SanDisk Corporation (SNDK)
February 16, 2012 11:00 am ET
Jay Iyer -
Sanjay Mehrotra - Co-Founder, Chief Executive Officer, President, Director and Member of Special Option Committee
Sumit Sadana - Chief Strategy Officer and Senior Vice President of Business Development
Shuki Nir - Chief Executive Officer and Co-Founder
Dan Inbar -
Kevin Conley -
Greg Geolz -
Ritu Shrivastava -
Judy Bruner - Chief Financial Officer, Executive Vice President of Administration and Member of Secondary Executive Committee
Greg Goelz -
Doug Freedman - RBC Capital Markets, LLC, Research Division
Good morning. How is everyone today? I don't hear you. How is everyone today? Awesome. Great. Well, thank you for coming. My name is Jay Iyer, I handle Investor Relations for SanDisk. And it is my pleasure to welcome you all to SanDisk's 2012 Analyst Day. A special welcome to those who are joining us on live video webcast as well.
I'd like to make a few comments, announcements before turning the meeting over to Sanjay. In each of your tables, you will find an evaluation form. Feedback to us is very important, so please take a few minutes to evaluate this entire meeting at the end of the day. And you can turn it in to me or you leave it on your table as you walk out. We will also be handing out PDF files of presentations that you will see today on a USB drive, an 8-gigabyte USB drive. And so be sure to grab one on your way out as well. We'll also post the PDF file on our website at the conclusion of today's meeting.
A word of appreciation is in order here. This is my Oscar moment, by the way. An event such as this won't be possible without the help of many people and teams across the company, and I thank them all for that. I'd also thank the management team for their ongoing commitment to investor and analyst communications.
Okay. So we have a full agenda today. Sanjay Mehrotra, SanDisk's President and Chief Executive Officer, will kick off today's meeting and provide a company overview. Sumit Sadana, our Senior Vice President and Chief Strategy Officer, will offer his perspectives on demand drivers and SanDisk's strategy. Following that will be Shuki Nir, our Senior Vice President of Retail Business, and he will provide an update on his business. After which, we'll take a 15 minute coffee break. That'll take us about 9:45 or so. Following the short coffee break, Dan Inbar, our Senior Vice President of OEM, will talk about his accomplishments with OEM products and customers. And shortly thereafter, Kevin Conley, our Senior Vice President of Client SSD business, will show you where we are in this rapidly growing market. You will also hear from Greg Goelz, our Vice President of Enterprise SSD business, about our position in this high-growth market. We'll then take a 30-minute lunch break. You should plan on assembling back in this room promptly to hear Ritu Shrivastava -- Shrivastava, pardon me, our Vice President of Technology, and he will discuss SanDisk's memory roadmap, including future technologies. Judy Bruner will be the last presenter, and she will provide a financial overview as well. We'll then have a consolidated Q&A after all the 8 presentations, so I ask you to hold your questions until then. So that'll keep us on schedule.
Lunch will be served just outside this room, towards your back, in the anteroom area, where you'll also find -- and you would have found them already -- product demos from our various businesses. So please feel free to speak to our product experts whenever you can today. So if everything goes well as planned, we should conclude our meeting by 2 p.m., possibly sooner. And needless to say, you'll have coffee and tea throughout the day at the opposite end of the room to my right.
Okay. So before we begin, please note that during our Analyst Day meeting today, we will make forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections, future technology achievements and future market conditions, is a forward-looking statement. Actual results differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in the documents we file from time to time with the SEC, including our annual report on Form 10-K for fiscal 2010 and subsequent quarterly reports on Form 10-Q. SanDisk assumes no obligation to update these forward-looking statements, which speak as of the date hereof.
Please note that non-GAAP to GAAP reconciliation tables for all applicable commentary that Judy Bruner will provide today will also be posted along with today's presentations on our website. These reconciliation tables are exclusive of any one-time transactions and do not reflect the effect of any acquisitions, divestitures, or similar transactions that may be completed after January 1, 2012.
So with that, it is my distinct privilege to introduce you to SanDisk's President and CEO, Sanjay Mehrotra.
Thank you, Jay. Good morning, everybody. Welcome to SanDisk's 2012 Analyst Day. And I would also like to welcome our listeners on the webcast. It's hard to believe that a year has gone by, and we are here meeting again today, discussing the future business of SanDisk.
Before I start, I want to share with you SanDisk's mission. SanDisk's mission is to enrich people's lives through digital storage anytime, anywhere. 23 years ago, when Eli, Jack and I founded SanDisk, our founding vision was that in the future, there will be consumer electronics devices which will require flash memory for storage due to flash attributes of low power, high capacity, high performance and high reliability. And that vision certainly has come true. Today, flash is everywhere. Flash is digital film. Flash is in your USB drives. It's in your mobile phones, in your notebook computers. It's everywhere now, even in the cloud. Today, you will hear from our team on how we are continuing to carry our mission forward.
In my presentation, I will focus on 4 key areas: First, the strong demand drivers and supply considerations; second, our strengthening mix of business portfolio; third, vertical integration, a key to our competitive advantage; and fourth, our strong financial strength. I believe that combination of these 4 positions us uniquely to continue our leadership and continue to win in our industry.
But first I will recap our 2011 results. 2011 was an excellent year for SanDisk. Our revenue was a record $5.7 billion. Our profits were a record as well. And we had free cash flow of $377 million, which I am particularly pleased about because we generated the strong free cash flow even after acquisition -- strategic acquisition of Pliant, strategic investments in technology, as well as fab capacity investments.
Two years ago -- about 3 years ago, we had -- late 2008, early 2009 time frame, SanDisk had undertaken the strategy of diversifying our customer channels and products. We used to be, before then, 2/3 retail company and 1/3 OEM. Through successful implementation of that strategic transformation, today, our business is 2/3 OEM and 1/3 retail, and you bet that we are absolutely continuing to drive pedal to the metal in both OEM and retail, with leadership position in both areas of the business.
This successful strategic transformation has resulted in us gaining $2 billion in revenue from 2009 to 2011 time frame. A very solid increase of $2 billion, with 2009 revenue of $3.7 billion and now 2011 at $5.7 billion.
In OEM, we diversified our customer engagements. Our growth today is mostly from leading OEM providers, smartphones and tablets, and I’m very proud to say that through our engagement in the mobile ecosystem over last 2 to 3 years’ time frame, we today are a supplier to all major handset and tablet manufacturers globally. We are engaged with all of them in continuing to work with our enriching portfolio in their future design platforms.
And on the retail side, despite the macroeconomic weaknesses, our business has done well. We grew in 2011, 8% on a year-over-year basis to $1.8 billion. And our brand is the #1 brand. We have leading market share. SanDisk product sells everywhere. SanDisk product today sells in 250,000 store fronts worldwide. And our sales, our growth is coming today from emerging markets, where, in 2011, we doubled our unit sales on a year-over-year basis. We are very excited about the opportunities in our OEM as well as retail business going forward.
Our other achievements in 2011 included scaling up very efficiently our supply chain to meet the growing demand requirements for our business. We sold 760 million units during 2011, a record year, a 31% increase over 2010 time frame. And I believe that's a very impressive execution.
We also scaled up our supply chain, the fab infrastructure. Fab 5 completed construction -- Fab 5 Phase 1 completed construction on time, despite the setback of the March earthquake in Japan. I'm very proud of the partnership of Toshiba. I'm very proud of the execution of SanDisk and Toshiba teams in not only completing construction on time, but also ramping up production to plan. And today, Fab 5 is already executing at world-class yield levels.
On the technology front, 2011 was another solid year for us. We launched 19 nanometer technology, the smallest node in production. And our die in 19 nanometer is the smallest, most cost-effective die. We led the industry with 19 nanometer technology development, but we also continue to work on future scaling, NAND scaling, 3D, BiCS technology, as well as 3D resistive RAM. And you are going to hear from us more later on in the presentations.
And one of the things I'm most thrilled about is our strengthening mix of business portfolio and some of the key initiatives that we took -- some of the key initiatives we launched in this regard during 2011. And our Pliant acquisition gives us entry into the enterprise storage market, and our client SSD business is continuing to make strong strides. And we are gaining momentum with increasing sales in that business as well.
I want to talk about the key market trends, and I know that you all know about this since this is such an important driver of our business, that I decided to take a moment here to elaborate on this. There are key -- 3 key trends today: One, mobility, connectivity, and content, that are driving the growth of flash memory. Mobility, there are billions of mobile devices today that are being used worldwide by users. These are devices that are sleek, thin, easy to carry. They're always connected. And people are using them today not only for communication purposes but for web browsing, for their Internet experience, for cloud services and applications and of course, multimedia entertainment and social networking. These devices are really enabling smart, rich lifestyle for people across the globe. These are being used by people of all ages. And as these devices are becoming more and more powerful and more and more affordable, these are not only being used in developed nations, but also huge opportunity in the emerging markets. With 2G networks going to 3G in the emerging markets, with LTE networks, the video content is the biggest growth driver. It's your HD movies, your TV shows, that are now being used on these devices. And it's not just content consumption but the devices, as they become more powerful, are also being used for content creation. So tremendous opportunities, and flash is very much at the heart of these devices. Flash is the key enabler for these devices. These devices are pointing to growing opportunity for our industry.
Today, there are 4.5 billion various consumer electronics devices that are getting sold, that’s what was the number sold in 2011, that's used flash in one form or another. And out of those 4.5 billion devices in 2011, more than -- almost 600 million devices were these smartphones, tablets and devices using SSDs in them such as thin notebooks.
The number of these smart mobile devices, what I call smart mobile devices here, is expected to grow by 2015 time frame to almost 1.5 billion, over 1.5 billion. So an increase of another billion devices getting sold per year by 2015 time frame that are these smartphones, tablets and ultra-thins. And all of these devices represent massive growth. Of course, mobile phones, smartphones, is the biggest growth driver. Smartphone's expected to be over 1 billion devices in 2015 time frame. But tablets as well as SSDs in thin form factor devices are also expected to grow very rapidly. It's not only about these increased units. It's also about the average capacity that is growing in these devices in order for them to be able to provide the strong experiences that the users worldwide expect from them.
So what does all this mean? These increasing units, these increasing average capacities in these flash devices, all of this translates to, by some estimates, demand for flash growing to as high as 140 billion gigabytes by 2015 time frame. These estimates put it at 7.5x growth from 2011 to 2015 in terms of flash bit requirements.
So the point here is that the demand for flash in these consumer devices, looking ahead, is enormous. And as these devices are becoming increasingly powerful, increasingly affordable, being used across the globe with video content heavily used in these devices, they're putting more and more pressure, more and more demand on the infrastructure that supports these devices for providing the strong experience. That means that the cloud, the enterprise, the data center, has to be even more responsive. Not only it has to get bigger, it has to be faster. And that's a huge opportunity building right in front of our eyes for flash memory today.
The cloud, the data center requires, as the demand for rich experience grows, highly responsive storage, fast storage, that needs to be very reliable, that needs to be low power, and it needs to have small form factor so that the buildup of these data centers in terms of real estate can have benefits as well. Ultimately, it requires storage that has low cost of ownership.
Flash has all of these attributes. Flash is low power, highly reliable and of course, small form factor. Flash is already a disruptive force in the cloud today, and this opportunity is projected to grow -- one of the fastest growing segments for flash industry. And the flash in enterprise is expected to grow to over 7 billion opportunity by 2015 time frame.
So the demand for flash in consumer devices, as well as demand for flash in cloud really translates to enormous growing opportunity in terms of dollar term that is addressable for our industry and for SanDisk business. The mobile market, the 800-pound gorilla here, is expected to grow to almost $20 billion TAM by 2015. SSDs, client and enterprise combined, approaching another $20 billion TAM by 2015 time frame in terms of sales of SSD solutions to the end customers. And the traditional markets of imaging, USB drives and other flash applications continues to be strong as well. Almost $10 billion by 2015 time frames. So all of this adds up, by third-party estimates, to $46 billion plus opportunity in 2015.
So when I look at these numbers, I find them very impressive. I believe this kind of growth rate and this kind of scale of opportunity outpaces anything else in the semiconductor industry. And what's exciting for us at SanDisk is that we are very well positioned now to address each of these market segments.
So we have talked about demand. Now let us look at the supply considerations. So when we look at supply bit growth, there are 2 important factors here. One is the wafer capacity percentage increase in the industry on a year-over-year basis. And second is what is the capability of the technology transitions to deliver bit growth on those wafers on a year-over-year basis?
So let's first talk about number one, which is the wafer capacity increased percentage on a year-over-year basis. As you see in this dark line on the chart, and the scale for that in terms of percentage is shown on the right axis here, you can see that a clear trend is the wafer percentage increase in the industry is declining. In 2011, there were almost 12 million wafers of capacity in the industry. And one of the factors why wafer capacity percentage is declining, first of all, is simply the law of large numbers. This industry has grown to a very large scale of operation, so now any capacity that gets added, that is manageable to be added by the 4 camps of production that exists in this industry, that capacity is rather limited. So when you add capacity on a large existing installed base, its impact in terms of percentage decreases. And as this capacity grows, given manageable capacity that can be added, obviously, it leads to smaller and smaller percentage impact, percentage increase on the industry wafer capacity.
And then, second factor, of course, is considerations by individual suppliers of flash memory based on their own business decisions such as CapEx considerations, as well as resource limitations that are required to be adding capacity. So bottom line is that the wafer capacity percentage continues to decline in 2011, slightly above 20% and is expected to go lower in 2012 and 2013 time frame per third-party estimates.
Now let's look at the second factor, which is the bit supply growth rate coming from technology transitions on, let's say, per wafer basis. So here, I would just like to point to a couple of things. One, technology transitions are getting more complex. Technology transition capability to add more bits on a year-over-year basis is declining. They're getting more complex, and also technologies are lasting into production longer. One of the reasons is that when you're operating at a massive scale of production, and you all know that technology transitions happen over a period of time, the larger the scale of production, the longer it can take to really implement a full technology transition on a given node. So again, the combination of these couple of factors here lead to reducing technology transition capability to add to the bit growth percentage.
So these 2 factors: the wafer percentage increase declining over time; and second, the bit growth capability of technology transitions to deliver -- technology transitions to deliver bit growth on a year-over-year basis, these 2 factors combined is leading to a declining, moderating bit growth in the industry.
In 2007, the bit growth in flash memory industry was approximately 75%. SanDisk projects that in 2012, the bit growth would be -- for the industry, it would be in the range of 70% to 75%. And for 2013 time frame, we project that the bit growth for the entire flash industry will be in the range of 50% to 60%. So the bit supply growth rate is moderating.
So what does this all mean? The demand drivers are secular and strong. The industry's capability to supply bit growth is moderating. And what that means is that with the large scale of production that already exists and the strong demand drivers, we believe that there will be strong environment in terms of healthy demand supply balance overall in 2012, as well as beyond for our industry.
So now I have discussed the demand environment and the supply considerations and the growth opportunity that are ahead of us. Next, I want to focus on that how we are continuing to leverage our strong results and our strong capabilities and strengthening our business portfolio going forward.
You will hear from Dan and Shuki regarding how they are doing that in the retail and OEM part of the business. And today, in my presentation, I'm going to focus on the main area of solid-state drives. In this area, first, key aspect of us, SanDisk, is strengthening our business portfolio is Pliant acquisition. Pliant acquisition gives us entry into the fastest-growing segment of the flash industry, the enterprise storage. Pliant was the leader in developing -- not only addressing a fast-growing flash industry of enterprise storage, but even within addressing the fastest-growing segment and what is expected to be the largest segment in the future, the SAS drives.
So when we looked at flash, among other companies we were evaluating last year in terms of acquisition, we saw that, really, flash has the best capability, the best roadmap -- with SAS drives, fast segment of growth with leadership products already using MLC memory, strong customer engagements, we felt it was a perfect fit for SanDisk to leverage our synergies of technology and manufacturing capabilities. This integration has gone extremely well. And as you all know, that enterprise storage product development and selling to the enterprise business segment is very different from just consumer products. So here, Pliant team had several decades of experience in product development and selling and supporting enterprise storage customers. They came from the hard disk drives' world initially.
So we have kept the Pliant business unit as a separate business unit in terms of engineering, marketing, sales and quality. And in terms of leveraging our own technology and manufacturing infrastructure and corporate support services, they are leveraging the SanDisk overall functions in these areas. This model is working very well. We are already advancing the enterprise SSD storage product roadmap. We are already on a fast revenue growth rate in this business.
And this business is very exciting for us because it's a high-growth, high-margin business, and now we are expanding our product portfolio here. We are investing more resources. And after our acquisition in June, we announced industry's fastest 6-gigabit SAS MLC SSDs, and they're already shipping to HP at this point. They started shipping in June. And we also expanded our portfolio to sample enterprise SATA solutions in –- late in 2011. As well as late last year, we began sampling our PCI Express solutions as well.
So with expanding portfolio, we expect to broaden our engagements with enterprise customers. We are already selling products to 3 of the top 7 enterprise storage OEMs: NetApp, HP and Dell. And our customer engagements, as you'll hear later from Greg, are continuing to broaden. I'm very excited about SanDisk's position in this exciting high-growth, higher-margin business.
Second key aspect of our strengthening mix of business that I want to talk about is our client SSD business. And you all probably heard, or you experienced yourself, the announcement of dozens of ultrabooks at the CES last month. This is a growing opportunity. It's about ultrabooks, as well as about ultra-thin devices. Flash now is at price points where it enables further growth of flash memory and really accelerates the momentum of SSDs in computing platforms. In SanDisk, we have strong entry-level products. We have continued to develop our form factors, as well as our products in terms of segmentation based on performance. And we have a very strong product portfolio now. We are engaged with customers on the OEM side. We are shipping product, increasing revenue on the client SSD. And key attributes that we bring in terms of our product specifications are not only performance but low-power capabilities as well.
And just earlier this week, we announced our latest generation of retail and OEM SSD products. We are excited about the opportunities and our product platform, as well as our customer engagements. And this is another rapidly growing business for SanDisk. You are going to hear more about this from Kevin later in his presentation.
So what does all this translate into? Our growing enterprise SSD business, as well as our growing client SSD business mean that these businesses will strengthen the mix of our business. They will become a bigger part of our overall product portfolio. And last year, SSD represented approximately 3% of our total revenue. We are looking at this growing to approximately 10% of our total revenue in 2012. We look at 2012 as the inflection point for the SSD in -- this year. We look at this year as the year of the take-off for SSD. And our strong roadmap, both on enterprise side as well as on the client side, we believe will take us to approximately 25% of total revenue represented by SSDs in 2014 time frame.
Here, I would like to point out one thing, that SSD business, whether client or enterprise, really requires vertical integration capabilities. Vertical integration, taking flash memory technology and really applying system expertise to deliver solutions that have high performance, high reliability and really predictable reliability for the OEMs on the enterprise side, as well as on the client side, is extremely important. This can only be done when you really have memory technologists advancing the future roadmap, working hand-in-hand with system designers, controller firmware experts, as well as overall ecosystem to deliver the solutions.
So I really believe that the play for SSD leadership in the future is those that are vertically integrated is going to be key going forward for client SSD, as well as for enterprise SSD business. And you are going to hear more about this later. And I think you will be able to appreciate even more why this is so important.
So we are focused on strengthening the mix of our business portfolio. And another very important strategic initiative that we have undertaken here is enriching this mix and adding value to our solutions offerings to our customers beyond hardware, now into software. I'm very happy that -- with the latest development in terms of our entry into software solutions with the exclusive license on the client SSD side with Diskeeper that we just have signed an agreement for. This Diskeeper license gives us an opportunity to really accelerate the momentum for flash adoption in client computing platforms. The Diskeeper software essentially accelerates the performance for flash in dual drive systems. It works in conjunction with hard disk drives using flash as cache. And Diskeeper is an industry leader working on these kind of solutions for last several decades -- last 3 decades, engaged with the entire ecosystem on the software side, operating system side.
