Credit Suisse Technology Conference
December 3, 2013 1:00 PM ET
Sanjay Mehrotra – President and CEO
Well, let’s go ahead and get started. I’d like to welcome everyone this morning to the SanDisk Fireside Chat. It’s my pleasure to introduce Sanjay Mehrotra, President and CEO of SanDisk. We’re going to go through about 20, 25 minute conversation, we’ll have time to open up questions to the audience.
I have few slides.
First, we’ll go to the slides then. Perfect Sanjay, please.
Good morning. I just returned from an overseas trip and I just caught a bad cold and cough. So, please bare with me during the course of the presentation in case I end up coughing here. Of course, first let me point out that during the course of my presentation, I’ll be making certain forward-looking statements and the risk factors associated with our business. Please refer to our SEC filings which we make from time to time. My agenda today will include an overview of SanDisk business, key growth drivers, SanDisk strategy. I’ll make short industry comments and just briefly review SanDisk financial results.
SanDisk as you know is the Fortune 500 company, employees over 5000 worldwide. Last four quarters revenues – last quarter – reported quarter revenues $6 million with strong net cash position. And of course we invest heavily in R&D particularly memory technology as well as system solutions technology. With respect to memory technology, our fabs our world class NAND fabs in joint venture partnership with Toshiba and we are now ramping up – starting to ramp up our latest industry cost leading 1Y technology node which will be the world class technology and cost reduction capabilities in 2014 timeframe
Over the course of 25 years and yes by the way this is the year that SanDisk marks its 25th Anniversary. We have really generated a strong business both on the retail front as well as on the commercial side of the business. On the retail side, SanDisk product sales grew more than quarter billion store fronts worldwide and SanDisk has number one revenue market shares with retail products on a worldwide basis. And SanDisk have substantially grown its business in embedded product solutions particularly in the mobile markets and today we are a provider of our flash products to all leading smartphone and tablet manufacturers.
And we are particularly excited about growth of our SSD business in the Client SSD SanDisk is a supplier to all 12 leading OEMs as well as on the Enterprise SSD side one of the biggest growth drivers here at San Disk, we are very excited with the revenue growth that we are experiencing in this business as well as the opportunities that exist for the business and on the Enterprise side, Enterprise SSD side. In fact with the acquisition of SMART Storage Systems which we closed in the third quarter, we now are a supplier to six of the seven storage OEMs and of course we are engaged with other cloud and hyperscale customers as well to drive future growth of the business in this market segment.
We have achieved the success across retail side of our business as well as OEM and enterprise side of the business through having a very broad portfolio of products and I believe that our portfolio of products is unmatched in the industry. On the consumer side, we supply – on the commercial consumer side we are a supplier of embedded solutions, wide range of solutions as well as Solid State Drive that go into client computing applications. One the Enterprise side, we are a supplier of SAS Drive, Enterprise SATA Drive as well as some exciting new product category that we got access to the acquisition of SMART Storage Systems called UltraDIMM which is basically an ultra-low latency product that will be really – we have started to sample that product to customers and we believe it will become an exciting product line for us in the future for enterprise-grade ultra-low latency applications which are critical in mission critical particular applications for enterprise
And on the retail side, SanDisk has a strong portfolio of products with our mobile cards, imaging cards, USB Flash Drive, as well as a new family of products that we just introduced earlier this year Connect family of products as well. The key of our success in terms of having a broad portfolio of products and a strong engagement with customers going from consumer smartphone and tablet manufacturers to client notebook device manufacturers to enterprise-grade customers is really our vertical integrations. Our ability to understand the physics of NAND Flash memory at the transistor levels and understand the manufacturing and drive the manufacturing and combine the physics of flash as we scale the technology generations with controller expertise the ASIC as well as the formula that is needed to manage the flash and then translate all that into product solutions that meet the requirements of our customers whether those customers are the consumers on the retail side of the business or those customers are OEMs for smartphone and tablets or notebooks or enterprise customers such storage OEMs or hyperscale or cloud computing customers.
Combining all of this under one row, flash memory silicon expertise, manufacturing, putting that expertise into testing of the products for highest quality and really delivering leading edge solution. This vertical integration is the key, we believe this is what is needed to win in the marketplace and our strength of vertical integration is showing in the results that we have produced in the company here. The key element of this vertical integration is of course flash memory production about half of world’s flash memory output is produced through the joint ventures of SanDisk and Toshiba out of Yokkaichi. So, tremendous benefit of economies of scale coming through our joint venture with Toshiba on the manufacturing side.
