and qualifications that the board considered in making these nominations. The nominees are: Kevin DeNuccio, Irwin Federman, Steven Gomo, Eddy Hartenstein, Dr. Chenming Hu, Catherine Lego, Michael Marks and Sanjay Mehrotra.

Second proposal to be voted on this meeting is the approval of SanDisk Corporation 2013 incentive plan and the initial reservation of 20 million shares of the company's common stock to be issued under the SanDisk Corporation 2013 incentive plan.

Third proposal to be voted on this meeting is the ratification of the appointment of Ernst & Young as the company's independent registered public accounting firm for the fiscal year ending December 29, 2013.

Fourth proposal be voted on this meeting is to pass an advisory resolution to approve the compensation of the company's named executive officers.

For reasons outlined in the proxy statement, the SanDisk board has recommended that you go for to the director nominees listed on the ballot, for the approval of SanDisk Corporation 2013 incentive plan, the initial reservation of 20 million shares of common stock to be issued under the SanDisk Corporation 2013 incentive plan, for the ratification of the appointment of Ernst & Young and for the advisory resolution to approve the compensation of the company's named executive officers.

Additional information concerning each of these proposals contained in the proxy statement is made available to the stockholders as of the record date.

Let's see, are there any comments anyone like to make on any of these proposals?

Okay. Because no further business is scheduled to come before the stockholders, I declare the polls open for all matters to be voted on this meeting. We will proceed to vote on the previously discussed items. It's not necessary for stockholders to vote by ballot if they have already submitted their proxy cards unless they wish to change their vote. Ballots are available for any stockholders who wishes to vote by ballot. Your submission of ballot will revoke all prior proxies if your shares are held by another person or entity that is identified on our records as a record holder. If you wish to vote your shares today, you must provide a valid proxy from the registered holder appointing you to vote the shares.

Inspector of elections will now collect any remaining ballots, which I don't think there are any. The poll is now closed. Mr. Sacro, give us your preliminary report.

According to the preliminary report of the inspector of elections based upon the proxy voter's ballot, each of those persons nominated as directors has been elected to serve as the director of SanDisk for the ensuing year and until his or her successor is duly elected and quantified.

SanDisk Corporation 2013 incentive plan, the initial reservation of 20 million shares of common stock to be issued under the SanDisk Corporation 2013 incentive plan have been approved.

The appointment of Ernst & Young as the company's independent registered public accounting firm has been ratified.

The advisory resolution approves -- to approve the compensation of the company's named executive officers has been passed.

Thank you for voting. The final votes will be tabulated and results of the election will be published within the next 4 business days on a Form 8-K filed with the SEC.

That concludes the formal business portion of the meeting.

As the formal business of the meeting has been completed and there's no further business to come before this meeting, I now declare the meeting adjourned. We will move to the informal part of the meeting, which will be a presentation by Mr. Mehrotra.

Sanjay Mehrotra

Thank you, Michael. I will make a presentation here on the company business updates. In May -- On May 8, SanDisk actually held the Investor Day. We have covered all of the material that is in today's webcast in that Investor Day presentation. So I'll go through it relatively fast. There is really no further update compared to what we had in the May 8 meeting and also what we have just subsequently in various technology forums -- industry technology forums.

So first, in terms of agenda, I'll just go through our SanDisk market and business overview, SanDisk technology position, the industry environment and the quick review of some of the key financials.

I have to remind you that I will be making certain forward-looking statements and please do refer to our SEC filings, which we make from time to time regarding any of the risk factors associated with these forward-looking statements.

First, let me share with you that SanDisk on June 1 turned 25. And what I'm showing here is on the NASDAQ marketplace site, NASDAQ congratulated SanDisk for 25-year anniversary. Really quite a milestone. I would like to take this opportunity to thank long-time investors in SanDisk, shareholders, SanDisk customers, partners, of course, the employees, the team and the board members here.

Flash, when SanDisk started 25 years ago, was just a technology concept. Today, flash is a $25 billion-plus industry. Flash is everywhere. Flash is in your smartphones, your tablets, your ultra-thin notebooks and flash even being disruptive in the Enterprise applications.