We believe that through these Diskeeper solutions, we will be able to offer them as stand-alone solutions to our customers, as well as bundle them with our SSDs to help accelerate the performance of their computing platforms, their dual drive systems using flash as cache in the platform, in conjunction with hard disk drives. This is going to accelerate the momentum for adoption of flash in computing platforms.
I'm also very excited about FlashSoft acquisition that we just announced yesterday. Our enterprise storage solutions team, the ex-Pliant team, had actually been working with FlashSoft for last several quarters. And working closely with them, they determined they absolutely had the best leadership products in terms of cache capabilities for SSDs in enterprise storage. We are very excited about now having FlashSoft as part of SanDisk. This team is part of Enterprise Storage Solutions business group at SanDisk, reporting to Greg Goelz, our leader for Enterprise Storage Solutions business. And this, too, will give us opportunities for further value-add products, and we have opportunity to sell software solutions here, stand-alone, as well as bundle it for a better with our [ph] enterprise storage hardware SSDs to help our customers accelerate the performance of their applications with SSDs, enterprise SSDs being used as cache.
So my main takeaway to you from here is that SanDisk is very much focused on bringing high-value solutions to the market. We believe that as we accelerate the growth of our SSD business on the client and enterprise side and as we deliver greater value with software to our customers to our solution -- to our partners, we will be bringing higher value, differentiated mix of product into our portfolio. And I believe that SanDisk, with its vertical integration capabilities, going from memory to system expertise and now to software as well, will be best positioned in the industry to address these high-margin differentiated growth opportunities for our business.
So I'm very excited about the implications of these for our future growth. A lot of heavy lifting ahead of us, but our team is very focused. We have a very strong track record of execution, and we believe that both the acquisition of Plaint and FlashSoft and now for client SSDs, the exclusive license for Diskeeper, these are really giving us very strong and unique capabilities to drive our business forward.
So I talked about importance of vertical integration, referred to it in the context of SSDs. Now let me move on to address some of the key aspects of vertical integration, which is a very important competitive advantage for SanDisk, and this is a capability we actually have built over last 20 years. I believe that we are the leaders in this regard in the flash industry.
So here, there are 3 key aspects that I would like to highlight. First is technology. That's the very core, the very foundation. That's where the leadership starts. The second is system expertise. You heard me talk about it. I'm going to briefly elaborate on it later. And third is our flash scale of production. Important thing is not just to possess each of these distinct capabilities. What's important is that these 3 actually collaborate closely with each other so that the memory technology roadmap of the future can be understood by system experts and expertise can be taken by the memory designers and the system designers to production tests so that you are ultimately delivering the highest reliability, highest performance products in high volume to the customers.
So our vertical integration is bringing end-to-end solutions, cost-effective solutions in large scale to our customers. And our experience that we have built over last 20 years in these areas really positions us very well because vertical integration, as I mentioned earlier, is becoming increasingly important.
Vertical integration is becoming increasingly important because, as I discussed before, SSD growth needs it. But vertical integration is also becoming increasingly important because technology is getting more complex.
So let me talk about technology. We just announced our 19 nanometer, and we are shipping it since late last year. Our 19-nanometer, 128-gigabit device is the smallest memory chip in the industry, the most cost-effective memory chip. So our 19-nanometer portfolio gives us the most cost-effective multiple dies -- multiple die -- I mean multiple capacities such as 64 gigabit and 128 gigabit, and they are now ramping into production. Our 19-nanometer production is going successfully, and this is a mark of our technology and cost leadership in the industry.
Here, system expertise is used for 3-bit-per-cell production, because 3-bit-per-cell would not be possible without all the algorithms and the enhancements -- performance enhancement features that the controllers implement on them. We leverage the controller expertise for such high level of 3-bit production, but we also leverage several advanced design techniques in our memory chip such as, an example I've shown here, of all bit line, ABL architecture. So SanDisk is very much focused on continuing to advance our memory cost leadership with features implemented in the chip, as well as in the systems.
And for the future, we are working on 3-pronged strategy that we have talked to you about before. First is about NAND scaling. Our engineers believe that NAND will continue to scale for a few more generations. Our roadmap shows that next year, we will have 1Y technology node in production for further cost reduction and giving us more bit growth. Following year, 2014, we believe we will have 1Z node in production, and we are continuing to work on future scaling approaches for NAND memory.
We believe that NAND will be the dominant technology in production for this decade. The ultimate technology as the NAND successor will be the 3D resistive RAM, which we have made strong progress in 2011. Strong progress in terms of materials research in determining the viability of this technology. This technology requires EUV for production, and we think this technology has production opportunity in beyond 2015 time frame.
And with 3D resistive RAM as the ultimate technology for the NAND successor, the BiCS 3D NAND, which we began collaboration with Toshiba early last year, we believe can offer interesting opportunities for bridge between future scaled NAND to the ultimate technology in the high-volume production of 3D resistive RAM. And the benefit of BiCS 3D NAND is that it can use the existing fab infrastructure to provide further cost reduction and higher capacity chips in the future.
I think our 3-pronged technology approach here, working in parallel on NAND scaling, on BiCS 3D NAND, as well as the ultimate 3D resistive RAM technology is a unique and differentiated approach. And I believe that we are well positioned for technology leadership for this decade and beyond. You will hear a lot more details of this from Ritu later on in his presentation.
So just few more words about vertical integration. We start with the memory. We apply system expertise, the controller expertise to it that I talked about earlier. And as we have grown our business in the embedded OEM side, embedded flash solutions in your smartphones and tablets, this has required us to engage with the ecosystem. And ecosystem in terms of chipset providers, handset manufacturers, operating system providers, and all of this actually has extended our system expertise even further.
And now, with the enterprise business and the client SSD business and the software opportunities that we have to further enrich our value add and further move up the value chain, we really are able to go from memory to systems to software all the way. So really, very powerful vertical integration. I believe, we are again unique in this regard in our industry.
Our expertise in memory and systems comes from our R&D dividends -- our R&D investments, which are already paying strong dividends. Our R&D investments are at the rate of more than $500 million. Judy will go through some more details on this. And we are also leveraging the Toshiba 12-year very successful partnership in terms of our 50-50 collaboration on R&D on advancing our 3-pronged strategy roadmap. And of course, our R&D investments on the systems side are in areas such as system algorithms, StrongECC and Adaptive Flash Management, which you'll hear from Dan later on today. Those are all the kinds of things that are giving us increasing penetration with our customers.
So our results of R&D investments translate into several benefits for us. A couple I would like to highlight here. Our fifth generation of 3-bit-per-cell in production. We are few generations ahead of rest of the competition in this regard. We are more than 50% in 2011 in terms of utilization of 3-bit-per-cell. So really, very significantly ahead of any closest competitor in this regard. And our R&D investments are giving us our high-performance products, both on imaging and mobile cards, embedded solutions and now SSD as well. The success of our R&D investments also reflects in our patent portfolio, which has now grown to over 3,700 patents on a worldwide basis.
So I'm quite pleased with SanDisk's position on the technology and systems side, and now I want to move into the third element of our vertical integration, our supply chain.
And here, first, I will talk about our fab infrastructure at Yokkaichi, Japan, in joint venture with Toshiba. What you are seeing here is the aerial view of our fab facilities in Japan. You see Fab 3 and Fab 4, and you see Phase 1 of Fab 5, which has completed construction and is already in production. And next to Phase 1, you can see vacant lot, and that is for future buildout of Phase 2. And ultimately, in the future, depending upon demand requirements, as we build out completely Phase 1 and build Phase 2, once Phase 1 and Phase 2 are both fully equipped in the future, the total capacity of Fab 5 will be similar to Fab 4.
I want to show you here that this complex of Fab 3, Fab 4 and Fab 5 is actually operating like one big mega fab. We have capability, as you can see on this picture, of transporting wafers between the factories. This red line actually shows an automated inter-building transportation system for the wafers. And I think the benefits of this really would be obvious. You are able to utilize the equipment in all 3 fabs. You are able to get the economies of this very large scale of these mega fabs of operation and essentially utilize these equipments at the highest utilization rate possible. So this is very good in terms of cost effectiveness of our production in our fabs in Yokkaichi.
Now let me move to our captive supply outlook. And we, in our last earnings call, had talked about that Fab 5 Phase 1 is now 30% equipped. We reached that level in January. We completed the ramp, the initial ramp in January. And we also had discussed in the earning call that we have paused the ramp and we don't plan to start that ramp again, at least until July. So there are 2 key factors here to look at. We made this decision on a month-to-month basis. We look at our demand requirements for the future, and we also look at our progress of 19-nanometer technology ramp, as well as the yield RAM [ph]. And 19-nanometer technology is proceeding well in production. And we expect that for this year, our production ramp plan in Fab 5, together with our Fab 3 and Fab 4 production and 19-nanometer transition, will give us bit growth that will be slightly less than 2011's bit growth. And just to remind you, the 2011 bit growth was 77%.
So we think that in terms of supply, our captive supply growth for this year, we are very well positioned to deliver a strong 2012. And looking at capacity expansion considerations beyond 2012, that means 2013 onward, the key factors here will be continuing capacity ramp in Phase I based on demand assessments. Second part would be for future buildout of Phase 2, which I don't expect to be happening before 2013. And of course, our future technology transitions on NAND 1Y and 1Z, as well as the future technologies, the BiCS 3D NAND, as well as 3D resistive RAM both will play a role in our future capacity plans, depending upon their production capabilities.
So my key message here is that SanDisk, we are very focused on prudent capacity expansion plans. We are very focused on driving our growth maximum. However, bringing our supply online in a managed way, constantly evaluating our demand considerations and looking at our technology transitions progress. We believe we are very well positioned with our captive supply strategy in terms of meeting the strong demand requirements for our business in the years ahead.
Another very important aspect of our scale of production is our back-end assembly and test factory in Shanghai, China. We have talked to you about it before. This really has turned out to be amazingly successful for us. The rate of production here has shown that we can be very flexible, and we can scale it very fast. In fact, when we look at the demand requirements ahead, and I believe we shared this with you last year, we are now constructing a second facility right next to our existing facility in Shanghai. And in 2011, we sold 760 million units. And with the second factory coming online by mid this year and going into production in second half, and also continuing to leverage our subcontract partners where we believe we will have approximately 50-50 production between our captive assembly and test and our subcontract partners, in 2012, we are looking at a scale of production approaching 1 billion units.
I think this scale of production, 1 billion units capability, with the mix of products that we supply, removable cards, embedded solutions, SSDs for client and enterprise, this scale of production with this mix of products, I believe this is unmatched capability in the industry.
And I just would not be surprised if in 2012 we sell units at a scale that if you combine the units we sold in 2011 with the units we will sell in 2012, we would exceed the total units that we would have sold in the first 20 years of SanDisk's history of production up to 2010 time frame. So in 2 years, being able to sell potentially as many units as we sold in the first 20 years of production through 2010. This demonstrates the excellent execution capability that SanDisk has built over last several years in flexibly scaling up our supply chain in-line with the customer demand requirements.
So I want to have couple of words on financial strength, and this is something Judy will go lot more into detail of, but this is a very important element of our unique combination of the 4 areas that I have discussed in terms of our positioning to win in the future.
And here, I would like to highlight again that 2011 was excellent result in terms of our leadership in the industry and our financial results. Our balance sheet is very strong. Net cash, we ended the year with $3.7 billion. And SanDisk continues to be focused on continuing to drive revenue growth, generating strong profitability and cash flows. With our strong balance sheet and the net cash position, it gives us flexibility to drive strategic initiatives for future growth such as in 2011, we acquired Pliant, now the FlashSoft acquisition, as well as opportunities to invest in manufacturing capabilities, fab investments or back-end assembly and tests. And of course, strategic investments related to fab capacity expansion and other enhancements to our portfolio and technology investments as well. Like in 2011, we made technology investments, including the BiCS 3D NAND-related investment. So our strong balance sheet gives us strong flexibility and the ability to drive strategically our key growth objectives for the future.
So I would like to conclude my presentation here with our key takeaways, our focus on strengthening our business portfolio; the initiatives we started late 2008, 2009, have already given us the benefits of strong diversification in customers, products and channels in OEM and retail business; and now, we are continuing to focus on bringing value-add products and solutions, leading toward high margin and differentiated opportunities with the SSD business, both on the client and SSD side and now with the software strategic opportunities as well.
Our vertical integration is working very well with respect to our technology leadership, as well as cost leadership in the industry. And our financial results are from our prudent capacity expansion and our solid scale, a solid and efficient scale of production. And as I look at the future demand projections in our industry, with all of these core competencies that I just highlighted, I believe that best is yet to come for SanDisk.
Thank you. And now I would like to invite Sumit Sadana, our Chief Strategy Officer.
Thank you, Sanjay. Good morning, everyone. It's really good to be here with all of you. I wanted to do 2 things today. First is to talk about some of these growth trends that Sanjay mentioned, elaborate a little bit more on them, give you a few more things to think about on that front. And second, to talk about our strategy for success and how we solidify SanDisk's position as the preeminent supplier of flash storage solutions in the world.
So let's get on with it. Really, the first thing I wanted to start the discussion with is to really talk about how flash has enabled exciting new device and new product categories every other year. We have huge growth opportunities in all of these, and these are devices that we all know and love.
Our smartphones, our really thin laptops, our tablets, and these devices are enabled by really thin form factors, very low power consumption that enables long battery life, and indeed the instant-on capability that these tablets and smartphones have caused us to get so accustomed to, that immersive experience that you can really get instantly. All of these have been brought by flash to the consumer electronics market, and this is something that has created universal appeal in the consumer electronic devices.
This appeal extends from developed markets to developing markets, from young kids to adults using products for work, as well as for play. So let's look at some of these trends in a little bit more detail.
So I'll start with smartphones. Now smartphones have been growing very rapidly as its share of the overall mobile phone business continues to increase. From just over 450 million units last year, we actually expect smartphones to grow beyond 1 billion units a year, driven by very strong growth around the world, particularly in emerging markets. Now, there was a time when thinking about 1 billion units of mobile phones per year was a stretch, but now 1 billion smartphones per year. So a huge driver of growth for flash.
The next category I wanted to briefly discuss is tablets, and this is a really disruptive new product category, and it is really changing the way we work, we play and we interact with each other. And I wanted to spend a moment on just this one aspect. Now, think about it this way. Tablets didn't even exist as a product category before 2010. In fact, just burst on the scene in April 2010. And just in the 5.5 years following that time, we in fact expect that over 1 billion units of tablets will have been sold by the end of 2015. And that's not bad for a category that didn't exist before 2010. And in fact, we expect that growth rate and that trajectory to be such that the second billion units will take only 2.5 years beyond that. So 5.5 years for the first billion units, only 2.5 years for the next 1 billion units. That's the trajectory we expect this market to be on. And in fact, we think it will eclipse the PC and laptop market combined, and there is going to be a substantial level of cannibalization that tablets will create in that market. And so the PC market, the laptop market, has to think of reinventing itself, because the user experience that these tablets create is so immense, and that's what brings me to some of the discussion that I want to have with you on how the PC market is adopting. But before I get there, what is the reason tablets are going to grow so much? What is the reason that some of our forecasts are actually higher than what you might find from some of the industry analysts? And I want to spend a minute on some of the really compelling use cases of tablets. And I'm sure some of you have heard about Khan Academy. Here's the guy who took really a lot of the education market by storm. He's actually put entire libraries of videos on YouTube for free, everything from mathematics to physics, chemistry, biology, finance even, and anyone with a tablet anywhere in the world with an Internet connection can access really top-notch education through these free videos. A huge revolution in the education space. And actually, we think that tablets are going to be really embraced very heavily in the education space.
Now think about it this way. In developing markets, a lot of countries, a tablet could be the only computer a child has or a family has at home.
The next thing I wanted to talk about is really the immersive experience and the very intuitive user interface that tablets have. Think of children working with tablets, not needing to be literate, not needing to know much and are still able to interact with these devices and all on their face and in their eyes when they do that. I think that market, tons of apps being developed for that market, that's going to be another huge market starting with the developed world and then spreading all over the world.
Now commercial use of tablets is another huge growth driver. You see these days pilots using tablets, restaurants using tablets, you can go and get a wine list and you'll see you'll be presented with a tablet in several restaurants, and you can look at a lot of the detail of the wines. These are just simple applications that are changing the way people use these devices.
Another example is retailers. If you look at point-of-sale devices, you go to a retailer, you don't find the favorite color of your shirt on the rack, it can be shipped to your home through the warehouse because the salesperson there is standing with the tablet, quickly able to order it for you. Really amazing level of adoption in the enterprise across different segments. And tablets are not just for work and not just for geeks, you actually have a lot of content consumption capability, and that's where really tablets shine, whether you want to watch video, you want to watch a movie, your favorite TV show. Again, a huge opportunity.
So we think this is a place where -- this is a product category, which is going to impact and really curve the growth and potentially have a cannibalization effect on the laptop market. And so laptops are actually adapting. You heard all of the discussion around ultrabooks at CES. And that market is actually growing as well through the use of flash inside laptops. Because laptops are going to want to create that same kind of user experience that customers have started to demand because of their interaction with smartphones and their interaction with tablets. So we expect the SSD market on the client side to also grow very rapidly. That market should approach 150 million units going forward on an annual basis. And that's a big growth opportunity because the average capacity in that SSD is a lot higher than you would see on either a smartphone or a tablet. So big driver of petabytes going forward.
The next driver I wanted to really spend a minute on is the enterprise market. Now Sanjay mentioned this as well, but the way I want you to think about it is as follows: Not since the advent of virtualization in the enterprise has such a disruptive force presented itself in the enterprise segment. Flash in the enterprise enables a whole new paradigm. It actually enables customers who want to implement a really efficient data center to use Flash in ways that had never been imagined before. In fact, we think that 10,000 and 15,000 RPM drives on the hard disk drives will actually get obsolete, driven by the adoption of flash in the enterprise. And I will talk a little bit more about this when I discuss this at a little bit more length later in the presentation. But these solutions actually allow customers to reduce their OpEx as they implement a capability to expand the number of users they can service on any given platform. And this market opportunity is growing so rapidly that just in the last 4 to 5 quarters, the estimate for this market for 2015 has doubled. And we actually expect that the $7 billion number that Sanjay spoke about as large as it is, we expect that those estimates will continue to escalate with time.
Now serving the next 2 billion consumers around the world is another exciting opportunity for us. As you well know, SanDisk has really the #1 brand in flash in the world, tremendous opportunity across the world. Our units shipped in emerging markets actually doubled year-on-year in 2011, and we see that opportunity continuing going forward. So really strong opportunity for us there.
Let me now switch from talking about units to talking about dollars and the actual TAM that we see in just 3 of the growth opportunities I spoke about. So this only shows enterprise SSDs, PC SSDs and the NAND portion, the flash portion of the tablet market. This does not include smartphones, does not include all of our retail products, so only those 3 opportunities. And we actually expect these opportunities alone to triple in size from the roughly $7 billion to over $20 billion going from 2011 to 2015. I just wanted to give you a little bit of context, that $22 billion or so that you see here for 2015 is just a little bit less than the entire size of the flash market in 2011. So that's the magnitude of the opportunity these 3 drivers have for SanDisk.