And SanDisk of course has strong industry position in terms of patents and have close to 5000 patents and of course meaningful portion of our revenue comes as royalty income from other industry players as well. The key trends today, the connectivity and mobility certainly the smartphone, the tablets I mean these are all becoming ubiquitous and are really driving increased usage of flash to ultimately deliver the experiences that these devices promise. All of this is leading to strong growth in content creation and all this content is growing exponentially and this content businesses, consumers, users expect to access this content fast and that is what is leading to our vision of all flash data centers as well because access of content fast flash is a key enabler in that and I’m going to speak to this in a minute. So, these are the key trends that are driving the growth of flash. Flash is very much at the heart of all the mobile devices that are proliferating fast throughout the world. Flash is very much at the heart of content creation, content sharing, content consumption. And flash is being disruptive now in the data centers.
What all this means is that flash in the storage segment is one of the fastest segment. In fact, flash is growing faster than other memories such as DRAM or Flash growing faster than hard disk drive. What I’m showing here is that in 2008 flash was about $13 billion industry, 2012 it doubled to about $26 billion. And over the course of next three years or so by 2016 timeframe flash industry is expected to grow to $38 billion. So, this is very few industries of this large and have this larger growth opportunity ahead of them. And by 2016 timeframe, with this kind of strong growth ahead, flash would become as large if not larger than the DRAM and the HDD industries by that timeframe.
So, where is this growth primarily coming from, within the flash industry TAM, you can see here in blue and grey what is shown is that flash in SSDs is growing about $2.8 billion, in Enterprise SSD in 2012 and about $4.5 billion in Client SSD. So, about $7 billion, $7.5 billion doubling by 2016 timeframe and the fastest growth in the flash industry TAM is coming from enterprise SSDs which we are certainly very excited about. So, the biggest growth flash industry growing from $26 billion to $38 billion is coming from Solid State Drive and within Solid State Drive, Enterprise SSD is the biggest growth driver for flash industry TAM.
And of course the Embedded segment continues to grow nicely from about $11 billion in 2012 to about $15 billion in 2016 timeframe and the removable staying at about $7 billion, $7.5 billion by 2016 timeframe. So, main message here is that as the industry sees the strong growth, the biggest growth driver is coming from Solid State Drive. So, what is our strategy to address the growth in this industry. First and foremost our strategy is to focus on high value segments. SanDisk is not about chasing bit share in the market, our strategy is our revenue share to outperform our bit share. And we achieve that by focus on high value added solutions by transforming our portfolio mix toward higher value add solutions such as enterprise-grade SSDs which command higher ASPs and higher profit margins as well as focus on for example in Embedded high performance Embedded segments as well as high performance segments within our retail business.
So, high value segments driving the mix of our portfolio in business toward high value, high margins is key element of SanDisk strategy. And of course that requires the world class products and execution. And that means working closely with the customers to understand their roadmap and making sure our product roadmap of the future is aligned with theirs and making sure that we have leading-edge memory technology and large scale volume production that is needed to be a leader in terms of product execution.
The third element of our strategy is to focus on OEM and enterprise-grade, OEM and enterprise business leadership. And here we want to be a leader in terms of supplying the products and solutions to our customers on the enterprise OEM and enterprise side but we also want to be part leaders in terms of the future markets requirements and that means as a part of driving our OEM and enterprise leadership to work closely with key customers and the ecosystem partners. And certainly as we deliver our broad portfolio of products to our customers, to do so with strong customer support and high quality that is expected of customers such as enterprise-grade customers.
And ultimately the fourth key element of our strategy is to deliver a strong financial results. And here we are very much focused on really driving shareholder value through the strategy of shifting towards high value add portfolio mix as well as making prudent investments in terms of capacity in terms of technology and of course continuing to focus on IT as an important part of our revenue stream as well.
Our strategy that I just articulated with specific focus on high-value add solutions that high margin solutions has translated into the success that is reflected on this slide. You can see the Embedded side of the business has grown to about 28% in 2013 year-to-date compared to about 21% in 2012. But remarkable achievement here is in SSDs which have now year-to-date in 2013 so the first three quarters have become about 19% of our revenue compared to about 8% of our revenue in 2012. So, our strategy of shifting the mix toward higher value add solutions is working very well as reflected in some of these key metrics.
I want to just take a moment to talk about our vision for all flash data centers of the future. As I mentioned before, flash is being disruptive in data centers today. It’s used to be that the Tiers the various Tiers of storage that are well known Tier 0 being the highest performance, lowest latency requirements, Tiers which primarily relies on applications tied to indexing and cashing. The middle Tiers, Tier 1 and 2 are the kind of Tiers where you have storage and you have high speed transactions happening. The last Tier, Tier 3 is about archival storage where data is infrequently accessed.