And this is really the key attributes of flash, being small, being light, being fast, having cost effective high-capacity, as well as being low power that have really created many disruptions for flash over the years. Flash replacing the old chemical film, the flash imaging card. Flash toppling the traditional floppy disk drive industry with USB drive. And now flash starting to replace hard disk drives in ultra-thin notebook devices. And it really is flash, it's key attributes that made this possible in terms of many of these detachable, convertible, ultra-thin devices, just would not happen if it wasn't for flash.

And now flash continues the deception in Enterprise. This is an exciting growth trajectory for the industry and SanDisk is certainly very well positioned to enter this market opportunity as well.

So what does all of this mean in terms of the strong demand, drivers for flash, what does it translate into, the business opportunity? SanDisk estimates that flash industry will grow from $26 billion in 2012 to $38 billion by 2016 time frame. And the strongest growth will be coming from solid state drives shown here in orange and gray. It's growing from about $7.5 billion to almost $15 billion from 2012 to 2016. And flash and embedded applications continues to grow nicely as well, growing from about $11 billion in 2012 to about $15 billion.

So this industry will add more than 12 -- more than $10 billion in annual revenue over a course of 4-year period. Industry is already large and such exciting growth opportunity that is ahead for this industry, and we are very much focused on making sure that as we look at strong growth in the industry, we are addressing a stronger mix of value-add solutions for our business.

And what that means is that SanDisk revenue share is expected to outperform SanDisk bit share. SanDisk is focused on driving increased mix of value-add solutions in our revenue going forward. And this is well aligned with our strategy of diving for the best combination of revenue, profit and free cash flow for the company. And I believe we are well positioned to achieve these objectives. SanDisk, through its 25-year history, has become a Fortune 500 company. Over the course of last 4 reported quarters, revenue of $5.2 billion. A team that is 4,700 plus strong. Technology leadership with 19-nanometer technology today, giving us the lowest cost structure in the industry. As well as SanDisk and Toshiba joint venture, so flash memory production represent about 50% of the total output of flash in the industry.

And our technology leadership, the technology such as 19-nanometer giving us low cost, as well as our economies of scale benefit that we get through the joint ventures with Toshiba, really give tremendous power to continue to lead the industry in terms of costs and technology of our products.

And SanDisk is well engaged with the entire ecosystem of customers for flash. In fact, for tablets and handsets, SanDisk is engaged with all leading providers of those devices. In notebook computers, 11 of the top 12 suppliers of notebook computers, SanDisk is supplier of flash solution to them.

And also, in retail, SanDisk is, as is well-known, #1 brand worldwide. SanDisk products selling through more than 260,000 store fronts worldwide.

Our retail and our OEM and enterprise presence and market position is really unique in the industry. And this is achieved through technology and through a broad portfolio of products. I believe our complete set of product portfolio that we offer is really unmatched in the industry. And this has given us a number one market share in retail, approximately 30%, on a global basis. And in commercial channels, which consists of OEM and Enterprise, we address about 14% of the industry TAM in 2012 timeframe, and this is a strong growth opportunity ahead for SanDisk. This is what we are focused on in terms of driving greater mix of value-add solutions toward solid state drives, as well as embedded solutions.

In terms of technology, SanDisk has in the 2012 timeframe ramped up into production 19-nanometer technology. We have talked about our second-generation 19-nanometer technology, the 1Y technology, which will begin to ramp in third quarter timeframe. And 1Z technology, which will be ramping in production late 2014 timeframe.

Our technology roadmap of 2D NAND positions us well for cost leadership in the industry. We're also working on 3D NAND. The 3D BiCS technology. We partnered with Toshiba at the beginning of 2011, and we are continuing to advance the 3D NAND agenda. And what I would like to point out here is that our 3D NAND, that structure, the sales structure, is the most efficient and most scalable 3D NAND architecture that is out there. I'll speak more to it a little bit later in my presentation.

We, of course, also are continuing to work on CD resistive RAMs. We consider this as the ultimate technology of the future. This technology requires EUV and this would be launched into production latter -- in the latter part of the decade.

So first, on the technology leadership. One key measure of cost leadership is the dye side area. So what we have plotted here is the high-volume dye in an production, high-volume production chip of flash by various suppliers, and showing you that the SanDisk dye 19-nanometer, the current dye that are in production in the industry, has the smallest area, and that speaks to SanDisk's ability for cost leadership. And this comes about not only through technology transitions -- I mean, advanced technology nodes, but also through advanced memory architecture that SanDisk has that leads to very effective dye size for our memory chips.