Now I wanted to switch to what is happening behind the scenes to enable all of this great user experience that everyone has gotten so accustomed to. First, I wanted to talk about our view of the connected world. We have spoken about this before. We have clouds and enterprise servers on one side, the data networks that deliver the data and connect you to the cloud and to the enterprise and the client devices on the other end. I will focus the first part of this discussion on the right side of your screen, which is the client devices and the data networks that connect them. So it's no secret that video is driving a lot of growth. In fact, 60% of all the mobile data was video last year, and that number continues to escalate. And as all of us have experienced from time to time, this kind of growth in mobile video does create some challenges. It does create some frustrations in the user experience. Many times we find these streams buffering, trying to load, because the cellular networks are literally being brought to their knees by the tsunami of data that's being requested of them. And if you think about it, a lot of these carriers are actually putting tiered pricing plans in place to somewhat discourage the use of infinite amount of data that these devices really want to consume. In fact, when you see a lot of that buffering going on, research shows that if that signs last for more than 10 seconds, 80% of the people just bail on that video. My kids probably do that in 5 seconds. I guess that's just the attention span of this new generation. But what can we do from a flash perspective to take this challenge of this frustration in the user experience and turn it into an opportunity?
We think that a lot of this data buffering problems can be fixed through caching techniques, and we have actually been working with the industry and the ecosystem to drive some of these capabilities in these devices. And the net result is an increase in the average capacity of flash in these mobile devices. So let me talk about 3 of them. The first one is time shifting. This is where when your mobile device is charging overnight, connected to a wall outlet, in the context of a WiFi network at home, you could have preselected certain content to be downloaded over your WiFi network onto the phone. So next morning when you wake up, it's already there cached on the device for you, so you can access it anytime you want, whether or not you are in the vicinity of a cellular signal. This could be for example your next edition of the Wall Street Journal for the next morning, the next episode of your favorite TV show, anything that you choose to configure your phone or your tablet with.
The next opportunity is to do predictive caching. And here, assuming the user allows the device to learn its capabilities, learn its -- the user's preferences, the predictive caching can actually figure out what kinds of shows you're watching and suggest by pre-caching certain of these programs beforehand, the same genre of movies, the same genre of TV shows that you're watching. That's the kind of thing that can be made available offline for your use without you even wanting to have to spend the time to program for it.
The last category is load shifting. This is where we try to shunt traffic from the cellular network onto WiFi networks onto tethered PC connections. All of which, all 3 of these capabilities taken together, increase the user experience, make it a lot more positive, lot less frustrating to deal with all of this content and increase the average capacity in these flash devices.
Now, we spoke about how flash can be used and how this ecosystem is responding by actually increasing the flash capacity in these devices, and that trend has been continuing over time and improving that user experience.
So let's turn our attention to the left side of this chart, which is to talk about the enterprise servers and the cloud. Here, I want to talk to you about 3 important trends that are taking shape on the enterprise side and the cloud side. The first one is cloud services. Now think of social networking. We all have experienced the power of Facebook, Google+ in connecting people around the world. Facebook alone has 850 million subscribers around the world, 1 out of 7 minutes on the Internet is spent on Facebook today. So can you imagine the amount of data that they have to serve up? Videos, photographs, around the world at a moment's notice just when you click on it. The kinds of challenges these kinds of capabilities create are unprecedented in the IT infrastructure. In fact, a lot of these companies from the ground up are rethinking how they would architect the next-generation data centers. And really, flash is at the heart of how they are doing it. Flash has hundred times the I/O capability of hard disk drives. And that capability is being leveraged heavily to ensure that the customer experience that users expect is delivered to them. Today, when you type a search string in a Google search, the actual results start showing up even before you hit the enter key. That kind of speed of search is not really possible on a large scale without the use of flash. So that's a huge growth opportunity for flash in the enterprise.
The next important trend is data analytics. Data analytics, as you know, has been growing very rapidly, it's a very hot field, a lot of investments going on by all of the large companies, a lot of acquisitions. What is data analytics? And what does it have to do with flash? The next time someone tries to steal a credit card and use it in a transaction, wouldn't it be great to be able to stop that person and stop that transaction really, really fast instead of it taking hours and days as it does today? Walmart and other companies are working feverishly to reduce the size of their inventory and get into a better managed inventory state, again requiring huge amount of number crunching that again requires massive amounts of bandwidth to and from their databases. Again, something enabled by flash.
The other really huge growth driver going forward, in terms of all of these networks and how we experience and consume content, is this new world of content delivery that is being -- that the landscape is really changing in front of our eyes. So let me give you a little bit of perspective on this. 25 years ago, 75% of us here in the U.S. watched 4 TV channels: CBS, NBC, ABC and PBS. Today, 75% of us watch other channels. Less than 25% watch these 4 channels. In fact, going forward, there is a really important case to be made here that there is a paradigm shift that's going to take place yet again in the world of content. Everything from YouTube with 800 million users around the world to Netflix, which is driving a lot of content on the Internet. It's really changing the way we all experience and use content. In fact, you can very well imagine a time not too far away where you will be able to use smart TVs, search for a certain program that you want to watch, click on it and be able to watch it instantly on your terms whenever you want to. And in fact, there is new content that is being commissioned by the likes of YouTube and Netflix that's really going to revolutionize this entire space. And all of that tsunami of data that has to be served up, searched and served up instantly, will require on the cloud side huge amounts of flash. So another growth driver for flash. So in fact, if you think about it, these 3 important trends, some of the most important technology trends of our time, are actually all driving straight towards the use of more flash in the enterprise and on the cloud. So how is SanDisk positioning itself to take advantage of it from our strategy perspective? I just wanted to shift our discussion to that.
I actually showed you this exact same chart last year and I spoke about the enterprise, the cloud and the client devices. Shortly after our discussion last February, we actually announced the acquisition of Pliant, and as Sanjay mentioned, that acquisition has gone really well and we are on an excellent trajectory for market leadership with Pliant's products. So I wanted to spend a minute to really talk about the next phase of our evolution, and that next phase is really taking products that we have and turning them into higher value-add solutions, to add more value to what we bring to our enterprise customers. And that is something that software will play a really big role in. And I wanted to start that dialogue on the software side by spending a couple of minutes on the 2 transactions that we announced yesterday.
I'll start with the client side, where we announced an agreement with Diskeeper and in order to explain that a little bit more, let me first set up the discussion by talking about what we experience in a regular PC today. So you have a regular laptop, it's based on a hard disk drive, and we know that it's frustrating when you boot it up, takes a whole minute to load all -- sometimes 2 minutes to load all the device drivers while we twiddle our thumbs. What happens when you take that device and, again, as I spoke earlier, the tablets and smartphones and the user experience that we're all getting used to, that instant-on capability, these devices really have to reinvent themselves to stay relevant. So one way to do that, of course, is to just replace the hard disk drive with an SSD. But often times, for certain portions of the market, large portions of the market today, the cost-effectiveness could be dramatically enhanced by actually using flash as a side-by-side cache to the hard disk drive. In that kind of format, you would actually take software that can intelligently figure out what is all of the hot data, i.e., frequently accessed data that can be put on the flash, so that even a small amount of flash can actually dramatically accelerate the system. So the software that we have exclusively licensed worldwide on a perpetual basis from Diskeeper actually gives us exclusive rights to the market-leading software that can automatically figure out that hot data and preferentially cache it on a flash device that is side-by-side sitting next to an HDD. And the advantages there are tremendous. Boot time is reduced by 66%, hibernates in less than 7 seconds, huge increases in battery life. All of that, again, because of that caching solution. And that caching solution, we will actually sell as standalone software worldwide to our OEMs, and we will obviously optimize the bundled solution of that software with our SSDs. And we have been talking to you for a while about our vision that these small form factors SSDs are going to be really big and ultrabooks give us really the best platform to be able to leverage that capability. So between this software and our SSD solution, we believe we have the most cost-effective, smallest footprint capability to help turn laptops into ultrabooks. So we're really excited about this opportunity.
Next, I wanted to talk about software on the enterprise side and speak a little bit about the FlashSoft acquisition that we announced yesterday. Now FlashSoft is a company that makes enterprise-grade caching software. We have Windows, Linux and VMware platforms for which we offer software. And again, this is a capability that really is strategic and really important as these cloud data centers and even traditional data centers look at improving performance dramatically using flash. And we are again going to sell this software standalone to our customers to be able to use across the range of devices but certainly optimize the linkage between the software and our hardware, so that we can offer a really high-value solution to our customers. And it also changes the dialogue we have with our customers to a far more strategic level, and that's the importance because we are moving SanDisk into that higher value-add space in how we work with our customers. So in order to demonstrate the value of this software, picture a situation where you are an IT manager, you're working on a cloud installation or even an enterprise installation, huge growth in subscribers. You're having to add 5 more servers to work on the regular workload. And you have your operating systems, your databases that you are worried about, but there is a problem. The disk drives, hard disk drive solution that you see here, and you look at the dials on the right side of the screen, don't actually utilize the very costly CPUs that you have sitting inside these servers. So you have these ultrafast CPUs and unfortunately, 80% of the time they're twiddling their thumbs waiting for data. And I mentioned to you the tsunami of data these services are getting stressed by and have to supply, and it is really, really difficult to do that given that the system is really very I/O constrained. So what happens when you bring flash into the picture?
So let's say we add flash capability either through PCI cards or through SAS SSDs to just 3 out of those 5 server configurations. Now flash will end up taking a lot of that workload on the I/O side, but the caching software that can intelligently cache hot data on this flash can significantly make this entire installation very, very cost-effective, only 10% of the storage pool can be flash in this kind of example, and you would get tremendous benefits off that capability. So when flash comes into the picture, you install this caching software, very easy installation, and the cache warms up in a short period of time, watch those dials on the top right corner and how, as soon as that cache warms up, the CPU utilization goes through the roof and the disk I/O actually falls because now, a lot fewer of the data requests are going to the hard disk because the software is figuring out and preferentially caching a lot of the hot data on the flash, which is significantly faster. So you have been now able to service all of that same requirements that you had with 2 fewer servers and think of all of the savings on the software, not just on the hardware, that you would have put on these servers. All the maintenance, the cooling, the infrastructure costs, it is really a lower total cost of ownership and a better solution. So this is what a caching solution combined with flash capability can do for our customers.
So a word on how we are, if you step back from all this and look at the big picture for SanDisk. How are we evolving our company? So a couple of years ago, Sanjay mentioned how we actually made the transition from primarily a retail company to majority of our revenue coming from the OEM space. The retail and OEM business that he was referring to was still serving primarily consumer-type applications, whether it is smartphones, tablets or our retail products. But with the acquisition of Pliant, we actually brought enterprise-grade capability. This is not just from a product perspective, this is bringing in a team that had decades of experience working with enterprise customers, understanding exactly what it takes to win in that space and being able to craft solutions that directly meet those needs. So the next step of our evolution, which we took starting yesterday with the 2 transactions, is to actually increase the value-add by offering software and solutions that change the dialogue with our customers and allow us to engage at a much higher level. And what does this do to our portfolio?
In 2008, the overwhelming majority of our portfolio were cards and other consumer devices. 2011, we had a lot of success with the embedded business. Dan is going to talk more about it in the next few minutes. And we had a shift in our portfolio. But going forward, in 2014, we expect that we will have a really balanced portfolio. You'll have a strong presence of SSD solutions, a strong presence on the embedded side and a healthy level of the original set of products that we started with. Of course, this is a very, very strong portfolio and it positions us tremendously well from a business model perspective to continue to deliver strong results for our shareholders.
So in terms of our strategy, this is exactly the same strategy I had articulated last year and I just wanted to focus your attention on that high-value phrase that I have highlighted in there, because that's where a lot of our focus is from a strategic perspective. Now, when you combine that and the changes that I highlighted in our portfolio with some of the things that Sanjay spoke about and what you will actually hear from the rest of the speakers today, very innovative technological capability, operational excellence and cost leadership, we spoke about how we have the smallest dies in production in the industry and very diversified end markets, and we continue to add to our capabilities to our products, to our portfolio, and this really results in very strong returns.
So in conclusion, I just wanted to highlight that we not only have technology leadership, we have the best global brand in flash in the world. We have a strong talent in our company and a culture that is very easily adaptable to new technology trends and in fact, loves to lead the industry in new directions as we have done over the past many years. We are at the nexus of several secular growth trends as Sanjay and I have just explained, and we have a track record of excellent execution. And all that results in a very strong business model, and we have huge excitement for the future.
So thank you for your time. And I will now welcome Shuki Nir to talk about the retail business. Thank you.
Thank you, Sumit. Very impressive. Good seeing you again. For those of you who haven't met me before, my name is Shuki, and I manage the retail business for SanDisk. And what I would like to share with you today is a pretty simple agenda: How strong our retail business is today; what are the growth drivers for our business in the future; and why we believe that we can leverage the existing infrastructure that we have in order to further grow our business.
So 2011 was a very good year for us on the retail business. Our revenue exceeded $1.8 billion, a growth of 8% year-over-year, which we believe and -- we believe that we gained share on a global basis in this year. We achieved it through selling all of our products in more than 0.25 billion storefronts worldwide, which basically allows us to have a very healthy mix between all the regions. And as you can see, a very healthy mix between the different product segments, starting from imaging, USB flash drives, mobile and the other reflects mainly the Sansa players that we are selling.
As you can see here, this pie charts represents the share that NPD and GfK are following in the point-of-sale in the different regions, in the U.S., Europe, APAC and Japan. By far, SanDisk is the clear market share leader. The gray area is the all others, which is an assortment of many small brands who have 1% to -- even less than 1%. And SanDisk as you can see, very clearly leading the market. We gained this market share leadership and our intention is to continue holding this position.
Specifically in the U.S., TWICE magazine, they published the top CE retailers in the country, SanDisk is being sold, sometimes exclusively, sometimes with others in 19 out of these 20 retailers. In case you wonder the 20th one is a very well-known consumer electronics brand that sell their own product in the stores. And all of this share -– this share leadership is actually more impressive, when I look at it when you see that consumers are willing to pay more for SanDisk. As you can see here in the different regions, and this is again based on the NPD and GfK point-of-sale data, this is what consumers are actually paying. When consumers are coming to the store and they're offered with a variety of brands, they choose to buy SanDisk as you could see before, but not only do they choose SanDisk, they're willing to pay more. Whether it's dollars or rubles or euro or RMBs or Yens, these premiums are comparable to leading brands in other industries as well. And we are very proud of that. We invested a lot in building our brand, as I showed you in years past, we built our brand mainly in the store but also having some marketing campaigns as well. The second reason for leadership and premium is the product portfolio. We have the broadest and the most recognized product portfolio in the industry. For years, we've come to our retail partners and we offer them as one-stop shop. Retailers love it because they don't have to worry about it. SanDisk is actually the one giving them the entire portfolio. Can offer them also an upsell opportunity, so to take it from the basic level product to a high-performance one, so they like this product portfolio. We like it, and we continuously invest in broadening and strengthening this product portfolio. As you could see, the day before yesterday, we introduced the SSD Extreme to our lineup. We're very excited about it. And in the next 2 or 3 slides, I would like to share with you some other products that we introduced in the last 12 months.
So the first trend that Sumit covered, Sanjay covered, you all are very familiar with is mobility. Everybody now has either a smartphone or an ultrabook or a tablet or all 3 of them. And what we found in SanDisk is a good way to have our retail products accompany these devices. So what you can see on the right side is a very, very small USB flash drive, okay. Only 5.4 millimeters are protruding out of the laptop, which basically allows it to be a plug-in stay kind of device, up to 64 gigabytes that you can take and expand tablet PC or the ultrabooks. In the middle is, it's a dime, okay, it's not ours. And on the left side is the microSD 64 gigabyte. Again, using our technology and our packaging technology, we are able to deliver the highest capacity microSD card in the market. Again, a great addition to the smartphone or to the tablet PC.
The next product is actually a new category that SanDisk created last year. We call it Memory Vault, and it's a new category of preservation. The Memory Vault through our vertical integration and system expertise, we're able to offer a device that consumers can store their pictures or videos for 100 years. 100 years. And we were able to do it basically to replace the photo album. We wanted to do it in order to replace the photo album. If in the past, one would print the pictures, take them into the photo album, put them there. And in case of a fire, you take the photo album and the cat and you run out of the house. This is the future photo album, okay. So in case of fire, you take the Memory Vault, you don't forget the cat and you go out of the house. Now, we are very proud of this device. It won several awards, one of them is the award from CES. And actually at the end of the day, each one of you is going to get a small bag with our presentations on a USB drive, but also a Memory Vault device. It's a token of appreciation for you coming here today. For the ones on the web, you can go to sandisk.com and buy it. And only today -- no, no. So you're going to get this device. And from personal experience, I can tell you that the challenge here is not which pictures out the tens of thousands of pictures you have to put there, but actually to scratch your head and to say, which pictures do I really want my grandchildren to see in 50 years from now, right. There's some pictures that I definitely not going to put on my Memory Vault.
The next one is on the imaging side. SanDisk has been the leader here. We've created this category, and we continue leading this category with the introduction of the Extreme Pro SD card. It's a Class 10 ultrahigh speed, 95 megabytes per second card. Very impressive figures. But what I realize is that –- too many figures –- and people don't really know what it means in reality. So with your permission I would like to use the next minute or 2 in order to have some experiment and, Jay, if you don't mind helping me here.
So what we have here, this one is the Sony Alpha 77 DSLR. We don't recommend specifically Sony but for the sake of this experiment, we'll do it with a Sony. And what I'm going to do here is, I'm going to take the SanDisk Extreme Pro card, I'm going to put it into the camera. Now as you know, it should go into the camera -- as you know, this camera -- they have a buffer. So when somebody, when a professional photographer or any other photographer, they press the button, the first few pictures are going into the buffer, only when the buffer is full, it starts writing to the card. So what we will do now is we will measure 20 seconds. So initially you're going to hear the buffer, it's going to be like, very fast. And then we're going to start counting how many pictures the SanDisk card can take in these 20 seconds. Okay, good? Jay, are you ready? 1, 2, and go.
All right. Sumit? 22. Everybody got 22, right? I chose Sumit because he's trustworthy. So now, what we are going to do is we are going to change the card, no tricks, same camera. Okay? I have long sleeves, but still it's the same camera. And what I'm having here is a competitor's card, it's a class 10 card, it's a known -- we will not mention the name, but it's a known brand, sold here in the U.S. and globally. This is their class 10 card. And we're going to repeat the same thing. You're ready, Jay? Are you ready? Okay. So initially it's the buffer and then we'll start counting. And go. Sumit?
No tricks, right? So -- and by the way it's still writing to the card. I don't know whether you can see it. Can you see it? And writing? Jay will go over time today, I'm afraid. But it's still writing. Now, it stopped. Okay, it was 22:8, 22:8. This is vertical integration and system expertise in action, right? This is the difference and this is why most professional photographers are choosing SanDisk, and this is why we have this premium and this brand. It's about the quality, it's about how good the product is. And we're very proud of that, and our intention is to continue doing it in the future.
So we bring value to consumers. And it's actually good for SanDisk, okay. As you can see, in 2011, 29% of the imaging units that we sold in retail were high-performance cards. Either the Ultra or the Extreme. However, 58% of the margin in the imaging in retail came from these high-performance cards. So it's pretty simple. We have better technology, gives better performance to people, delivers better margins to SanDisk.
So far, I've told you about SanDisk. Now we would like to share with you what our customers are saying about us.
They're more convincing than me, right? So far I've shared with you where we are today. And with regard to future growth, there are 3 areas where we see the retail business continues to grow for SanDisk. The first one is to continue or to gain further share in established markets. The second one is to benefit from the growth and gain share in the aftermarket SSD market, in the aftermarket SSD. And the third one is in the emerging markets, which are growing. We have further gain -- share gains opportunity as well.
So the first market is the imaging market, it's a large and stable market. As you can see here, in this market and all, I'll say most if not all of the cameras that are coming out today, they have HD or full HD video capabilities and other features that require better cards, faster cards, higher capacity cards. And the second thing is when you come to think about in a more mature industry, brands matter more, okay. The people who are buying these products are no longer just the geeks or the early adopters. These are the people, the masses, and these people they are attracted to brand. As the leader or as the #1 brand in this industry, we believe that we can further gain share in the imaging industry.
