Why Isn't Saifun Management Talking?

When Samsung talks about the reduction of flash chip production on the part of its competitors, it refers, among other things, to the bad news that Saifun Semiconductors Ltd. (Nasdaq:SFUN) received from its largest customer, Infineon Technologies (NYSE: IFX) subsidiary Qimonda AG. While on Friday Saifun lost a quarter of its value, Qimonda’s investors were pleased by its exit from the flash field and sent its stock up 10%.

As you may recall, I pulled out of Saifun back in May after the all-out attack by Saifun CEO Dr. Boaz Eitan on the x4 technology of M-Systems Flash Disk Pioneers (Nasdaq: FLSH). My reasons back then were more a matter of discipline in making investment choices, meaning that I am not willing to invest in a company whose CEO loses his head to the point of mouthing obscenities (and I didn’t repeat everything he said) about another Israeli company, which is not even a competitor of his and on whose board he once sat.

In all the comments I have read since Friday, I have not seen one word from Eitan, the founder, chairman, and CEO of Saifun, who owns most of the patents, about the loss of its biggest customer. In contrast to the x4 affair, this time he chose to remain silent. In my view, the proper thing to do when something as serious as this happens is to hold a conference call with investors, since between you and me, who, apart from analysts or managers at Fidelity Management & Research - which holds more than 10% in the company - would have dared to call Saifun’s managers last Friday evening?

For years, Eitan understood that his silence was golden. As the CEO of a private company, he was not obliged to talk to the capital market, but on the other hand, venture capital firms that invested in Saifun were very good at disseminating rumors on the market of technological breakthroughs and fantastic commercial potential, and about the mega flash revolution that was just around the corner. The brilliant way Eitan’s wife, Adv.Tali Eitan, outmaneuvered global giants Fujitsu and Advanced Micro Devices Inc. (NYSE: AMD), which attempted to bypass Saifun’s patents, reinforced, and quite rightly so, its potentially phenomenal value as a private company that shunned the media.

Investors, such as me for example, who were in awe at this success story, searched for every possible way to invest in the company, and the only way available for people without personal connections with the owners or venture capital firms, was through Tower Semiconductor (Nasdaq: TSEM). Tower held more than 10% of Saifun, as well as exclusivity over future production activity and future royalties.

Having subsequently lost out, when Tower eventually had to sell off its stake in Saifun, we all waited for the IPO of the century. When it finally happened, after repeated postponements and rumors, we found ourselves disappointed yet again, because all we got were crumbs while those with connections got most of the rest. One person who adroitly expressed our feelings in writing here at “Globes” was portfolio manager Kobi Sandler, who has not received a reply from Eitan to his letter to this day.

Today, Saifun is a public company, but its founder remains mum when the customer that accounted for 49% of sales in the second quarter, and, according to Citigroup, was likely to account for 36% of sales for 2006 as whole, abandons it. Instead, the company president Koby Rozengarten and CFO Igal Shany, who commented on the news to the media, said something like, “Never mind, it’s not a tragedy. It’s business as usual.” As they saw it, this was a local decision by a manufacturer to exit the NAND market and had nothing to with Saifun’s technology.

Qimonda’s spokesperson had a bit more to say on the matter in a comment to online technology news magazine EE Times. Apparently, while they are abandoning flash, since they focused on the lower capacity range, for which the market is currently weak, they definitely intend to return to the upper capacity range in flash at a future date, since they feel it has great potential. EE Times said that no decision had as yet been taken on the timing of the return to the market and the technology Qimonda will choose, but reading between the lines, it is doubtful whether they will opt for Saifun’s NROM technology a second time around.

Qimonda is not just abandoning production but also joint development with Saifun. I think that Saifun should be worried by this, because if Qimonda is thinking of returning to flash in the long-term future, there would be no reason for it not to continue investing in joint development with Saifun of data products for the top end of the market. Either way, Saifun has made no comment at all to investors about the pace of implementation of its new technology, and, as I see it, this is critical to the future of the company which has decided to become a key player in the data field, that is to say, to build itself as a competitor to the thriving NAND market.

When SanDisk Corporation (Nasdaq: SNDK) CEO Dr. Eli Harari, whom I consider to be the number one flash expert, unwittingly found himself in the middle of the row between Saifun and M-Systems last spring, he said that if Saifun had decided several years back to focus solely on non-data fields, especially embedded, it could have become a giant in the field. Save for the 20-F report, in which there is a generalized reference to risks such as significant delay in application and slow transition to mass production, the management, as far as I can remember, has not raised this in the past, nor has it addressed the possibility that Qimonda has thrown in the towel not just because of the market, but also because of Saifun’s data technology.

In my view, even if Saifun eventually signs an agreement with Samsung at some point, there is a slight chance that the implementation and transition to mass production will take quite some time, and this therefore will not be seen that quickly in the company’s sales and profit figures, save for a large advance payment on the signing of the agreement. Samsung may well comment on, or make a subtle reference to Saifun’s technology in its quarterly conference call which was scheduled to take place earlier this morning. In a reply to a question from an analyst during a similar conference call two years ago, Samsung said that the implementation was problematic.

Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

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