I want to comment on 3D NAND in the industry. 3D NAND, there are various approaches being pursued in the industry, and what I'm showing you here, based on our estimations of the 3D NAND architecture that have been published by other competitors. What are their estimated dye sizes represented by, again, millimeter square per gigabit, estimated for future 3 generations. And then when you compare that with our BiCS technology and its capabilities, you see that BiCS technology, our 3D NAND version, is significantly more scalable and efficient and it will give significantly lower dye size compared to the other 3D NAND technology out there.

And what is interesting is that 1Z technology, the technology node that we will be launching into production late 2014 and will be the workhorse for 2015 timeframe, is actually comparing well even with the third generation of other competitors' 3D NAND technologies as we estimate their dye sizes. And this is just a dye size estimate, of course, the wafer cost of 3D NAND technology will be higher. So the cost effectiveness of 1Z technology will position us very well for cost leadership through the 2015 timeframe.

1Y technology, it will give us cost leadership in 2014. 1Z, we believe, will give us cost leadership in 2015. And then beyond that, we will be introducing ramping into meaningful volume production our 3D NAND technology. So we believe this is the best way to address the technology and cost leadership, as well as maintain maximum ROI possibilities in the industry for us. We are very comfortable with our technology roadmap and we believe we are well positioned for driving the future growth objectives of the company.

So now the clicker here is stuck. Here we go. So in addition to the technology, of course, at the flash memory level, it's also about the system expertise, which you have heard about from us for a long time. SanDisk system expertise that really takes the raw flash, which has the typical device characteristics degrading with each successive generation. The controller and all the algorithms that go into managing the flash -- the system expertise that we have ultimately brings the product solutions that we sell in the marketplace to meet the customer requirements and to meet the application requirements, the systems -- the secret sauce of the controller is what makes those solutions robust for market applications. And SanDisk has 25-year history of this system expertise and we believe this expertise is unmatched in the industry.

And in addition -- so we continue to invest strongly in R&D, in the flash memory technology R&D, as well as the system expertise that's on the controller side for solid state drives, for embedded solutions and, of course, for other product solutions of the company as well. And what this slide shows you is that the key areas of investment where we are increasing our efforts are, of course, in the 3D memory technologies, as well as in the system expertise and that's where maximum year-over-year increase is reflected in our R&D effort.

In terms of industry, we have spoken before and we went through it in detail at the May 8 Investor Conference, the industry supply bit growth is moderating and this is due to technology challenges where each successive generation, you are getting less gigabyte per wafer, as well as with the industry mix shifting toward more OEM and enterprise applications, the customers requiring technology nodes to last longer in production. The combination of these 2 effects gives you a shallower cost reduction on a year-over-year basis, as well as is moderating the supply bit growth in the industry. So this is, overall, a good news for the industry in terms of the demand-supply environment.

On the manufacturing side, due to the increasing complexities of the memory technology, increase investments in CapEx are required. And also, as I talked about earlier, the 2D NAND, as it approaches the end of life and we look at 3D memory technologies on the horizon, any investments made in new capacity in 2D have to be looked at very carefully to make sure that there is compatibility of toolset for the 3D technologies. And therefore, ROI considerations become more complex and the future technology uncertainties associated with 3D make -- introduce certain uncertainty with respect to ROI as well. So the increasing CapEx requirement of -- due to technology complexity, as well as increasing uncertainty about ROI is also leading to less capacity additions in the industry.

So the effect of reduced bit growth coming from technology transitions, as well as less capacity getting added in the industry, is that industry supply bit growth on a year-over-year basis has significantly moderated over the last few years. In fact, in 2013 and 2014, we project that the industry supply bit growth will be in the 30% to 40% range on an annual supply bit growth basis, about half of what it has been for the last 4 years.