The USB market continues to grow and with 2 main drivers. The first one in more established markets, USB has become, USB flash drive has become part of the back-to-school list. So mom goes to the store, she buys a backpack, she buys some pencils and she takes a USB drive, okay. In emerging markets, where many people don't even have their own PC, the USB flash drive is where they store their data. So when they go to the work PC, or whether they go to the Internet café, this is how they're using their USB flash drive.
You all know about the smartphones, the growth in smartphones, feature phones. Today, people are using their phones as the camera, no news here. All of these trends support the growth of the aftermarket of our microSD card basically. And if you look at the aftermarket of SSD, SanDisk is very well-positioned here. What we've been hearing from customers and from the channel in the last few quarters is that they're looking for the SanDisk brand and quality. These are more savvy customers, right? It's not -- no longer the masses. These are people who understand technology, they understand quality, they're looking for SanDisk, they're looking for what we can bring to the table, and we feel that together with our channel partners, we are very well positioned to benefit from the growth of this market.
In the last 2 to 3 years, I've shared with you all of our activities or many of our activities in emerging markets. I've shared with you that we are hiring people, we're engaging with distributors and retailers, we're investing a lot of money and time in marketing activities, we are building our brand, we're dedicating specific products for these countries. And we continue doing so. One of the things -- one thing that I would like to show you is late last year, we started a TV ad campaign in India. It's been very successful. And this ad is going to be next, so I would like you to see it.
So it's been going on TV and as Sumit said, there are more than 4 channels, not only in the U.S., but also in India. And it's been going for several months. Very good feedback that we received, and we're very happy with the results of this campaign.
So all of this investment and focus on emerging markets, actually, has results, it's financial results. The revenue from BRIC countries, Brazil, Russia, India and China has grown 4x from 2008 to 2011, and our intention is for this revenue to continue growing in the future as well. And the one element or the one figure that I would like to share with you, and I'm very proud of, is that most recently, a third-party market research firm, they published the share in India. And SanDisk is the #1 in terms of share in India. We're very proud of that. Our intention is to keep this place and actually to increase and to enhance our leadership over there and to continue growing in other markets as well.
So to summarize, as I told you at the beginning, our business is very, very strong. We do see further growth opportunities. And we want to leverage this infrastructure of brand, product, technology, reach and the channel partners that we have in order to continue growing our business and leveraging on the growth opportunities that the market presents to us. Thank you very much. And I think that now we are having coffee. Thank you.
Okay, folks. Folks, if I can ask you to take your seats, please. Ladies and gentlemen, if I can ask you to take your seats. Okay, we are ready to start now. Greg Goelz, Satya [ph], please, if you can take your seats. Thank you.
Rick, would you help close the doors, please? Rick, Rick Spens [ph]?
All right. We're going to start now. So welcome back to the second section of a 3-part program. And it's my pleasure to welcome Dan Inbar. Dan runs our OEM business, and he is a Senior Vice President of SanDisk. Dan?
Thanks, Jay. So today, what I'd like to talk to you about is why SanDisk is winning in the OEM business and specifically, in the Embedded side. But before that, I'd like to give you some highlights about 2011. So we saw earlier, Sanjay presenting, the OEM business grew in 2011 from 2010 by 25%. But in fact, if we zoom in and look at the Embedded side, Embedded even grew even faster. In 2011, the Embedded business for the OEM was 41% of our business, so it's been growing very, very fast.
And in fact, if we look at our position in the market today, based on third party specifically, Gartner Research, today, in the SanDisk's share of OEM, microSD in smartphones is 45% market share. So this is a very strong position. And not only that, as we saw before, we're using the latest and greatest technology. Today, we're already in the process of moving all our customers to 19-nanometer product. So this is very, very strong position within the OEM world.
On the Embedded side, we're actually even growing even faster. We have today, 29% market share within e.MMC smartphones. This is basically a growth that happened in the last 2 years. If we look in our revenue from iNAND, which is our e.MMC component, over the past -- from 2009 to '11, we grew more than 6x. This is huge growth. And this is being done with a lot of work with our customers and the ecosystem, and I'll show you how we're doing that moving forward.
But those of you who are here with us last year, remember, I was talking about how we're penetrating this market and how we're going to go and introduce our X3 product line into the embedded world. So actually, the designs that we're running here in the slides are actually our X3 product line.
And in fact, to date, we are very well-positioned with our X3 product line in Embedded. We have leading design wins in mobile, in tablet and consumer electronics. So we're very happy with the results we've actually managed to achieve, introducing not only the embedded roadmap but our X3 product line.
And this is being done with a lot of work and a lot of effort, which again, I'd try and share with you a bit, how this is happening. So obviously, the basic ingredient for all of SanDisk product is our memory. We need good memory, strong memory, advanced technology, scaled, et cetera. And to date, our raw memory is being used in many components today, as a raw component. This, from our point of view, is a certificate of the strength of our raw technology, our basic NAND memory.
But in order to make this even more exciting and more effective to the market, there's a lot of system expertise that we'll talk about. This system expertise, I'll try and explain to you what exactly that encompasses. Because system expertise is a big world. How do you make that system expertise? Let me try and break it down to you and show you what we do.
So obviously, the first elements are to build a product. You need firmware, you need controller, you need advanced algorithms. And this again ties to our vertical integration. The fact that have all these capabilities in-house makes us very attractive to work with the ecosystem. The ecosystem meaning the chipset vendors and the operating systems. We work very closely with these guys, in order to make sure that we bring the right product with the right performance with the right cost structure, and continuously working with them to understand what is the next feature, what is the next lead.
And in fact, we are very proud of the fact that 8 of the 10 leading mobile chipset makers spec SanDisk iNAND as their component for the memory on their device.
And in fact, if you go into the SATA-based chipsets in the mobile world, 100% of them are using our iSSD. So we are very happy that we're very well-positioned vis-à-vis the work that we do with our partners in the ecosystem. But I don't want to talk about myself and how great we're doing. Let us see how our partners talk about this. Let them say what they think about their cooperation with SanDisk.
So this is working with the ecosystem. And as I said, we have to work very closely with them in order to define the right product from our side, integrate it into their processor to make sure that the user experience is the right user experience.
The next stage is actually working with the standard bodies. Because all these devices, they actually want multiple sources. They want the ability to use our component but they want to have -- make sure that they have continuity, so they want second sources. So this way, we work with the standard bodies to make these innovative ideas that we develop and we drive them into the standard bodies. And this also has been moving very, very fast. The e.MMC standard has been developing over the past few years. Many, many new features, many of them SanDisk has been a contributor [ph], as well as the performance growing.
And in fact, back in 2009, it was primarily smartphones that were using this, a few consumer devices. It's been growing. More tablets have introduced, et cetera. And as Sumit said before, basically to date, flash is everywhere. Every device now out there is consuming flash. Everywhere you look, you find opportunity for flash. And this is a very complex thing because it makes the world much more difficult to make sure how do you make a product that can do everything. You have to continuously do the balancing act here of how you optimize the cost versus the performance. And this is very tough. And this is where we work very, very closely with our customers in order to make sure that you're getting the right user experience. So just to give you an example, I have here in my -- this is my phone today. This is high-end smartphone today. This device today is actually using our X3 component. But actually, to make sure that my specific device, this is the phone I use, so I wanted to have -- make sure I'm using our X3 device. To make sure that I get this X3 device, I had to look -- go to a lot of effort to find a device that's X3. Because if you walk into a store and you ask for this device, they don't know whose component is inside it. And in fact, the second source for this is actually a competitor's X2 technology, MLC. We're the only ones that are doing X3 embedded today in mass production.
So we're managing to do this act significantly better than many by using more cost-effective technology, but by using sorts of new features and capabilities, giving the same user experience. So that when someone walks into the phone, he can take this device without caring what kind of flash is inside. This requires a lot of expertise, a lot of vertical integration, a lot of development that SanDisk invests in order to make this happen, as well as working with the ecosystem, the partners and the handset manufacturers. This is complete integration.
And this is really what gives us the capability. But beyond that, it becomes how do you make the product, the right usage model? In other words, how do you make a product to meet the same flash technology needs to be adaptive to various usage models. Each device, if you use a tablet or a smartphone or a digital camera, you're using it differently. The application is differently -- they're different. The use case is different. The need from your flash is different. How do you make all that happen? And this is where SanDisk has developed the usage model capability.
We work here with the customer. We understand his specific application. We go to the customer and we understand what his design is. We then select the right component from our family of various components. We identify the usage model that the customer is going to use. He specs out how this device will be used, and then we run specific simulations for him based on iNAND. The device is only at the spec level, but we're already running with them simulations, how the reaction will be, how the use case will appear from the point of view of the user. We give these analysis to the customer and together, we work in order to optimize either on our device, on their side, the drivers, the combination. This is a very complex system and requires a lot of cooperation between us, the ecosystem and our customers. Continuous work and continuous improvement.
Here, what we have an example, if you look at the chart on your left, you see before the optimization, so we did the initial analysis on a specific platform. This is one example of a specific platform that we work with our customer. And you can see the red dots here are basically inconsistent occurrence. In other words, the user experience -- the user would get some like delays in performance, sometimes if you drive the device too far, it gets issues there.
But by optimizing, using the same device, but by optimizing using our ability to manage the flash differently according to the specific use case, we managed to get the device to the table that you see on the right, which is no delays, perfect operation. So the memory is not a bottleneck. The overall system is where the delays are, which means the device can be at best utilization. Again, identifying what are the issues working together as a system. This is where SanDisk shines. Because this vertical integration that we have, the ability to go all the way from the memory through the controller, through this firmware, to the system, to the OS, working with all the ecosystem, this ability that we have and we've developed over years, is creating the ability to build the perfect solution for the specific application, and this requires a lot of work and a lot of cooperation between all the players in the ecosystem.
As we know, the technology is becoming tougher and tougher. As we scale down the memory and Ritu will present afterwards, the roadmap, et cetera. But this is becoming a more and more challenging technology. The memory is becoming more and more difficult. We also already know today, that actually, the requirements are getting higher and higher. Today, our smartphones in our pocket are a PC. I mean, few years ago, what our smartphone can do today is what a PC did just a few years ago, so it's becoming more and more challenging.
Last year, I shared with you about our AFM and how we're developing the AFM and how these features are helping us bridge the gap. What's happened over the past year is this gap is actually becoming even bigger because the computing requirement and the fact that this tablet or handset is becoming the main processor for people is creating a much bigger gap.
On the other hand, there's also the budget devices. The budget smartphone. Budget smartphone is becoming a huge penetration into emerging markets, new opportunities where everyone wants a smartphone, but not everyone can pay for the prices that you see them here in retail in the U.S. They want what we call a budget smartphone.
So again, how do you gap between the same device but all these different capabilities? And this is where the usage model comes in. This is our next-generation Adaptive Flash Management, AFM 3.0, this is what gives us this capability to work together with the system all the way from the OS, from the application level all the way down to the memory in order to optimize a specific application, a specific use case. And make sure that at the end of the day, the customer, the consumer is getting the best user experience that is possible.
And these are various applications. And again, you have to optimize all the way from -- I mean, it can be a PND, personal navigation device, all the way through a tablet, a slate, smart TV, all these applications, all of them are starting to use flash. And what SanDisk has done is we've built tiered product lines. So we have the iNAND Standard, Ultra, Extreme, iSSD, all of these right products for the right application, depending on the application the consumer -- the OEM is developing, we work together with them and we identify what is the right product. Then, together with AFM 3.0, we can optimize the experience so that they get the ultimate user experience with the right product. Of course, we have a variety of different capacities all the way from 4 to 256 gigabytes.
So we've been very focused, and I think last year again, I said we believe the mobile and tablet is a big opportunity for us. And we've been very focused on mobile and tablet over the past year. I'd like to share with you a bit of our results as we see them.
iNAND is qualified today on 2011 models. We did an analysis. More than 50% of iNAND -- of e.MMC mobile devices have qualified iNAND for that platform. If you focus on the android market, it's actually more than 60%. On the tablets, again, more than 50% of the tablets using e.MMC have spec-ed iNAND on their device. This is a very strong penetration in the market. This gives us a lot of ability to grow and continue to grow.
Now what we need to do is to take this experience, to take this penetration that we have and expand it to many more different devices, many more different markets. And actually, the cloud is creating a lot of opportunity for us, as Sumit was talking before, about the caching need and the need for more storage. Because of the cloud, this is creating for us a great opportunity. Devices like Smart TVs that -- who thought about having storage in a TV just a few years ago, why would you need storage in a TV? But today, more and more TVs are being launched with memory, storage, either for running the application, doing the Smart TV operating system, DVR capabilities, et cetera. All that is being added to TV. Again, nice growth, nice opportunity.
And SanDisk actually today is working with many of these to optimize the right solution for this kind of user application. Two of the leading Smart TV vendors already today have chosen iNAND to work with us. So we work very closely. Again, this is a completely different user experience, completely different usage model, but we use the same building block. Using our AFM 3.0, we can optimize for their specific needs to make sure that the application is using the memory in the correct way, giving a more cost-effective solution, a better user experience.
So in 2011, we had many leading design wins. We're very proud. Some of them you can see outside. You're welcome to go outside and see them. But this is just a small sample. Because if you look at what we've done during 2011, we're very proud that we have done many, many different designs. These are all different design wins that have gone to the market during 2011. iNAND is everywhere, really everywhere.
So I'd like to leave you with why we believe SanDisk is winning. The system expertise is our core competence, the ability to have this vertical integration that we have, the fact that we have all the way from the fab, to the controller, to the OS. This whole path that we have gives us the capability to have very strong system expertise. And you heard from our partners before that they're working with us, gives them the value that they need in order to bring the right platforms and the right products to market.
Adaptive Flash Management gives us that capability, to make sure that we're using the same raw NAND in multiple applications, multiple ways. And as I said before, there are many new segments coming up. And we're very well-positioned to grow with them. We're sitting on many of these different growth markets. Obviously, smartphones and tablets, I've already showed you many design wins. Smart TVs that are coming up and many different other applications. We are well-positioned to leverage this growth moving forward.
So with that, I'd leave you. Thank you very much, and I'd like to invite Kevin, who's General Manager for Consumer SSD to continue. Thank you very much.
Good morning. So I'm Kevin. And before I get into why I'm excited about where SanDisk is positioned in the Client SSD market, just thought I'd share a little bit about my history at the company. I first joined back in 1993 as an engineer, and was able to participate in developing and innovating in flash storage solutions that address a number of growing markets, from the digital photography growth, to digital portable storage, to mobile phone storage, and in the AV space, in developing our audio video players. So I've seen a lot of growth and I've seen what flash can do for the user experience.
Originally starting in the storage industry, I'm now very excited about what flash is doing for computer storage. And so I'll take you through why SanDisk is very well-positioned to address what we see as very large growth opportunity.
So today, I'll take you through how we see the market opportunity and how we're positioning ourselves with our portfolio of products to win in this space. I'm going to focus on Ultrabooks as one particular category where we see a lot of opportunity and it's presenting some new things that weren't there previously. And lastly, I'll talk about our advantages as a vertically integrated company, not just from our capabilities but also as a vertically integrated supply chain.
So when we talk about client SSDs, we're looking at 4 major subcategories. On the PC OEM side, we've talked in the past, about the SSD as a replacement for hard disks. Now we're starting to see growth in a new segment in these applications of side-by-side storage. And you heard Sumit talk a little bit about that earlier.
SSDs can accelerate the hard disk space solutions, as well as being the mainline storage. Both of these are relevant in what I'm going to talk about later on regarding Ultrabooks.
The tablet is not just going to be a consumption device, but actually is going to be a production device in the future. As such, you heard some of our chipset partners talking about more computing power being brought to these tablets. That's going to put more demand on the storage as well. So we will see SSDs continuing to grow in the tablet space as well.
And then finally, the PC upgrade market. You heard Shuki talking about the channel. And SSDs also have a growth story in that market. So in looking at the growth in these markets, you've heard us talking about SSDs in past as the mainline storage. That number continues to grow. A lot of different takes on what those numbers are exactly, but everyone is predicting that this is going to be a healthy and growing market. The channel as well continues to be a vibrant market for us. The dual drive category, which I'll get into more detail later on is a new growth factor that we see that's going to drive the consumption of SSDs in the client space. And tablets will continue to grow as media production, the content production devices requiring SSD storage as well. So over the next 5 years, we're seeing a very healthy environment and a lot of opportunity for SanDisk.
If I map that to the applications and the systems that these devices are going into, we look at the low end, the tablet and smartbook space where we've been positioned as an entry-level leader in the past, and we continue to play there as a strong provider of both embedded component and module solutions. At the high end, the standalone SSDs in the workstation space, the high IOP requirements, I'm going to tell you a little bit more about what we're doing to address that market that's new for us this year. And then, the Ultrabook space. So traditionally, where the notebooks were and the Ultrathins, this new category of machine that's come out which spans a range of storage requirements. So it does have an SSD-only storage capability but there's also a more cost conscious segment to the market that's looking for hard disks-based solutions, but it needs to have that responsiveness in order to meet its aspirations as a segment. So I'll get into that in just a few slides here.
So looking in detail -- a little more detail, the red bars here represent the SSD growth as the standalone storage in these systems. But if you look at the gray bars that are coming up very quickly next to it, this represents what smaller SSDs can do to impact hard disk space systems in order to give better responsiveness and a better user experience. So that starts to become a pretty healthy number, healthy percentage of the units that we'll be shipping in the coming years.
If I look at the previous chart on linear access, the systems go from very small low-cost, very nimble components that address those platforms that need to have a good level of performance, that are looking for a boost in their performance and trying to do it at much lower price points. Moving up through the mainstream, where everybody is looking for better responsiveness from their systems, all the way to the high performance where performance is the premium, and everyone is looking for the absolute fastest products that they can get. So I'm pleased to go into detail today, about where SanDisk is in our filling out of our product portfolio to address all these opportunities.
So you've heard us talk about our module and embedded products before. We've now addressed a lot in the higher performance, high-capacity capabilities. So this week, we announced in the OEM space our X100 product, which is addressing the high-performance, high-capacity needs of PC OEMs, as well as our launch in the retail market of our Extreme SSD product. Both of these products are designed for addressing what the customers are most looking for in these marketplaces. In the retail space, that's performance, performance, performance. In the OEM space, that's performance, low power and in the features that they need the most. So SanDisk today is now positioned with a broad range of products addressing each of those segments of the end system needs.
So what is an Ultrabook and why do we at SanDisk care about it? Ultrabook is an initiative by Intel based upon 4 pillars: First of all, it's to create a class of machine that's sleek, that's thin, that's light and portable, take it anywhere. It's to guarantee -- it's to give the users the ability to work all day, and to be able to interact with that device without having to go back to the recharger. It's enhancing the user experience, giving us more of what we expect from our tablets and smartphones but to get that in a computing device where we can be productive but still have instant on. Eventually moving to always on, always connected interaction with those devices.
And lastly, it needs to be mainstream. It has to hit price points, which are not above where the market is willing to go today. So that presents 4 challenges for the storage subsystem, but also opportunities where we see that flash provides the right solution. So that's in the form factor flexibility of the storage devices, that's in the power consumption of the storage subsystem. It's in the performance that it can deliver and in the price per capacity.
So if we look at how Intel has staged this, it's tied to their chipset releases, the Heron River last year, Chief River this year, moving onto Haswell or Sharks Bay next year. And at each of these stages, we're going through different refined specifications that eventually lead us to that ultimate computing experience, but are already providing very, very compelling solutions today.
To take you through a couple of these aspects. For example, 20 to 40 watts is where today's or last year's systems were, moving to under 15 watts in the 2013 timeframe.