These Tiers today are primarily being supported by hard disk drive technologies. But what is already starting to happen is that flash is due to its strong value propositions, strong value proposition in terms of total cost of ownership is really making penetration now across all Tiers of storage. Flash, initially started with adjusting just Tier 0 the highest performance segment but now flash is really targeting the mixed use, read intensive or write intensive kind of applications that are in the middle Tiers that are tied to fast transaction processing and now flash even starting to make inroads into applications such as cold storage, archival storage. But this is all not just because flash has achieved attractive price points where it is becoming a good value proposition but it also primarily is because flash provides the kind of performance that actually helps you for example in the case of virtualization reduce the number of servers that you require and else lower the cost.
Flash you can pack much tighter flash capacities in a rack therefore fewer racks needed and what that means is less power supplies that are required in the data center, less host adapters that are the host bus adapters that are needed. All of that when again translates to power savings in data center which is as you well know very, very important. And of course flash saves in space as well. So, all these aspects the IOPS on the per dollar basis the power savings, the space savings, the performance that you get out of flash the high reliability that you get out of flash, this is what is really driving a trend for in seizing adoptions of flash in data centers ultimately leading we believe to our vision of all flash data centers in the future.
I will briefly now comment on industry and SanDisk financials. In terms of the industry trends in the 2013 industry environment has been the best ever in the history of flash. And when I look at 2014, I see strong demand trends continuing for flash and the industry supply growth has significantly moderated compared to the years passed and what all that means is that I expect that in 2014 industry will have healthy fundamentals in terms of demand and supply and that translates into favorable pricing and extended stability of the industry environment.
It’s important to note that the supply growth has significantly moderated to about 40% supply bed growth in 2013 and 2014 for the industry compared to much higher levels in the past and this is primarily due to the increased technology complexity and the increased CapEx that is required for a technology transitions as well as for any capacity to be added in the fab. So, overall I expect healthy industry fundamentals in 2014 as well.
In terms of our results, SanDisk with our latest guidance that we provided in the Q3 call, is our 2013 revenue based on that guidance would amount to around $6.1 billion. So a significant growth over 2012 timeframe. Throughout the year we have continued to deliver strong margins as well, Q3 reported margins were 50.1%. Operating margins 33% in Q3 timeframe and continue to increase through the year. All of these improving results throughout the course of the year again are the reflection of healthy industry fundamentals but primarily SanDisk shift in mix of our products toward high value higher margin solutions that we have successfully driven throughout the course of the year.
In terms of the capital return program, we have talked about it before. SanDisk stock repurchases we have announced that we will be basically using the strategy of diverting 70% of our free cash flow or amount to of the dilution from employee equity awards, higher of the two of these towards stock repurchases. In fact, in 2013 SanDisk has already repurchased $1.6 billion of shares through this program and we have authorization remaining from the Board of Directors of another $1.9 billion of purchases for the future.
We also are very pleased that given the consistency of our business model and growing confidence in our business model we have been able to initiate a dividend program we announced paid out the first dividend in Q3 of $0.22.5 per share per quarter about $0.90 and will on an annualized basis. So, overall a strong capital return program in terms of stock repurchases as well as dividends. So, in summary SanDisk is well positioned with respect to our brands a brand that is not only well known on the retail side of our business but a brand that is growing in its presence on the commercial side of the business. Our diverse portfolio of products and driving innovation, leveraging vertical integration and scale of operations are the key factor that are helping SanDisk continue to drive its unique position of being a strong retail leader as well as being a strong leader on the commercial side of our business.
And SanDisk is well positioned in terms of our financials. Strong balance sheet and that gives us flexibility in terms of driving our growth strategy for the future. And of course all of this is achieved through SanDisk dedicated focus on flash the fastest growing segment within the storage space and SanDisk is all about flash and I believe that with our strategy of continuing to drive the portfolio mix toward higher value add solutions with our technology, leadership and execution and with our prudent capacity management carefully managing our demand and supply balance, I believe that SanDisk is well positioned for success in the future years as well.
Thank you. And now I believe we can open this up for some questions.
Sanjay, I’ll start off with a couple of questions, some on the supply side, some on the demand side. You did a nice job laying out your expectation for industry bit growth this year and next. Can you remind us what your bit growth projection is for 2014 for SanDisk. The company CapEx this year is about $1.1 billion, you talked about the up next year, is there any more clarity around that. And I guess importantly given your mix strategy, my understanding is your revenue growth which should outstrip your bit growth because you’re moving to higher value added bids. So, how do we think about your bit growth relative to your revenue growth for the industry?
So, what we say is that our revenue share will outstrip our bid shift in the industry because we are not about trying to chase bit share we are really focused on really diverting our bits towards the high value segments of our business. In terms of industry supply bit growth we have said in 2013 as well as 2014 we expected to be about 40%, this is for the total industry. For SanDisk in 2013, we expect our bit growth supply bit growth to be about 20% and in 2014 we expect our supply bit growth to be in the range of 25% to 35%. So, keep in mind that in 2012, SanDisk had significantly outpaced the rest of the industry with in terms of bit growth, higher than the average industry average in terms of bit growth during those two years. 2013 and 2014 our bit growth will be less than the industry average.