Specific to SanDisk. We remain very focused on prudent capacity management. SanDisk's current capacity is about 2.5 million wafers per year. We have announced before that we have made the decision not to add anymore new capacity in 2013 timeframe. And we expect the Fab 5 Phase 1 to be fully utilized sometime in the first half of 2014, and it will primarily be utilized -- the space in that Phase 1 will be utilized for technology transition related to 1Y of all the installed capacity and Fab 3, Fab 4 and the capacity in Fab 5.

Fab 5 Phase 2, we have not yet made a decision regarding start of construction. We expect it to be made sometime this year. We start -- expect to start construction this year as well. It will take few quarters to complete. And we expect it to begin production sometime in 2014 timeframe, although we don't think that Fab 5 Phase 2 will add any meaningful capacity contribution in 2014 to the SanDisk total output.

In terms of SanDisk's supply bit growth, we have shared before, in 2013, we expect it to be approximately 20%. And in 2014, we expect our supply bit growth to be 25% to 35% range.

Overall, with the strong demand drivers continuing to build up in mobile devices, as well as in enterprise applications, the demand trends are strong, robust for the industry. The industry supply bit growth is significantly moderated. So the combination of strong demand trends with moderated supply growth, we believe, will lead to extended stable industry environment. I believe the best ever for the flash industry. And this will, of course, translate into improved pricing environment compared to any time in the past, as well.

Just to give you quick highlights on the financials. You can see that compared to the downturn that we experienced in the first half, SanDisk in the second half of 2012, delivered very strong results in terms of revenue growth. In fact, our first quarter in 2013 was the highest-ever first quarter for revenue and we delivered 41% gross margin in the first quarter as well with 2% sequential price increase.

This is the first time ever, that 2 quarters in a row, we had price -- average price increase due to the, of course, industry environment, as well as our improving mix of product. Two quarters in a row that we had a price increase.

In terms of the growth in the business, as you can see, our SSD solutions sales actually tripled on a year-over-year basis with 200% increase on a year-over-year basis. And, of course, we did very well with our embedded products as well with 30% growth on a year-over-year basis. Because over the course of last 1 year, we have significantly expanded our portfolio of embedded product solutions with next-generation eMMC, customized solutions, as well as multichip packages, which have our discrete iNAND, as well as DRAM product in it.

In terms of operating margin. In the first quarter, a solid 22% operating margin and EPS of $0.84. And free cash flow, I believe, in first quarter, our floating cash flow, as well as free cash flow was a record ever for the first quarter.

SanDisk has a strong balance sheet. Our objective for using this balance sheet, of course, we see strong growth drivers for flash and we want to be able to leverage our balance sheet for any possibilities to add further capabilities through mergers and acquisitions. Of course, we remain focus on return of cash to stockholders through stock repurchase plan.

Year-to-date, we have already repurchased more than 345 million of SanDisk's shares and this is significantly more than last year. I believe all of last year we did about 230 million. SanDisk also will plan to use this cash for future technology or any future capacity-related investments.

At the May 8 Investor Day, Judy also shared with you that with the evolving mix of the business, with the strengthening mix of the business and with our focus on prudent capacity expansion, we believe that going forward, in terms of long-term financial model, our gross margin range would be 38% to 44%, so that's a 300-basis-point increase compared to the long-term financial model that we had before in place.

Of course, with increased investments related to the technologies, the 3-pronged technology strategy that I briefly discussed earlier, as well as increased investments related to controller and system solutions particularly in the area of SSDs and embedded, our operating expenses, due to increased R&D levels, are in the 17% to 19%, about a 200-basis-point increase compared to the previous long-term financial model. What this translates into is the operating margin range increase now to 21% to 25%, a 100 basis point higher compared to the previous long-term financial model that we have in place. And we believe that as our business on the solid state drive becomes one of larger scale, some of these operating expenses will moderate somewhat, and we will have a potential for even further increases in operating margin range in the future.

So overall, SanDisk is very well positioned with its strong technology, with its strong product portfolio. SanDisk brand is well recognized and continuing to gain momentum in OEM and enterprise businesses, as well. Our vertical integration in terms of technologies, system expertise, manufacturing scale, all of this really positions us well for the future with a strong balance sheet and the SanDisk team that is 4,700 strong and fully dedicated and solely focused on advancing flash solutions roadmap ahead.

Thank you, and I will take any questions that you may have.

Since there are no questions, I think we can adjourn this meeting. Okay. Thank you.

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