Looking at form factors of 20 millimeters thick today, moving down to under 10 millimeters next year. So obviously, storage has a lot to do in enabling these as very small form factor devices with low power but very high responsiveness.
So taking you through how our products are positioned in each -- to meet each of these challenges. SanDisk has always been a leader in form factor innovation. You've heard us talk about that in the past. We started with not just the 2.5-inch hard disk replacement form factors, but did a lot in the industry to define smaller form factors like mSATA and mSATA mini, working with the ecosystem, with our partners, with the standards bodies, to make these available to the masses and really drive these solutions across the board. And today, mSATA and mSATA mini are prevalent form factors.
We did the same thing over the past year with our BGA form factor, the iSSD was a product that we are offering, but we didn't want to hold this advantage just for ourselves, we know that this is an enabler for the market, so we worked both with JEDEC and set I/O to define this as a standard and that has been adopted over the last year.
This is a 128-gig SSD in a VGA package. To give you an idea, so this is showing you a representation next to a $0.01 coin. You can see that this is very small. And when you show this to the system designers, it opens up a whole world of possibilities of what they can do from the form factor. And you'll find in your gift bags, as you go away, that we're giving you a mechanical representation of this. Just to give you an idea of what a 128-gig SSD can look at. And this is SATA 3. This is a high-performance device. This is a really amazing product.
Talking about power. So last year, with our entry-level products, we were already offering lowest power in the industry. But it wasn't enough for a lot of these portable devices that have very small batteries that need to give very long hours of usage to their users. So we have, today, in our U100 and our I100 products, we have brought that power consumption down significantly. Today, we offer below 10 milliwatts of standby power time. But again, that wasn't enough. We had to go further. But in order to go further, we had to work with our partners, with our standards bodies to take it even further.
So this year, we're very pleased with the adoption of our DevSleep initiative into the SATA standard. That's going to allow us to get below 3 milliwatts of power, eventually going even lower as the years go by. This is so fundamental to providing the type of experience for these users, that this is actually now a required part of the Ultrabook standard going into 2013. So a lot being done on the power side.
So talking about performance. I think everybody is fairly familiar with the types of acceleration and the types of user experiences customers get when they use an SSD. In some of our benchmarking for example, over 10x performance is achieved when you start to use an SSD as a main storage. And that has a firm place in the Ultrabook initiative as providing the best user experiences.
But also, we had to look at ways to address the cost-conscious customers who are looking for something to improve their responsiveness as well at lower price points. Now Intel had come out with their ISRT. And that did a lot to take a small SSD, put it next to a hard disk and provide almost half of what you get out of a standalone SSD.
You heard Sumit talk about our partnership with Diskeeper. So we have worked with Diskeeper over the last year and gotten a lot of traction in an alternative to addressing that by offering that solution at a much lower capacity point. So on this chart, I'm showing you that in the Ultrabook spec today, that we're actually meeting the Ultrabook specs with our Diskeeper at much lower capacity. So for -- and that allows us to bring a solution to the OEMs that allows them to be addressing that mainstream price point much more effectively. So this is where we see the power of software in our portfolio and in providing much better solutions optimized with SanDisk flash.
So 2012 at CES was dubbed as the year of the Ultrabook. There were over 50 platforms announced in this category. I'm giving you a select view of some of the ones that were introduced. The ASUS Zenbook which went into production last year using an SSD solution from SanDisk achieved or was awarded an innovative product award for SanDisk and ASUS. And I'm also highlighting at the bottom, a couple other platforms which went in -- or one of which is production, one soon to go into production, which are using Diskeeper paired with a SanDisk SSD as a caching solution in the Ultrabook category. So we're very excited about this and we look forward to great things in the year ahead, for the Ultrabook category.
So how are we positioned from a development capability standpoint? So you heard Dan talk a lot about our capabilities as a designer of flash memory, as a designer of ASIC's firmware, ECC, all the capabilities that we need to create world-class products, pairing that with our partnerships with the chipset vendors, with the OSs, with the standards bodies and really understanding the usage cases and the usage models and how to optimize all the components to deliver world-class products.
We've taken that one step further now with our partnership with Diskeeper, and we've added Host Software to the stack. So this is getting beyond the device in order to bring more to the customers, to give them an even better experience and improve the overall operation of these mobile computing devices. So we've taken it one step further and we'll continue to innovate in this space with our partner as we go forward.
I want to also take another look on our vertical integration strengths. So we take wafers out of our fab and we take those, and we do it with the mindset that we're going to eventually put this in a highly trusted device that is required to achieve reliability standards far beyond what typical consumer devices require. So we take these wafers, we specially test them, screen the memory that's the best memory available for SSD applications. We then take the components from those wafers once they've been packaged and assembled and further test them to make sure that they're going to stand up under the rigorous demands of these portable storage applications.
We take those and assemble them into the product, and then test at the product level. Again, looking to make sure that it's going to meet the reliability and performance expectations of the customer. And finally, at the end of the day, is an SSD with the trust of SanDisk built into it that delivers what our customers expect from us. This is something that's an advantage that SanDisk presents against the second tier SSD providers, and we believe will be a fundamental strength of SanDisk moving forward.
Why do we do all this? Well eventually, it's so that we can create an ultra-portable mobile computing experience that gives carefree experience, trust to the device, trust that the data that is generated while you're on the road. It's going to be there when you need it and it's responsive, and it is a sleek application, thin form factors that gives the peace of mind that this guy is enjoying there sitting on the beach.
Okay, why will SanDisk win in this space? So you heard me talk about our portfolio. Our portfolio now is broad enough to cover all the different segments of the market. We continue to innovate and to build on our low-power leadership, innovating on small form factors and then finally delivering high-capacity, high-performance SSD solutions. We've added value through our partnership with Diskeeper, beyond the device, to bring solutions to the OEMs that provide them storage solutions that are optimized and have their needs in mind. We bring our end-to-end system expertise. And lastly, provide a vertical integration product model that delivers the most reliable products in the market.
So with that, I want to thank you for your time and introduce to you Greg Goelz, who's going to talk about why we're excited about the enterprise SSD opportunities. Thank you.
Good morning. You guys awake? Yes? I always get stuck between lunch and keeping your interest focused on it. We've talked a little bit about the enterprise today, and we'll talk a little bit more about it. But I'll try and complement what Sanjay and Sumit and others have really talked about, about the opportunities as we move forward in the enterprise.
The first thing is who here wants to save money? Nobody? Anybody have a CIO that wants to save money? Nobody? I know ours does. Yes, we've got 1, 2, 3. The reason I bring this point up is it's really in the enterprise, it's about saving money. Now most people think that's kind of ironic because we know that a solid state disk drive cost more than an HDD, so how do we save money when we do this? This is not about a component story, it's about a systems level story, about how you use the best components to build a system to save money. Okay?
So if we look at the CIO, pretty simple. He's got a tough job. But what he looks at storage solutions about is how much information can I hold, how much work can it perform, will it meet my response time targets, all right? Because we all have service levels. We don't want to be doing like Sumit was talking about, waiting for a load or query or something. And last, how much does it cost?
So these are the parameters that CIOs are looking at when they make a storage system decision. So the nice thing about it is you can innovate in any combination to address these fundamental requirements. And if you can do it cheaper, you have an advantage, and that's what enterprise storage is about.
So how did we do it the old way? We actually did it sort of with small high-performance, 10K and 15K drives. In this case, you'd get more performance, we actually increased the cost of systems. These are specialized components that incrementally provided better performance than a traditional HDD, but not that much more from a different standpoint.
So to get better performance, we paid more. And what we're doing now is reversing that paradigm. So how do we do it? Well essentially, we use a combination of what HDDs are good for, which is capacity-optimized storage, which is big bulk storage. And we use flash to get up to performance-optimized storage. And by mixing these 2 different technologies together in a hybrid configuration, we build bigger, faster and cheaper storage solutions. Not only are they cheaper, they take up less footprint. They use less components. Less components makes them more reliable. Take up less floor play space. They take up less energy, less maintenance, overall and all. So you can see a very powerful benefit to the end customer who has a job to accomplish, and we can provide some unique ways to be able to meet those needs.
So here's a real-world example. 2008 state-of-the-art, this was HP submitting their best-in-class system for a TPCC benchmark capability. And again, this was their best-in-class in 2008, it was all spinning disk drives. This configuration was about 1,000 drives and it was really kind of a mid-level application, so not really highest to performance. But that's what they submitted.
Just last year, they submitted it using a combination of SanDisk flash drives and HDDs, and were able to dramatically change the user experience and profile. Cut the TPM in half, increased the storage capacity, increased the ability to have more concurrent users, increased the capabilities for fast response time, all by driving down the footprint, driving down the power and overall, driving down the cost. So it really works and we're going to see more and more of these examples as the enterprise takes more hold of solid state as a part of the overall market.
So let me give you a little bit of view behind how it got here, because many of you do know us as Pliant. Many of you that track SanDisk don't know who is Pliant, what happened, what got there. A couple of trends that you do know from the enterprise is that it takes a while to develop true robust hardened products, and that's part of the demanding part of the cycle.
We actually started back in 2006 with a different mix of people. We were all enterprise storage vendors. So we knew everything there was about rotating disk drives. We knew very little about flash and we certainly had a lot to learn. But a lot of things we knew was that rotating drives just couldn't get there. You can spin them faster but you weren't really addressing the need for the customer. And again, that was to give them a better solution at a lower price point and make it reliable.
So we mixed these teams together to learn a lot about flash, built an architecture. And in 2008, we got our first ASIC and we'll talk a little bit more about it. But our first generation of product. Went out to the market, started working with partners and removing the different I/O bottlenecks that existed in different systems and show them that you could provide not just an incrementally better solution but a dramatically better solution.
I/Os that people thought were unheard of were truly sustainable. So now, all of a sudden, the landscape starts to shift in different ways. Customers like Teradata built the first all-SSD system to deliver more than 3 million I/Os for their data warehousing customers. Doesn't sound like much but when you're taking on the challenges that Sumit was talking about, and data analytics are trying to analyze large amounts of data on-the-fly, you need a tremendous amount of storage capabilities to be able to do that.
Along the way, we delivered, like many of the market, our first SLC-based technology off of robust NAND technology and we spent time convincing our customers how flash was really ready for the enterprise and building their trust. We then developed the second generation of it, make enhancements to it, to make it better, make it faster, make it work even better than the first generations did, so we're out in the marketplace making some things work.
We also delivered one of the first true volume production of MLC technology for the enterprise. And if you look at some of the competitive landscape today, we still are looking at competitors that are still working on it, still developing it, trying to get it to that stage because what does it offer? A benefit of very high performance but yet at a lower cost point so therefore, we can offer more value through to the customers.
In May, we closed the transaction and joined SanDisk. For Pliant, it was a great day. For our customers, it was an even better day because we're an innovative startup company with a really good idea and our customers like this. But they also had a business to run and we're supplying to Tier 1 OEMs. And I'm sure we kept them up at night wondering if we're going to be able to scale with the growth of this dynamic business. And SanDisk brought that, brought the security, the comfort, the balance sheet to be able, the operational team to scale the market. And most importantly, insight into some very leading edge innovative flash technologies. Because as we learned in the generations that we developed, it's going to get harder as NAND scales to make them go faster and make them more reliable as our customers expect them to be.
In 2011, we introduced, if you remember, what we called a converged model design, right? What does converged mean? It was a first model for our customers to address their broad range of requirements. Some had high activities and write intensities and they wanted SLC technologies. And others wanted the most cost-effective, high-performance NAND they could get, they wanted MLC. So we put the 2 into a single product package and be able to offer them a broad range to a single customer. All during that timeframe, our competitors were still working on getting their first generation of SLC-only out, we gave our customers in those days, HP and Dell and NetApp, a differentiated competitive advantage.
And as Sanjay talked about in the fourth quarter of last year, we started sampling our next expansion of this portfolio, which is SATA-based and PCI-based solutions for these broad expanding customer markets. Oh yes, and along the way, we picked up some customers as well. So how do you make this work? I've a lot of people ask, whose controller do you use? Because I hear that a controller is a key vital building block in the technology to make enterprise solutions work.
Well, we actually use our own. But first, it starts with firmware. And firmware architecture was really important because we knew that the enterprise storage solution had to be different than a rotating disk drive. A disk drive today, does sort of one command at a time. It stores some but it does one at a time. To get the performance you needed, you needed to have parallel but scalable architecture. So now we had to do lots of things at once. It's a different approach from a systems design. So it requires you to sort of throw away the old design and start fresh with a brand-new design and that's exactly what we did.
The other thing that customers always wanted in the enterprise was deterministic performance. If you're in the enterprise, you know what it means. If you don't, what it really means is they want to know that every day, all day, it behaves exactly as I expect. I can't give a CIO something that works well one moment but not the next moment, because he's got service level requirements for what he has to deliver.
And most importantly, you needed software flexibility because a couple of things are important. One is you need to support multiple generations of different products; and two, you need to be able to adapt to your unique customer requirements and each of the major OEMs have their own unique ways they want to behave. So we built that.
Next thing is we try to figure out what's the least amount of hardware we could run this high-performance architecture on? We looked at the marketplace and said, geez, there's nothing that really exists. It needs a certain amount of compute. It needs a certain amount of I/O, it needs all kinds of different stuff, so we took down the path to build our own innovative proprietary controller. Something that was really optimized to do this and only this for this specific application. And in that, it had to have sustained host I/O. That means that very predictable performance. If you know anything about flash, it takes a fair amount of background management tasks, moving data around as it gets rewritten or moved into blocks. Managing and touching in what we have called patrol read. Looks at all the health of the data to make sure that in the future, when somebody comes to get the data, the data is in good shape. Another reliability feature which is very important to our OEMs and the enterprise customers because reliability is top of their mind. So we did that.
The next things we had to do was to truly demonstrate it. And I think when we did our announcements out in 2009, and showed demonstrations to many of our analyst partners, our specs that we published were actually below what we demonstrated. That was a first in the industry because everything our customers had told us is I can't see how I get to the specs that are published out there. So that was a really good way to show and demonstrate very sustained, very high, but very predictable capabilities.
Along with it, we introduced some leading edge data reliability features. That was around robust error correction, ways to be able to manage flash not on day 1 but most importantly to our customer, on year 5 or year 7. So how do you make sure that you’re robust and reliable at the end-of-life, not at the beginning of life. And we had to develop techniques to be able to show and demonstrate that to our customers.
Along that way, we had to figure out how to manage flash very intelligently to get that kind of a long life and be able to extend what was the natural life because flash wasn't designed for the enterprise. It was really designed for the other applications that Dan and Shuki had talked about in those other areas.
And then also pioneering with the industry standard for T10 DIF, a reliability feature that all of our customers wanted but weren't able to get in a solid-state device.
And next, they want to talk to a team that understood them. Solid-state enterprise devices were being qualified by the same teams that had qualified rotating disk drives for 25 or 30 years. They have a process. They have a vernacular. They wanted people to be able to talk to in their own language of, how do I get products into my systems, in the way that I'm used to doing it, as predictable and as reliable that it's demonstrated to be. They wanted dedicated account teams, people to make sure that they were there, focused on their issues, to be comfortable as it moves through the process. And we had to build our own robust testing capabilities. We worked with some different partners to build high-performance test capabilities because they didn't exist in the industry, because we'd blown by the performance that an HDD could deliver, and now all of a sudden, we've got to be able to do verification and capabilities at these much higher levels, so we had to build our own sort of tool sets to make that stuff work and it's paid off over the years.
So we take that strong solid core capability, and then comes SanDisk. Who brings great flash technology, great vertical integration, great corporate structure, great elements. Obviously, when we did the announcements, many of you gave us such great positive feedback as well as our customers, because it's a perfect fit. It matches together. Bringing a great technology in the enterprise with great NAND flash technology and like systems expertise, to be able to put this together to really make it work.
So how do we look at the competition relative to you today? And I'd really put them in sort of 2 buckets. The enterprise HDD guys that I respect and many of our team actually worked with at many years. And we all know the names of those companies. And we look at them and say, what do they have? They understand the enterprise really well, but they don't understand the NAND market. And we spent over 6 years and dedicated focus on learning what NAND does and what it doesn't do which is important. So I think the challenge for those competitors is to really embrace NAND as the new form of media and to learn what it takes to be able to deliver it. I can tell you, since being part of the SanDisk family, we've learned a ton more about the nuances of flash and what it takes. And as we say, going down the geometry nodes and scale is going to take -- that information is going to be a premium that's even more important as we move through these next technology generations.
So I think these guys have great enterprise capability, but I think they've got to build the NAND capabilities, which is a challenge.
On the other side, we have the flash manufacturers who know a lot about NAND but they don't know anything about the enterprise. They don't know about the customers, don't know –- about how they qualify it, they're trying to learn it. It's a steep learning curve to be able to do that and be able to be able to embrace what customers want and expect for these types of different processes. So we think we're extremely uniquely positioned between the benefits of both of those sides of the equation and being able to demonstrate it. I think as I talked through our ASIC roadmap, and again, we're done. Last year, we were shipping volume production, our second generation of designs with a converged platform, and obviously, you can guess that we're working deeply on our third generation, where our -- many of our competitors are still working on their first. Many are still working on getting to the lower-cost MLC media and making it reliable for these applications. So we feel very good about our position overall.
So what else is happening? Sumit have talked about a tremendous amount of demand and requirements for data in new areas, in the cloud and cloud providers and how social media is changing the way that customers are looking for work. So we think we've brought to the SanDisk family a good solid foundations on the enterprise side for the data creation and the data serving capability, but let's see how things are going to change as we go forward.
One, our customers have very broad requirements for systems. It means they have very broad requirements for different interfaces to solve those different capabilities. Most people know SATA, lowest-cost, simple solution, worked very well as a very core workhorse around HDD's capabilities. But we talked about moving to flash and we said we got to go parallel. We've got to go higher performance. We've got to use interfaces that can enable and unlock that a bit more. So we built SAS. SAS is very scalable. It actually has 4x the I/O bandwidth as the SATA interface and allows you to do concurrent reading and writing, which is very important in building high-performance enterprise systems moving forward. And it does something like multihull support as we talk about environments where data is shared. I have multiple hosts being able to access shared pools of very fast data and that's very important to customers.
And then lastly, also PCI. I really call it more like a DRAM extension because we all know, if I could put a lot of gob of memory right next to the CPU, I can run applications a lot faster. So I think it's a great way to be able to offer what different -- many different configurations that customers need based upon whether they're building high-performance server applications, whether they're running [ph] a storage application or they're building a just faster than they had application with different capabilities.
So if we look forward, as they always say in hockey, you should always skate to where it's going to be, not where it has been. And we all know the tale of Fibre Channel. It was a big part of the market a few years ago, but clearly, it's the blue line on the bottom. It's really just sort of hanging on. The interfaces that have been dominating have been SAS and SATA in the enterprise storage space with rotating disk drives. PCI is certainly a new and up-and-coming market as we talked about. It offers great performance and low latency for new applications. So in looking at this, you can see we're investing in the 3 right [ph] areas of technology that are really important for scaling on the unit growth. If we look at it from a revenue perspective, it's a slightly different mixture. Well, you see SAS and PCI become bigger as an overall revenue opportunity and the primary reason that's driving that is their higher capacity devices are really what's being demanded in those capabilities. Because higher capacity goes with higher performance interfaces and becomes a very good opportunity going forward, and we feel extremely well positioned in all 3 of these market segments.