However, if you look at 2013 results, our revenue growth actually outperformed the industry revenue growth. In terms of the CapEx for next year we have not really provided any specific guidance. I would expect that CapEx to be more than the CapEx in 2012 because of our 1Y technology transition that would be driven during the course of 2014. And we have said that 1Y is the more capital intensive transition than 19-nanometer transition was. However, we would expect our CapEx to be in the long-term financial model range that we have talked about before 20% to 30% of our revenue.
And the Sanjay, on the supply side for the industry, I think one of the concerns I hear from the investors is are we discounting the ramp of 3D NAND this next year enough. And could the guy in Korea ramped significantly faster. I guess within your 40% number what do you have baked in there for 3D and if by chance this is a – it’s a lot larger number given the cost structure of 3D, does it really impact a lot of the markets that you participate in?
So, in 2014 our estimate of bits industry bit supply growth was approximately 40%. We are taking into consideration the expectation for 3D NAND’s production by one particular flash supplier Samsung. So, those are already taken into consideration in our estimate of 40%. However, the 3D NAND bit output overall as a percentage of the industry will be rather small in 2014 timeframe.
And when do you think you guys will have to cross the CASM from planer to vertical NAND?
So, our strategy on planer NAND disk to continue to drive the planer NAND node to 1Z technology node which we believe bits are mix of X2 and X3 in that 1Z technology node the 2-bit and 3-bit cell technologies in 1Z technology will give us across leadership in 2015 timeframe. 2014 the world class would be the 1Y technology node. And beyond that, in 2015 is when we plan to ramp our 3D technology once it becomes lower cost than our 1Z nodes. We believe our 1Z technology node will position us very well in the industry with any 2D node or any 3D technology nodes in the 2015 timeframe and in 2016 we’ll bring out in volume production at 3D NAND bits technology that would be targeted to be lower cost than the 1Z technology. And I’ll also just mention that we will have pilot line production in second half of 2015 of bit technology.
We probably have time for one question from the audience. Yes, there is one.
You’re talking about transition from disk drives obviously old technology legacy, so the Solid State Drive based on economics just strictly upfront economics, what do you think transition period is were their heads up even for the tinier transition five year you kind of sit over long run if you transition unlike anybody disagreed. What do you think that is, is that seven years out six years, do you guys have any thoughts of projections?
I believe that they will always be hard disk drives and they will always be out there for next several years. Flash, is what is as I mentioned being deceptive flash is what will grow faster and will have increasing adoption. You’re already seeing as I said you know flash getting adopted in all Tiers. All – there will be some all flash data centers in the years to come exactly when that happen, I’m not really able to say that but over the course of next several years I would expect that to start happening. You are seeing tremendous attraction from major players on the hyperscale side towards the attributes of flash that is really starting to drive more innovation in terms of products as well as more capabilities for usage of flash in the data center.
Rephrase the question. How fast is market share changing between flash and legacy?
Between flash and…
Legacy, how fast is the market share changing, are you gaining 8% over legacy, this drives the year you think are – what you’re seeing, you’re talking about bit growth.
Well I think it all ultimately translates into when you look at the growth of SSDs and here I will look at Client SSDs as well as Enterprise SSDs combined, right. By 2016 timeframe Client SSD and Enterprise SSD is becoming a $15 billion market. In that similar timeframe HDD total market is about $38 billion as I showed in my slides.
One more question behind there.
Thanks. You said that you expect to maintain cost leadership in 2015 with the rollout of 1Z and then you transition the following year to fix. What gives you the confidence that your 3D approach in that timeframe is going to sustain a cost advantage versus the second generation of your competitors 3D approach?
I certainly expect that the competitors will have future generation of 3D NAND technologies in that timeframe because the first generation of 3D NAND that has been announced which is the 24 layer is actually not cost competitive bits, the 2D NAND that exist even today in the marketplace. So, certainly there will be future generations of 3D NAND. When I talk about our 3D NAND roadmap bringing out in 2016 in volume production and pilot line in late 2015 timeframe, I’m really talking about a technology that will be cost competitive in that timeframe, will be lower cost in our 1Z node but will also be cost competitive I believe with respect to other 3D technologies that are out there. So, of course we have several of our engineers in joint collaboration with Toshiba that are very much focused on advancing our big technology roadmap and we are making good progress there.
Perfect. With that, we end at this time. I’d like to thank Sanjay for his time this afternoon and heading to the [indiscernible]. Thank you all.
Sanjay, appreciate it.
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