In 2010, we switched from talking to our customers about technology, about SLC NAND or MLC NAND or even TLC NAND. We started listening to them more and said what are you trying to solve and you're trying to solve a workload application. So we changed our mix and really started talking to them about being able to build workload or purpose-built solutions for their needs. It also gave us that insight as being part of SanDisk was you had lots of different choices and technologies to use to be able to build these solutions. Much like Dan was talking about AFM and in the mobile market, customers had specific workloads they were trying to solve and being part of SanDisk and that access to different technologies said, "Wow, I can choose all kinds of different things and put them together uniquely to solve my customers' problem." These workloads break down into kind of 3 broad areas: high intensive writes, data journal, logging, HPC computing capabilities, very traditional. Mixed use, which is the big bulk of the market, but the emerging part of the market is actually the read intensive. Because when they started looking at the workloads, that their disk drives don't do as much writing as they thought. They do a lot of reading. And flash is much better at reading. And Sumit said 100x, and many times, it's a 1,000x better at reading, so it's a huge market opportunity and as we see the cloud changing the dynamics of putting more and more data online available any time. So 2 opportunities to be able to do it. So we think we're doing the thought leadership by talking to our customers about their problems, not about our technologies as we move forward.
Next, the other thing that's a constant trend is we've introduced our first products. They were 100 gigabytes, 150 and 300 gigabytes and our customers said, we want more. So we came back. We introduced 200 gigabytes and 400 gigabytes. What do you think they said? We want more. So that second generation, we introduced with 200 gigabytes, 400 and 800 gigabytes squeezed into a small 2.5-inch package. And what do you think they said? We want more. That's exactly right. You give them high-performance data storage that's reliable and they want more. So as you can see on the gray bar, right now our average capacity is a little north of 400 gigabytes. So for the analysts in the room who's probably [indiscernible], we run about 2x what most people think the average capacity in the market is because we're delivering both high performance and the high capacity devices that makes these systems very efficient for our customers to build and design.
Next, we'll talk a little bit about what we're doing. We always had a view sort of how do we expand the market in 2 ways. One is a broad array of different interfaces as I talked about. The fit for SATA, for SAS, and PCI as 3 different building blocks across the markets, but also about adding value and solutions and it weighs to accelerate that performance goal in very different ways or that ease of manageability between caching, and Sumit talked about it, and obviously our FlashSoft acquisition is a key part of it. But also to look at –- what are the other things to look about, how do we intelligently manage data in unique and different ways and different ways to sort of make that work? And we're going to do this through a combination of internal development, acquisition as we did with FlashSoft, but also through partner and a partner network. There's lots of different solutions out there to be able to build better and better solutions for our customers. So you're going to hear more and more about this as we really go forward but a combination of internal and external is the way to be able to really bring more value to our customers and then the end solutions.
So in FlashSoft, let me just take a quick minute about it, is we've known them, as Sanjay said, for about 18 months. And we work with a lot of little start-ups who are on the same vein that we were on, which was how do you provide better performance through systems architects or through new systems architects to end customers? Because the more performance we deliver, the more value they're going to get. The more value they're going to get, simple rule, the more they're going to buy. Best way to build the market is through that whole approach. So we looked at lot of different companies, and I can tell you a lot of the PowerPoints were very similar, but when we looked at the products, we saw some very unique distinct differences in what they were doing. Built a great architecture that scales as we go up, built it great from a performance standpoint that minimizes any sort of overhead, because these guys did kind of like we did. They took a clean sheet of paper to caching as a solution. They didn't just figure out how to take a traditional storage caching algorithm and sort of spin it for SSDs. It needed a rewrite and that's really where they started from. So that's an enabling element that we're very pleased to be part of. And as we always say, like we do today, is we sell our hardware without software, we're going to sell software without hardware. We know the way our customers think in mark and we think we've got a great opportunity to help them solve their own caching solutions. But while I would like to believe that everybody would only buy SanDisk products, we know there are other products that will be out there in the marketplace and supporting it. So we'll provide the autonomy of having software solutions only and an ability to add value on bundled elements where SanDisk products are present to get even more value out from those capabilities. So I think it's a great opportunity as we move forward.
In areas that we talked about caching, just to give you a little bit depth. It's a little more complex than most people think about. On the left side, I call it the single server. It's what most of us vision when we think of caching in a server environment. Straightforward delivery, but with the advent of virtualization, we now have this mixing of multiple machines, multiple applications on a single physical unit. So there are different dimensions that are required to be able to manage that in a virtualized environment, differently than you would do it in a single-server-ed environment. The next step gets to be more complex, which is where we move into a clustered environment. And clustered means I'm getting more CPUs, more applications and more systems, and I'm trying to get all the same shared access to data. So I'm getting more and more capabilities and complexities. So in the future, you'll hear more about developments at each one of these areas because as you can imagine, everybody wants to accelerate their application from the single-server approach to the high clustered environment because the benefits really transform through.
I thought I'd show just a little bit. The best way to get success in the market is to get some really good customers and partner with them as they go out in this marketplace. Teradata was one of the early ones. They've done videos. They've done lots of public announcements. They’ve been at their partner events. They've been also creating education as well, because this was new technology coming to the enterprise and it does take a while for customers to feel very comfortable about it really works to its expectations and building that on through. If I look at along the way, HP as well, not only expanding across the broad array of the systems they had as the #1 server and storage supplier in the world, but also doing it in partner events, so they're verticalizing their solution space to deal with the bio informatics element or the data analytics issue or some capability where their markets are really targeted, as well as continuing to expand the knowledge of what these solutions mean across their global network of support people.
And third, same thing with Dell. One of our early partners who put the trust in the innovation that we had in our architecture and the team that we started with but continued to expand across their broad array of both server and storage designs, as well as with the ecologic team that is addressing some ways and some unique, especially in the NAS market. So we've been very fortunate to have these as great partnerships moving forward. They're going to be part of what propels us in the momentum going forward.
So we talked about the market, it's a big opportunity. And as Sumit said, every time the update report comes out, traditionally the enterprise is a little bigger, which makes my job always a little more tough because Sanjay says, do more. And we're working on it as fast as we can to continue to get more. The 3 most important features in this segment, even though I've talked about performance, it's reliability, it's reliability and it's reliability. And when we came out with our story and showed our products to our customers, they loved our blinding speed, but they also got a great appreciation for the reliability that we delivered to them and it's an important value. Predictable performance, it's important because it is about what's the minimum, not about the maximum. And so that's the way IT guys look at it and that's what we've been able to deliver. And then adding solution values I think just continues to enhance our story across our different product portfolio as we continue to expand the capabilities.
So in sort of summary, why? I think we know a lot about enterprise. I think we took a clean sheet approach to get the right architecture that's going to solve the problems for where we've been and where we're going from an overall standpoint. The timing is absolutely perfect to be part of SanDisk and to have the access to the vertical integration, the NAND technology stuff, because we're designing 2 years out and we need to know how it's going to really work. And so having that dialogue with that team is so vital. If you don't have it, I don't know how you're going to become competitive in this space as you move forward. And then along the way, we've accumulated customers who have been able to partner with us and provided that trust and helped us propel through this growth and this momentum. We think we'll be able to add a few more as we go forward with the stability and resources and scale that SanDisk has brought for this opportunity. So we're pretty bullish about what we can do in the enterprise segment and I think it's a bright future going forward. Thank you.
Thanks, Greg. So slight change in plans. We are running ahead of schedule and true to our core values, which is -- one of them, which is, execute and exceed, we have done that so far. So I think we'll cover one more presentation before taking our lunch break.
So the next presenter will be Ritu Shrivastava. He's our Vice President of Technology Development. His responsibilities include process and device technology development in both our Milpitas, as well as our memory development facilities in Japan. He's also a fellow of the Institute of Electrical and Electronics Engineers, so IEEE, as you may know, and has served as the CMOS Technology Editor for the journal IEEE Transactions on Electronic Devices. Ritu has more than 30 years’ experience in the semiconductor industry in areas such as development and technology transfer of numerous generations of SRAM, DRAM, and flash memories. And he holds more than 25 patents. So with that, it is my honor to invite Ritu.
Thank you, Jay, and welcome. Well, those 30 years, actually, dates me also. So over the years, I've worked in many different technologies, DRAMs, SRAMs, flash, et cetera, and I can tell you one thing. There is no exciting time like right now than has ever been before in the last 30 years of my technology development. Just to give an example, I brought here -- I've been in gadgets, and I've been in photography and videos and music, et cetera, so I can relate to enriching people's lives that SanDisk's mission is. So here's a gadget's relic from the past from mid-'85, '84, '85. This is an HP-71B, which was the handheld computer, the best gadget of the time and very, very productive, a hit in Berkley. Really, that was a very big hit. Guess what memory modules it had? For some reason, I still have the box and the memory module. It's 4K. 4K memory, that's all that was available when it was introduced. Please see right now what kind of memories we have. 64 gig, even 128 gig. I paid $75 for it. So if you calculate per gigabyte, I think it probably comes to $20 million per gigabyte, okay? Flash did not exist then. Many of us used to meet that time in Vale and non-volatile workshop trying to figure out, develop the non-volatile technologies. Sanjay, Eli, Dan, many of the people at the forefront were there. And when the non-volatile EEprom, EEproms flash got developed, we used to wonder what will be the uses. We couldn't find any mass volume kind of use for those technologies. And here we are. So this is -- if you buy a SanDisk 64-gig flash drive, it's probably about $1 per gigabyte, something like that. So I think I paid a little bit too much for this but this was really what I want at that time.
So anyway, with that, let me start my presentation. What I want to focus on is 10 years from now, how somebody else can say the same thing about today's technology and today's flash, et cetera. So Sanjay already mentioned and talked about the 3-pronged approach that we have, 3-pronged strategy, which is the NAND scaling, continue NAND scaling as long as possible, work on future technologies, which are the 3D resistive RAM and the BiCS 3D NAND for us. And these will allow us to assure competitive advantage, to keep scaling the technology, to keep reducing the cost, to keep increasing the density so that we can enable many more new applications compared to even what we have right now.
So let me tell you where we are right now. This is the technology roadmap that you probably already have seen. The 24-nanometer technology is in volume production -- has been in volume production. 19-nanometer technology is the workhorse for this year, 2012, and it's doing very well in the fab, ramping up. We have been working on 1Y technology, which will be for next year. And our main goal is to be able to have technologies, which when in production, give us the smallest die size, highest density, best reliability and in time. So 19-nanometer technology is in production. As an example, the highest density part that we have there is a 128-gigabit chip, which is an X3 3-bits-per-cell product. It is the highest density product in the world and the smallest die size in the world. That's a very good achievement.
And earlier, you heard about vertical integration. Vertical integration allows these kinds of products, both X2 and X3, to be used in a variety of applications with very high reliability and performance. In fact, if you look at this product, it is, I'm very happy to say, it's been accepted for presentation, publication in ISSCC, which is the premier design and technology conference, international solid-state circuit conference, and it will be presented there week after next. So for more details, you can tune into that.
Now how do we keep continuing with the scaling? So our view is that NAND scaling will keep continuing. However, there are many challenges there that we need to overcome and we've been working very well to overcome those challenges. In this slide here, I describe a couple of those. Of course, the fundamental cell parameters have to be optimized, but these are the main ones that will determine how far NAND can scale.
So first one, of course, is the lithography. That is very critical. So the top right chart shows the cell X and Y dimensions. Obviously, those determine the final die size of the product, not just that, how you choose the scaling and X and Y dimension also determines the reliability. If you keep scaling it very fast before it's time, you might not have a reliable product, so you have to very carefully optimize what X and Y dimensions are. The current lithography tools that we have in the fab, and those are available to anybody, the best ones are immersion lithography. And there's a limit to X and Y dimension to which you can scale using the existing lithography. It's shown in the green quadrant there. On the red side of the chart, the red quadrant, is the future lithography. That's where you have EUV, you have different kinds of patterning, et cetera, but that gets very expensive and those technologies are not ready right now for production. So we have to scale the technologies intelligently. The cell size has to be scaled with care so that we can have a smallest die size product with highest reliability and which is manufacturable. Publishing papers, et cetera can keep going on the red quadrant but when you talk about the actual production, that's what we need to focus on.
The second consideration that every flash vendor has to go through is the physical limit. So in the middle picture there, I'm showing the conventional cell that is the workhorse of the industry, very much for all the manufacturers. But the tricks that we use with the process innovation, et cetera, are going to determine how much you can scale and at what point do you need to change the structure. So what I'm showing there is there is a cell-to-cell interaction that goes on and as it keeps scaling at some point, you're not able to deposit the layer which isolates the 2 cells. At that point, the cell becomes unreliable. There's too much interaction that goes on. And so we have to go through process innovations, which we are going through to extend the proven workhorse cell as long as possible.
The third limit is the electrical limit. When you keep scaling the cell, the number of electrons which store your information in the cell keeps reducing. So the plot on the bottom right in red shows as we go through different technology generations how the number of electrons is reducing, right? And of course, one of my and our job functions is to keep those electrons from getting lost, being there. So as you see, they keep going down, and that is not good. So we have to, again, come up with process innovations where you change the structure of the process in a way that you keep the electrons as large as possible. And so there you see in the green chart, we've been able to do that. And that allows us to keep scaling. So the bottom line is that there will be process innovations required. There will be, in each NAND generation technology, could be significant changes. But the infrastructure that we have in place for this conventional NAND, the more we can extend it, the better cost structure we'll have. So solving these problems through innovations keeps other costs low, which is one of the main goals. Of course, we'll change the cell structure when needed.
So we see that NAND scaling is going to keep going for a few more generations. And the innovations and process manufacturing technologies and the kind of vertical integration that you heard about earlier from Sanjay and others, in memory design, test, system-level solutions will allow us to extend this NAND roadmap. And with that, we'll keep continuing, delivering the smallest die, highest density, low cost, good reliability, et cetera.
So when we take all that into account, this is what we are projecting our roadmap will look like. And you are looking at -- on the 2014, 1Z technology, 1Z NAND and maybe some beyond that. And of course, in the meantime, we are making progress, good progress in our future technologies. Very aggressive post-NAND development work. So 1Y will be the technology for production for 2013. 1Z will come after that, and who knows how far we can keep going with that because when we will -- because nobody really knows what the limits of NAND are. If you recall, I'm sure all of you know, when we were at 4x technologies, everyone was wondering, that's the last node, then we went to 32, 24. Here, we are at 19. 19-nanometer is 190 angstroms. Gate oxides used to be 300 angstroms 15, 20 years back. Here we are in the horizontal direction with that kind of CD [ph]. So nobody really knows how long NAND can keep scaling. So we have to keep trying and we have to be innovative. But we are aggressively working on the future NAND, future technologies beyond NAND, and I'd like to give a brief update on our 3D resistive RAM. So once you go beyond the electronic storage, we get into the realm of where we have to rely on material change. So 3D resistive RAM is dependent on the resistance change of the material versus the electrons. And this approach, we believe, is the best approach for the long term. This technology, once we put in production, will keep going for a long time. However, the current promising approaches -- that we have for this technology require EUV, extreme EUV lithography, which as you probably know, is not ready and still is in development. But there are many other components to this technology that we still can work on and perfect, so that when the technology's available for lithography, we can put this in production. And as an example -- and we made good progress there. As an example, on the right chart there, you see the bit cycling yield. Cycling is when you go through -- you take the material through low resistance and high resistance state and you keep cycling as a function of number of cycles. It looks very good. So we are very pleased with that. So this can provide us with production opportunities beyond 2015. And we are very excited about that. The second technology which we're working on, which is still a form of NAND but it's a 3-dimensional NAND, so the NAND string here is vertical, which means that you can have a number of layers, one on top of the other. You can come up with products with extremely high densities, which are not possible by 2D NAND that we currently have. Moreover, it utilizes the existing infrastructure. It does not rely, it does not need EUV. So you are able to take this technology, utilize the existing infrastructure and take it to production. Again, we are making progress here. We have had some good key developments on the process front. We have a 24-layer development test vehicle. By the way, for both the 3D resistive RAM that I showed earlier, that was also tested utilizing a test vehicle to look at all the process and device technology developments.
So here, we have got 24-layer structure. In the middle picture, you see the fully processed wafer. On the right-hand side, you see a picture which was taken in line. Again, please note that these are still in these process modules and technology. They're still in development. At the bottom, you'll see something very interesting, which is storing 2 bits per cell. You see 4 states, distinct states that is required for the 3D RAM technology to be cost effective. And we are very pleased to see that we're able to do that. So this could be a bridge to the 3D resistive RAM technology that I showed earlier. And if we're able to complete this development and the timing is right then it can go into production using existing infrastructure.
Now let me change the topic a little bit. Earlier, I talked about different technologies. The question, of course, arises. Are these new technologies going to replace the applications that we have for NAND? And so here, I'm showing a spider chart, which shows 2 kinds of things. It's kind of busy but I think you can see the black boxes with the red boundary. The attributes of technologies, so low cost per bit. One of the reasons why NAND has been so successful is because of scaling the technology and the cost reductions. SanDisk alone in the last 20 years has reduced the cost by a factor of 50,000. 50,000. That's quite a lot. Other technologies right now are not getting scaled like the NAND has been scaling. So low cost per bit is important. Endurance, you have the speed, and then you have the data retention.
Now different applications may require different combinations of these things. For example, if you look at the 1:00 position there, there's an application for set-top boxes. I'm sure many of you have them. Set-top boxes keep storing data constantly. But you don't read them that often. So the endurance requirement there has to be very high. But the data retention doesn't need to be that high. If you look at 10:00 position, there's an application for navigation. I'm sure many or most of you have GPS systems. GPS requires reading all the time. There's no writing, so why burden that application with high endurance kind of consideration or requirement? So you can trade off -- one of the beauties of NAND is you can trade off performance, data retention, endurance and make it applicable to a given application. That's what is so powerful about NAND. So the spider chart shows you qualitatively, and actually, we have gone quantitative calculations too, of how this given technology or a given technology does against those different properties. So if you look at the next one, which is BiCS, I showed and talked about that earlier, comes very close. In fact, in cost per bit, it's even better. Obviously, once we start designing the systems, the circuit design architecture, you can optimize some of these things and maybe we can actually improve upon this. This one in yellow is the 3D resistive RAM. This is the reason why we think this is a technology of future, which can replace NAND. Most of the properties that you see here are actually better -- can be better in 3D resistive RAM. So this, in short, tells us that we have a very, very strong strategy, a 3-pronged strategy, which allows us continuation of scaling that we have going on right now on the NAND, push NAND as hard as we can. Obviously, we'll have challenges but we need to solve them and use the existing infrastructure. We think that NAND will be the dominant technology for the rest of the decade. We also think that technologies are very likely to coexist. I don't envision where one day suddenly somebody has a very good technology and within 6 months or a year, you can replace something as strong and widespread and useful as NAND with the infrastructure that we have in the fabs, et cetera. And that 3D resistive RAM will be the successor into the next decade. So I think we are positioned extremely well in terms of where we are, where we have to go in the short term and where we will be in the long term. And hopefully, this 4K to 64 gig someday will be multiple terabits, and we'll all have to figure out what we're going to use it for, like we were wondering about 20 years back. Thank you.
Okay. Thank you, Ritu. We'll now take a lunch break for 30 minutes. We'll come back to this room at 10 past 12. Thank you.
Okay, folks. We are ready to start the afternoon session. If I could ask you to take your seats.
Okay, welcome back. It is my distinct honor to invite Judy Bruner to provide the financial overview. Judy needs no introduction. Personally, he's one of the best -- she's one of the best CFOs I could ever work for. So with that, Judy?
Thank you, Jay. All right. Good afternoon, everyone. I'm really glad to be here today, and I'm really glad we had such strong attendance today here in Milpitas and I want to say a special hello to our investors and the analysts who are joining us on the webcast today. So with that, let's get started.
I have 2 key topics that I want to share with you today, and the first is I want to review our financial performance for 2011, which I believe truly was outstanding. And then I'd like to talk to you, share with you, a little bit about how we're thinking about how we are really working to deliver strong performance in 2012 and beyond.
So let's get started with the 2011 review. You've seen some of these numbers today, but I think they're worth repeating. Our revenue for 2011 was a record high annual revenue at $5.66 billion. That's up 17% on a year-over-year basis. Within that, our petabytes sold grew 80% year-over-year and our price decline, our ASP per gigabyte decline, was 34% year-over-year. In terms of selling those petabytes, we actually received from our captive fabs an increased amount of bits supply of 77% on a year-over-year basis, and we supplemented those captive petabytes with a modest amount of non-captive purchases in order to deliver this revenue. In fact, non-captive memory made up about 10% of the petabytes that we actually sold during 2011. So very strong revenue growth.
In terms of units, our units grew 31% on a year-over-year basis, and we sold 760 million units during 2011. That is, on average, more than 2 million units sold every day. In addition, the average capacity of those units that we sold accelerated in terms of their growth. Our average capacity per unit grew 38% in 2011 and that compares to a growth rate of 23% in 2010. So we're proud of this unit performance as well.
If you drill down into our revenue between our retail channel and our OEM channel, our retail revenue grew 8% on a year-over-year basis. And that growth was really driven primarily by our success in emerging markets. In the emerging markets, consumer demand is clearly growing stronger than it is in the developed markets and we've been gaining share. We've been furthering our penetration in these emerging markets. And here, I'm primarily talking about Latin America, India, China, Middle East, and Africa, as well as Eastern Europe. Our growth rate in the developed markets in U.S. and primary areas of Europe was in the low single-digit range on a year-over-year basis. So it was really the emerging markets that drove this growth.
In terms of our OEM revenue, our OEM revenue grew, as you heard from Dan today, 25% on a year-over-year basis. And that growth was driven by the mobile market, both smartphones, all phones, as well as tablets, and also by our growth in our SSD revenue. And you can see on this chart, the real success we've had in the OEM channel over the last few years.
If you then look at our total revenue across all channels and look at the mix, you see that the largest increases in revenue mix were also driven by mobile and by SSDs. Our mobile revenue grew from 50% of our revenue mix in 2010 to 54% in 2011, a growth rate in terms of revenue of 26% on a year-over-year basis. And our growth -- and our mix in solid-state drives grew from 1% in 2010 to 3% in 2011, a very fast growth rate as we accelerate our presence in this part of the market. You can also see here that convergence is occurring in the imaging marketplace. More of the imaging sales of the past are going into the mobile market. Now that doesn't mean that imaging is not an important segment for us. It remains a very important segment. It's still 16% of our revenue, and we're proud to have #1 share in that segment of the market and we have a very high mix of high-performance products in that segment, our ultra products and our extreme products. So it's a high-margin part of our revenue.
Over the next few years, the area here that we expect is going to clearly grow the most in terms of mix of our revenue is solid-state drives, and you've heard a lot about that today, and I'll talk some more about it.
Turning to gross margin, we delivered a very strong total gross margin of 44%, and I believe this was stronger gross margin than any of our competitors in the industry. Now you can see that, that gross margin came down 3.3 points from the stellar 2010 gross margin. And I think it's worth walking you through some of the pluses and minuses in the 2011 gross margin. There's 3 factors that I've talked about a lot over the course of the last year that were a negative impact on gross margin in 2011. And that was the strength of the yen to the dollar, our increasing non-captive mix because we did increase non-captive mix from 2010 to 2011, and then Fab 5 start-up costs as we've been ramping Fab 5. Those 3 factors together had a 7-point negative impact on gross margin for 2011.
Now what that means is that if you take away those 3 factors for a moment, that means that the underlying cost reduction from our technology transitions and the other things that we do day in and day out to reduce costs, those cost reductions, with the price declines that we experienced for our products, the 2 of those things together had a positive impact on our gross margins for the year, a positive 3.7 point impact on our gross margin. So those are the pluses and minuses to get to that minus 3.3 points of total gross margin. But again, this 44%, I believe, is the best in the NAND industry today.
In terms of expenses, we had prudent expense growth in 2011. Total expenses of $846 million and that remained at the very low end of our long-term financial model in terms of expense investment. I've said for several years that our expense model is 15% to 17% of revenue and we were at 14.9% in 2011. So very prudent expense growth and these expenses came in very close to what we had expected at the beginning of the year, even with the addition of Pliant partway through the year.
If we look at where those expenses are being invested, we have really been continuing to focus our investment in R&D, which is really the lifeblood of the company. In 2009, R&D was 51% of our operating expenses, and we've grown that in 2011 to 61% of our operating expenses. And during that same timeframe, we've actually held our dollar investment in sales and marketing and G&A flat. If you look at the dollars, they've been flat from 2009 to 2011. So those organizations have really scaled up in terms of supporting the revenue growth, which, by the way, was 2 -- over $2 billion over that timeframe to over $2 billion of revenue growth from 2009 to 2011. So we've really been focusing our dollars on R&D. And then if we look at how are we mixing the dollars within R&D, we've been increasing the investment level on future memory technologies, the kind of things that Ritu just talked about. And future memory technologies here, I'm talking technologies beyond NAND like 3D resistive RAM and BiCS.
Now this doesn't mean that we didn't grow the R&D investment in all the other areas. We did. We grew the investment in NAND to continue scaling NAND in system-level technology and products but we grew the investment the fastest in these future memory technologies, so that, that investment went from 8% of our total R&D dollars to 14% of our R&D dollars in 2011. So when you combine our strong revenue growth, our strong gross margins and our prudent expense investment, we delivered in 2011 record operating income, over $1.6 billion of operating income. And that was 29% of revenue. And I challenge you to find another memory company that's producing 29% operating margins.
And not only were the operating margins strong in 2011, they've been consistently strong for 10 quarters in a row now. For the last 10 quarters, we've delivered operating margins 28% or better. And I really believe this is a testament to our broad product portfolio, our diversified customers and our leading-edge technology.
We also delivered record EPS in 2011 at $4.65. Now you may not think that's that much of an increase over 2010, but I actually think it's pretty remarkable because when you think about 2010 -- in 2010, the industry and SanDisk had a very wide margin in difference between cost decline and price decline. Actually, for us, there was more than a 25% difference between our price decline and cost decline, meaning cost decline was greater. And we delivered $4.60. And in 2011, the market was much more in balance and in fact, our price decline was a little bit higher than cost decline and we still were able to deliver record EPS at $4.65. So this is a number that I'm very proud of.
So now I want to turn to some balance sheet items to review for 2011, and I'll start with capital investments. Our capital investments in 2011 were $1,368,000,000. And you can see here how they broke down between the fab joint venture investments and our non-fab capital equipment. Within the fabs, the tools that were invested on behalf of SanDisk totaled $1,175,000,000. Fab 5 was $617 million of that and Fab 3 and Fab 4, $558 million. How did we pay for those investments? Well, the joint ventures actually delivered joint venture operating cash flow of $818 million to fund the equipment. We also took out or guaranteed new operating leases in the Japanese market to the total of $291 million, and then that left cash outflow from SanDisk required of $259 million. So that $259 million, if you think about it, it makes up the $193 million of our own SanDisk capital equipment and then a net $66 million that we contributed to the joint ventures for funding. Where does the funding from the joint ventures come from? It comes from the depreciation cash flow that's in the joint ventures and that was $760 million in 2011. And then also, the joint ventures reduced their working capital by $58 million during the year. So that's where the joint venture cash flow comes from. One other piece of data I've shown you here that you're probably interested in is the split of our joint venture capital equipment investment between tech transitions and capacity expansion. Tech transitions were $417 million and capacity expansion was $758 million for Fab 4 and Fab 5. Remember that we expanded Fab 4 in the first quarter of 2011 and completed that fab and then we began expanding Fab 5 in the second half.
Another thing I'm proud to report is that the CapEx efficiency of our technology transitions is continuing to improve. And by this, what I mean is the incremental CapEx dollars that are required per wafer to convert to the next-generation technology. And you can see here that it came down for 24-nanometer and it's coming down again for 19-nanometer, and this is helping us to achieve strong ROI on the technology transitions.
I'm also pleased to report to you, we've recomputed now with another year under our belt the life-to-date internal rate of return for Fab 3 and Fab 4 and that's now over 23% compared to our weighted average cost of capital of about 12%. Last year, I gave you the same figure and it was at 17%, but with another strong year, 2011, it's now reached greater than 23%.
Of course, it's too early to give you a internal rate of return on Fab 5 since that's just been producing for the last 6 months, but I fully expect that it will also have a very strong internal rate of return.
Now let's just turn to inventory for a minute. Our inventory on our balance sheet remains lean, and the turns have actually been quite stable from the end of 2010 to the end of 2011. This is inventory turns measured in petabytes, which is a truer measure than if you just take the dollars on the income statement and balance sheet because those are impacted by period costs and reserves and other factors. So this is looking at petabytes in inventory and petabytes that we sold, and our turns were 6.6 at the end of 2010 and 6.7 at the end of 2011, so strong performance in inventory.
And the result of this was that our operating cash flow, our cash flow from operations for 2011 was over $1 billion, $1,054,000,000, and we actually invested a fair amount of that cash in 2011. I'll take you through the details in a minute, but we invested in our own CapEx. We gave a little bit of money to the joint ventures. We bought Pliant Technology, and we invested in future technology. And still, we had positive free cash flow of $377 million.
Now you may be wondering, why is the cash flow from operations down on a year-over-year basis? You can see that it was down about $400 million from 2010 to 2011. So I'd like to take you through some of the elements of our cash flow. This is a detail slide, but if you look at the first 3 line items at the top, this is non-GAAP pretax income, taxes actually paid out of the company and non-fab depreciation, which hits our books, those 3 elements are sort of the 3 key elements of the earnings power within SanDisk. And if you net those 3 numbers together for the 2 years, you'll see that the cash flow from operations from those 3 numbers actually went up a little bit from 2010 to 2011. So what caused the cash flow from operations to come down in 2011 was several balance sheet items, and the first and the biggest one was inventory. We grew our inventory dollars on the balance sheet in 2011, but as I just showed you in terms of inventory turns, we grew the inventory in line with the growth of the business, in line with the top line, whereas back in 2010, we actually had been increasing inventory turns, decreasing the inventory dollars on the balance sheet, and so that was a positive contributor to cash flow in 2010. As we exited 2010, our inventory was really at the right level. We kept it at the right level, and since we're growing the business, it's using cash.
Then there were several other working capital items that increased in 2011, including various prepaid expenses, non-trade receivables and some other items, and those were the other element of change in operating cash flow from 2010 to 2011. Here, you can also see the investments we made. So the $66 million I referenced a few minutes ago was our net contribution to the joint ventures; $193 million for our own SanDisk CapEx; $318 million for Pliant; and then $100 million for future technologies, which we invested with Toshiba. So again, you see the $377 million of free cash flow.
Now I think it's worth pointing out here that you can see over the 2 years, 2010 and '11, we only invested $66 million in the joint ventures. And over that same time frame, the joint ventures invested on our behalf -- or purchased on our behalf more than $2 billion of equipment. So how does that work? How do we get more than $2 billion of equipment for only $66 million? So what I've done is I've created a little bit of a primer on how cash flow of the joint ventures impacts SanDisk, and I want to take you through that.
So how did the joint ventures impact SanDisk cash flow? What I'm going to show you is a pro forma cash flow that represents or estimates what SanDisk cash flow statement would look like if our share of the joint ventures was part of SanDisk, if it was consolidated into our SanDisk financial statements. So start with the numbers as we reported them for SanDisk, these are the same numbers you saw on the previous slides, $1,054,000,000 cash flow from operations, $677 million of cash flow used in investing and free cash flow of $377 million. Then if you look at what the adjustments would be if the joint ventures were part of SanDisk, well, the joint ventures had $760 million of depreciation. If you look at the depreciation on SanDisk's cash flow statement, you get a pretty small number for a semiconductor company, and a lot of people are puzzled by that. That's because most of the depreciation is on the books of the joint venture. The joint ventures also reduced their working capital by $58 million, and so we got an additional cash flow from operations of $818 million from the joint ventures. Then the joint ventures actually spent that money to buy tools. They bought tools, remember, of $1,175,000,000 on behalf of SanDisk. We gave them $66 million, and they took out leases of $291 million. So net-net, they spent their $818 million of cash flow to purchase tools. And so if you combine that together, what it says is that on a pro forma basis, really, SanDisk had cash flow from operations of close to $1.9 billion, and we spent on investments about $1.5 billion to net the same free cash flow of $377 million. So what you can see here is that for SanDisk, because we are operating our fabs and joint ventures, the geography of our cash flow statement is different than if we owned those fabs directly, but you still get to the same net number. You just have less operating cash flow and you use less cash in investing, but you get to the same number. So I hope that's helpful in trying to understand how our cash flow works.
So I want to summarize this section on 2011 by showing you a comparison here, and what I plotted is the top 25 semiconductor companies in the world as measured by revenue. And on the x-axis, you can see the last 4 quarter reported operating margin for those 25 companies using non-GAAP when they report non-GAAP, and on the y-axis, their last 4 quarter reported year-over-year revenue growth. And you can see SanDisk is the red dot, and you can also see there's only 2 companies on this chart that have a better combination of revenue growth and operating margin than SanDisk in 2011. And I may as well tell you who those 2 companies are. I'm sure most of you can guess. It's Intel and it's Qualcomm. So I think that we are in very good company on this chart.
All right. Now I'd like to turn to, how do we continue to deliver strong performance in 2012 and beyond? And I first want to start by talking about a key trend in the NAND industry, and that is that cost reduction is slowing down. And this is not something new. We've talked about this for the last 2 or 3 years. We've been saying that with the increasing complexity of NAND scaling, the cost reduction capability for the industry and for us is slowing down. Now if you look at the second half of the last decade, we generated very consistent cost reduction every year, over 50% every year. In fact, I think that we have the best cost reduction over this time frame in the industry. And I think that's a testament to our technology transitions and in some of the later years to our heavy mix of X3 usage. But we have very strong cost reduction. And now it's starting to come down, and you've seen it start to come down in the last few years. And in 2011, for us, it was 31%. We believe that the industry and SanDisk is now moving into a phase where the annual cost reduction capability is really more in the range of 25% to 35% using NAND. And remember, as Ritu showed you, we fully expect to be producing NAND in 2012 to 2014. So why is it slowing down? Well, with each technology transition with each node now, we're getting a less percent increase in the number of bits from that node, and the technology transitions are lasting longer as well. And so those 2 things are really contributing to this lower cost reduction on an annual basis.
So let me now just take you through a few of the specific drivers of cost reduction, and I want to start with 2010, which I shared with you last year, and then compare that to 2011. So if we look at 2010, cost per gigabyte reduction, the first and largest element is the amount of reduction that we get from the memory. And I'm measuring this year in terms of reduction within the overall products that we sold. So in 2010, the memory cost per gigabyte reduction that came from the memory was a little bit over 30% of our overall cost reduction. Then we add to that the non-memory cost reduction and the non-memory cost reduction which comes from things like transformation cost, non-memory materials and is also positively influenced by the rising average capacity of our products. That brought our total cost reduction per gigabyte into the mid-40% range. Then we also got a positive benefit in 2010 from the fact that we brought our fabs back to operating at full capacity. Back in 2009, you might recall that we underutilized the fabs. We ran them below full capacity, so when we brought them back to full capacity, that gave a boost to 2010 year-over-year cost reduction. And then also in 2010, we had a few negative factors. We had a small increase in our usage of non-captive. The yen was appreciating back in 2010 as well, and we also had a power outage in the fourth quarter of 2010. So all of those 3 things combined brought the cost reduction down a bit, and the total cost reduction that we reported for 2010 on a per gigabyte basis was 46%.
So now what do those numbers look like for 2011? First, the memory cost reduction in 2011 this time is in the high 20% range compared to the low 32% range in the previous year. So the memory cost reduction is slowing down, and of course, 2011 came primarily from 24-nanometer, whereas 2010 came primarily from 32-nanometer. Of course, also in here is the impact of the mix of X2 and X3 in that memory cost. Non-memory cost reduction also came down some from 2010 to 2011. And here, you can see between memory and non-memory, we were in the mid-30% range in terms of cost per gigabyte reduction -- actually, high 30% range. And then we had several negative factors, which I've talked about, in 2011, and those included the increase in non-captive mix, the appreciation of the yen and our Fab 5 startup costs, as well as an earthquake in 2011. And those things brought our total cost reduction in 2011 to 31%. So now as we go forward to 2012 to 2014, again, we think that the memory cost reduction is slowing down, and when we factor that in, we believe we and the industry will be in a total range of 25% to 35% in terms of cost-per-gigabyte reduction.
So with that context, we are really focused on how do we generate strong margins in this slower cost reduction environment. And to do that, we are really looking at 3 key focus areas. The first is strengthening our portfolio mix, and you've heard a lot about that today. I'm going to share a few more thoughts on this. The second is continuing our leading-edge technology position. I believe we have had the lowest cost in the industry, and we intend to keep it that way. And then the third is prudent capacity growth, and I think you've seen our commitment to prudent capacity growth over the last several years.
So now let me talk a little bit about each of these areas, and I'll start with focus area #1, strengthening our portfolio mix. So first area here is really product diversification. And I think the most exciting area here is what you've heard today about SSD solutions. We expect, over the next several years, to significantly increase the mix of our revenue that's coming from SSD solutions. And that's not just SSD hardware products, but it's SSD hardware and SSD software solutions to have the full package of value-added solutions. We'll also continue to grow our presence in the embedded products. That's a strong area of emphasis for us. And we'll be maximizing our high-performance products, our products like Ultra and Extreme, which we've brought beyond our retail products into our OEM offerings as well. And we fully intend to maintain a strong IP revenue stream as well. So that's product diversification.
We're also diversifying our market exposure. If you think about SanDisk over the years, our products have been destined almost entirely for consumers. Whether we sold those products through retail channels or through OEM channels, the products were ultimately ending up in the hands of consumers. And now with the addition of our enterprise solid state storage product offerings, we've really entered the enterprise market. And so that really diversifies the markets we're going after and, I really believe, helps us, over time, produce steady and higher growth revenue. And it should also, over time, dampen the seasonality of our revenue because we have enterprise and consumer.
And then the third element of this is customer diversification. We are adding PC OEM customers that we've not serviced before. We're adding enterprise and cloud customers, and of course, we're also continuing to increase the number of emerging market customers that we're selling to around the world. And I think it's worth emphasizing, again, you saw this in a different form, I believe, from both Sumit and Sanjay, but we are expecting that our SSD solutions will grow from 3% of our revenue mix in 2011 to about 25% of our revenue mix in 2014. That's pretty significant.
So now let's talk about area #2, continued leading-edge technology position. Here, we've clearly been the X3 leader in the NAND industry. We have generated 50% or more of our revenue utilizing X3 for 10 quarters now since the third quarter of 2009. And I think it's not a coincidence. If you think back to the operating margin chart I showed you, with 10 quarters in a row of operating margins 28% or above, I think it's not a coincidence that those happen to be the same 10 quarters that we had 50% or more of our revenue coming from the sale of products utilizing our X3 memory. So this is a key area where we continue to invest and continue to work with our customers to remain the X3 leader in the marketplace. We also are the die size leader, and this is another key area of investment in our technology and an area that we fully expect to continue to be the leader.
And then third, and you heard a lot about this from Dan today, is system level leadership. And here, we are investing in system level leadership for all of our products in OEM and in retail and in our SSDs. So these are really key areas of emphasis, and it's the reason why we're maintaining a very strong investment priority in terms of our R&D investment.
And then the third area of focus, again, to continue to generate strong margins in a slower cost reduction environment, is prudent capacity growth. You've heard and we've said that Fab 5 capacity expansion has now been paused. We finished the initial ramp of Fab 5 capacity expansion in January of this year, and we've now paused it and we're evaluating it on a month-by-month basis to really ensure that we match our supply growth to our demand growth. And as you've heard from Sanjay, the earliest we expect to start up Fab 5 capacity again is in the second half of this year.
With that, our 2012 growth in our wafer capacity, percentage growth in wafer capacity, will be less in 2012 than it was in 2011. And if you look at that graphically, it's pretty remarkable that the growth in wafer capacity as a percentage has come down quite a bit in the last several years. And you can see here in 2011 that it was in the low- to mid-20% range in terms of increased wafer capacity. And in 2012, it will be less than that, assuming the earliest start to Fab 5 capacity growth in the second half of this year.
In terms of how that then translates into bit growth, our 2011 captive bit growth was 77%, and we expect our 2012 captive bit growth to be slightly less than that 77%. And that, again, assumes Fab 5 capacity expansion but not until starting sometime in the second half. I think it's also useful to reflect here that SanDisk has a pretty unique supply strategy in the industry. We invest heavily in very cost-effective captive capacity, but we also supplement that captive capacity with a modest amount of non-captive supply. And that really gives us a lot of flexibility, and I believe it helps us keep our supply-demand balance as optimal as we can. And that is an area that we will continue to utilize, continue to utilize a modest amount of non-captive memory in order to help us keep that good supply-demand balance and give us flexibility to go capture more of the market share out there.
So in summary, on this section, in terms of delivering strong performance in 2012 and beyond, you've heard today about the strong secular demand trends for NAND. Those are continuing. And then we have these 3 focus areas to try to ensure that we continue to deliver to our shareholders strong margins, strengthening our portfolio mix, continuing our leading-edge technology position and maintaining a prudent amount of capacity growth.
So with that, now I want to turn to recapping our 2012 forecast, and these are numbers I shared with you 3 weeks ago on our earnings call. So for 2012, we forecast that our revenue will be in the range of $6.2 billion to $6.6 billion. That represents a growth rate of approximately 10% to 17% on a year-over-year basis. And that, by the way, is a stronger growth rate in 2012 than the average of the third-party analyst estimates for the industry in 2012. We've also said that within that revenue range for the year, we expect the majority of our year-over-year growth to be concentrated in the second half of the year versus the first half of the year. And there's really a few reasons for that. We've talked about this. One of them is that we are experiencing lower demand from several of certain key mobile OEMs with whom we have had a large amount of share in certain models. And we are actively engaged in getting qualified in some alternative models out there in the mobile industry, and we expect that the revenue from those will primarily benefit the second half of our year.
In addition, you've seen from various reported numbers that there has been some softness in pricing in the NAND industry in the late part of the fourth quarter and in the early part of the first quarter. And that also, as we talked about on our call, factored into our expectation that the majority of our revenue growth year-over-year will be in the second half of the year. And in addition, of course, we are seeing an accelerating ramp from our SSD businesses, and we expect that to also contribute to more growth in the second half of the year. But overall, this is a very strong revenue growth rate on a year-over-year basis.
In terms of our total gross margin, we expect total gross margin in the range of 39% to 42%. That is down somewhat from the 44% in 2011, and the primary factor there is the appreciation of the yen to the dollar. We have locked in about 60% of our yen requirements for 2012 for wafer purchases, and we locked them in at a rate of about JPY 78, and that happens to be approximately equal to the current market rate as well. And that is about a 4% to 5% appreciation versus the average rate that we experienced in our cost of sales in 2011. So that's the key factor in bringing down somewhat our gross margin forecast for 2012.
In terms of expenses, we expect about $975 million of expenses, which translates into 15% to 16% of revenue, and that remains in the lower half of the long-term model in terms of expense investment. And all of that translates to total operating margin of 23% to 27%, still a very strong operating margin and at the higher end, if not above, the long-term financial model, which you can see here on the left.
Now just a word on this long-term financial model, which I introduced a few years ago. I said at that time that this is a model that we believe balances revenue growth, profitability and cash flow and is a model that is required, in terms of operating margin, in order for us to deliver strong return on investment on our capital-intensive business, on the investments we make in our capital capacity. And we still believe that. We've been operating above the LTFM for the last 2 years, and really, with the focus areas that I've talked about in terms of continuing our leading-edge technology, diversifying our product portfolio and maintaining prudent capacity growth, we are working very hard to be able to maintain and be able to continue to deliver very strong operating margin performance. So really, we're focused on continuing to deliver strong performance. Our range forecasted for this year is 23% to 27%. In addition, we are bringing down our tax rate expectation from 33% in 2011 to 32% in 2012.
Now I'll just summarize our 2012 capital investments. Here, we said that our capital investments would range from $1.1 billion to $1.6 billion, and the fab portion of that is $650 million to $1,150,000,000. The variation there in that range is really because of -- the key variable, really, is when we start up Fab 5 capacity expansion. And then our non-fab capital investment is expected to be $450 million, up from about $200 million in 2011. I'll talk more about this in just a minute. In terms of how we fund these capital investments, we expect the joint ventures to contribute cash flow in 2012 of $500 million to $700 million. That comes from depreciation, which, this year, will be a little higher than last year, probably around $825 million. But this year, we expect that the joint ventures will have to increase some of their working capital, and this really comes from the timing of when tools are purchased in the fabs and when they get paid for. And it's our expectation that that timing, over the course of the year, will lead to an increase in working capital in the joint ventures. We expect we'll take out and guarantee a similar amount of operating leases in 2012 somewhere in the range of $200 million to $400 million. And then that will leave SanDisk cash outlay of about $400 million to $500 million, which happens to be equal to approximately the non-fab CapEx that you see here. So said another way, we expect that the capital investment in the joint ventures will be funded primarily by the joint ventures' own cash flow, as well as operating leases that are taken out by the joint venture.
Now let me talk for a minute about the non-fab capital investments. There are really 2 key areas of increase on a year-over-year basis. The first here is manufacturing, and we are expanding our manufacturing capacity both at our Shanghai facility, as Sanjay spoke about, as well as at our subcontractors. And here, we expect that the increase in tool investment will be about $80 million, and most of that is for test equipment. The second item you see here is we have actually purchased our headquarters' campus. We purchased it about a week ago. What we purchased is the 5 buildings across the street, across the side street here, 3 of which we have occupied for over 5 years on a lease basis and 2 of which have been empty for many, many years. And over the course of this year, we will be renovating those 2 empty buildings as well as upgrading the 3 buildings we're in. And at the end of this year, we expect to move into those 2 buildings, move out of this building, which is a leased building, and also move out of another building, which we are leasing about 1 mile away, which currently houses our Enterprise Storage Solutions division. So at this time next year, we should all be in one campus across the street, and hopefully, we can host all of you again in that new campus across the street. So this $150 million is the estimated total for the purchase of the 5 buildings and the land that they stand on, which is about 37 acres, and for the renovation of those 5 buildings.
So you put all of that capital investment together, and it is well within our target model of 20% to 30% as a percentage of revenue. What I've graphed here for 2012 is the midpoint of the capital investment range that I gave you and also the midpoint of the revenue range, and that equates to 21% of revenue.
So now let me talk a little bit about cash and our cash investment priorities. Clearly, SanDisk has a very strong balance sheet. Our net cash, net of the maturity value of the debt on our balance sheet, was just under $3.7 billion at the end of 2011, and we've grown that net cash over the last 3 years. So we've had positive free cash flow in each of the last 3 years. In terms of priorities, our first priority for this cash, always, is our capital investments. We're a capital-intensive business, and this is really how we get our capacity to grow the business, and so this has to be our first priority. That said, our cash flow from operations has been covering -- more than covering our capital investment for the last several years, and we forecast that it will continue to more than cover our capital investments.
So the secondary priority area is mergers and acquisitions and technology investments. In 2011, I showed you that we spent $418 million on the acquisition of Pliant and of future technologies. And in 2012, so far, we've purchased FlashSoft, which was also a cash acquisition. And I believe that there are a number of opportunities out there that make sense for SanDisk in terms of enabling us to grow our business, further strengthen and diversify our portfolio and increase our returns to shareholders. And so this is a key area that we will be focused on, and of course, cash is the right currency for us to use when we see something that makes sense for our business.
And then the third area is that we are returning cash to our shareholders. We did put in place a stock repurchase plan at the end of 2011. It was put in place in the fourth quarter, and we started repurchasing with that program right at the tail end of the year. We've repurchased $4 million in 2011, late in the fourth quarter. We've continued to repurchase, utilizing that plan. And so far, through yesterday, we've repurchased about $60 million of our shares. So we are paying attention to this, and we do believe that this is a good use of our cash.
So in summary, I believe SanDisk is very well positioned for 2012 and beyond. The growth drivers are very strong, strong secular demand trends for flash memory in many areas. And SanDisk is maintaining a very prudent and a very flexible approach to supply growth. We're really focused on maintaining supply and demand balance in our business. And at the same time, we're diversifying our portfolio mix. I talked about product diversification, market diversification, customer diversification, and those are all important here. And I think that the moves we've made in the SSD markets are particularly exciting, especially the addition in the last couple of days of the software solutions for us in the SSD marketplace.
We fully intend to sustain our technology leadership, and as I hope you take away from this, we're investing heavily in R&D. That really is our key area of emphasis. And we have a very strong balance sheet, and that provides us a lot of opportunity, provides us opportunity to take advantage of investments that we believe will add value to our shareholders over the long run. And also, I hope you take away from this that SanDisk has a very seasoned team and a team that is very focused day in and day out on execution and a team that, I think, works very well together. And so with that, I would like to ask Sanjay to come back up and share a few closing remarks, and then after he's finished, we will take your questions, okay?
So as I was getting Mike Dirk [ph] to come back here, one of our AV experts, who is from an outside agency, says to me -- he has been listening to our presentations. He says to me, "Boy, you guys put your memory through a lot of torture." And I said, "We do that to make sure the memory that's with you is good." Then he says, "I know that because I put my memory in my shirt and washer, and it has come out still working well." And I have to tell you I actually get many letters like that, and that just speaks, again, to our vertical integration capabilities here.
So through all the presentations today, I hope you got the chance to understand the focus of SanDisk. The demand drivers are strong. We are very excited about the opportunities of flash in mobile devices, as well as flash in enterprise and cloud applications. We shared with you the supply growth outlook, and overall demand-supply balance, we believe, will be healthy for the industry 2012 and beyond. We also talked about the strengthening business portfolio. I think you've got a glimpse of that from all of the presentations today. SSDs are coming. They’re coming for SanDisk. They will be a growth driver for us here on SSDs in client applications, consumer applications, as well as SSDs in enterprise. And we are continuing to add value to our portfolio, particularly for SSDs, with the software capabilities we just acquired. And we believe that this will help accelerate our momentum in SSDs and will help us offer premium value-add solutions to our customers. I think you've heard a lot about vertical integration, and the key message there is that it's becoming increasingly important, increasingly important as technology complexity increases and increasingly important on the SSD side of the business as -- for consumers as well as enterprise, those markets become larger and larger. And it's also becoming increasingly important for embedded applications in smartphones, tablets, which are demanding more and more system expertise. Our technology leadership with respect to NAND scaling and developing terabyte memories that you heard from Ritu for later in the decade continues to be on a solid path ahead. And scale of operation, prudent supply expansion, these are all key factors in driving the profitable growth of the company. We are very focused with our strong financial position on continuing to drive revenue growth, growth in profits and free cash flows. And I can tell you, the 4,000 strong SanDisk team is very excited about the future that is ahead of us, and as I said before, I really believe best is yet to come for SanDisk. So with that, I would like to invite my dynamic team to come out here, and we will open it up for Q&A.
Okay. So as the presenters settle down in the chairs, just a couple of housekeeping comments. We'll take questions from the entire room. I'll be handling the mic along this aisle, and we have Stella and Wendy on the other sides of the room, so feel free to raise your hand, and we'll pass on the mic to you. The questions will be moderated by Sanjay. Sanjay will assign appropriate presenters to respond to your questions at appropriate times. So with that, we'll take the first question from here.
I mean, you guys talked about this 3-pronged strategy for R&D. You talked about NAND scaling. You talked about BiCS and 3D ReRAM. How should we think about a royalty opportunity in the future? From what I understand, the royalty agreement that you have today lasts to 2017. So based on the amount of R&D that you spend, how do you guys think about the royalty opportunity beyond 2017?
So I'll just comment on our IP position, and then Judy can give you some comments related to how we look at royalty revenue going forward. Our IP position both in the area of NAND as well as 3D memories, both BiCS 3D NAND as well as 3D resistive RAM, continues to be strong. As I mentioned, we are building a strong portfolio of patents going forward and continuing to strengthen it, and I think IP is a very important part of SanDisk’s business model, and we will definitely continue to leverage it as appropriate going forward, just like we have been doing it already. Judy, in case you want to...
Sure. I think you're referring to the agreement that we have in place with Samsung. It actually goes until August of 2016, not '17. It was a 7-year agreement put in place in August of 2009. And that agreement does not cover these future technologies. It really was very focused on NAND. And so as we think about investment in future technologies, we clearly are emphasizing creating a lot of IP there. We have a lot of IP there. And that would be an area we would look to in terms of potential future monetization for our business.
So a couple of questions. First of all, in the SSD market, you focused a lot in the presentations on that market. Obviously, it's a big growth driver. How should we be looking at kind of the margin profile of that business in the future? Is there a possibility that, that market becomes like the card market is today in a few years, and therefore, the margin structure might look very different than what it looks right now? And I guess it's also related to your enterprise versus client SSD mix. And then the question -- the second question is maybe more futuristic. Where are you on 450-millimeter wafers planned? It doesn't seem like it's anywhere in the slides with regard to potential cost reductions, which could really change the equation. Many times, memory companies are at the forefront of that. So where do you stand from that perspective?
So I'll answer the 450-millimeter question here first, and then we'll have Kevin and Greg comment on their respective SSD businesses to respond to your question. Regarding 450-millimeter, in terms of really cost-effective production capability of that technology is definitely several years away. It's likely second half of this decade. We are not going to lead in the NAND industry or in semiconductor industry, for that matter, with respect to 450-millimeters. The technology roadmap that we discussed today, the 3-pronged strategy, NAND scaling, 3D resistive RAM, which we believe, really, will very cost effectively provide high-capacity memories in the future, as well as the BiCS 3D NAND opportunities, these are very, very solid paths that we are pursuing for the future of flash memory development. They'll give us, we believe, what is needed for the rest of the decade in terms of memory technology advancements, bit growth capabilities, as well as cost leadership. So 450-millimeter, really, is just very early, and once it becomes a more commercially viable cost-effective driver in the industry, then we would consider that. Yes, in near term, it's not on the horizon. Maybe in the second half of the decade, we'll think about it. Kevin, you want to talk about client SSD?
So for the client space, I think the key for us, first of all, differentiating the client storage space from the card space. The challenges of producing high-reliability, high-performance storage solutions is magnitudes of order greater than it is to produce consumer cards. I would say that our focus is on driving costs of the products down through using the most advanced technology and being able to transition to the next node quickly, being able to do that faster than our competitors. That's why we do believe that our vertical integration model holds advantages for us. And ultimately, the challenges of NAND management to the level of reliability and performance will be limiting the number of players that can compete in this market. So my belief is that things should be healthy for years to come.
Just to a quick add in the enterprise, similar lines as Kevin pointed out. Clearly, differentiation is the key thing that drives distinctive value that eliminates the stall of commoditization across it. The nice thing about the enterprise today is there's a ton of innovation that's going on inside the products, inside the marketplace by itself. If you follow the industry close, PCI is relatively new for a storage interface for it coming forward, but with transformations of NBME, SCSI Express and all these sorts of transformations, there's a lot of opportunities to lead in those markets for additional differentiation and additional leadership in the market space. So we think that it's a good model. Long-term stability is going to be there from an enhanced margin standpoint. But it's all about execution on keeping an eye on keeping it cost-competitive. That is where between the 2 sort of camps of competitors that we talked about. It's going to be very difficult from a technology and a cost standpoint for non-captive players to really be in a leadership position in this marketplace, which means it falls more into vertically integrated solutions and the benefits that brings.
Two questions for me. One is a shorter-term question. With respect to your optimization of margins in terms of mix of your business, how should we think about the accretion you get from moving to more solid state drives. As you've talked about, that's a major growth driver for you, versus the continued mix benefit you get by pushing more and more mix of TLC or 3-bit-per-cell against your existing applications. Should we think about SSDs as being much more accretive or not?
Yes, I'll take that. So actually, as the SSD mix of our revenue grows, that will probably reduce the percentage of the X3 that we can utilize in our business, and I think this is what you're getting at. However, I don't necessarily translate that into being negative for gross margins. In other words, we believe we can produce strong gross margins with our SSD solutions utilizing X2 MLC. So really, both are very important to us. X3 mix for a lot of our products is very important in terms of generating strong gross margins, and then these SSD solutions, even if they don't utilize X3, are another area where we think we can generate strong margins. And I might just add on to the previous question and in relation to this as well, at a very high level, if you think about the SSD businesses, the enterprise SSD space, over time, we believe, will generate margins that are stronger than the SanDisk overall corporate average gross margin. The client SSD space, on the other hand, probably generates margins more in line with the SanDisk corporate average. And for both of those, the software solutions that we add on top, we believe, are accretive to margins.
And maybe a follow-up question, longer term. You've talked in the past about as you add new capacity, you want to future-proof that capacity in terms of the tool sets on new fab capacity that you add against moves to BiCS, moves to 3D resistive RAM, et cetera. So can you talk about -- with Phase 2 of Fab 5, whether those kind of factors that are influencing your thinking today and whether or not that's going to kind of influence the timing of when you add capacity to Phase 2 of Fab 5?
So as I've mentioned before, Phase 2 of Fab 5 is not built out yet, and our decisions related to Phase 2 build-out of Fab 5 will be primarily related to the demand requirements in the industry. So the timing will be primarily related to that. And as we said, we believe NAND will be the dominant production technology during the rest of this decade, so we're going to make decisions related to Phase 2 primarily based on NAND requirements, and depending upon the status of the 3D BiCS NAND as well as 3D resistive RAM technologies, of course, we will be taking those account. Based on their development status, we'll take those into account regarding Phase 2, but we are not going to hold anything back on Phase 2 related to those technologies. We are going to fulfill the future demand requirements in the marketplace And that will then really be based initially, for sure, on NAND.
Media, actually. Tie some of those other questions in when you're looking at resistive RAM in the out years you talked about resistive RAM potentially having better characteristics than NAND in terms of cost per bit, but you talk about it needing EUV lithography, which to my mind, would tend to raise capital intensity. So can you maybe talk a little bit of some of the other things that you're doing with resistive RAM that would lower other costs and since it would seem you’re going to have higher capital intensity because of the lithography?
Okay. Ritu, you can comment on the cost effectiveness of resistive systems.
Can you hear me?
Okay. So the analysis we have done shows that with the EUV and with the scaling that we have and with the 3D structures, 3D resistive RAM is going to be cost effective with respect to extending the NAND scaling barrier. Having said that, there are multiple implementation, even of the 3D resistive RAM that industry is looking at, and we'll see how the developments go. There are tradeoffs between different approaches. And some of them may not require EUV but the promising approaches right now do require EUV.
But you feel comfortable that there's other cost-efficient measures you can take that are -- that's going to offset that additional cost of equipment?
Yes. 3D basically goes into third dimension, so you can build very, very high density memory to replace flash NAND, which then makes it cost effective.
And then to follow up on that a little bit. Obviously, some of your competitors are working on different technologies. Do you feel comfortable that resistive RAM will be the choice or do you think that resistive RAM will coexist with other technologies, phase-change memory or some other type of technology?
Each technology has its tradeoffs and each technology is more suitable in certain application than others. We believe that 3D resistive RAM is the most suitable technology as we see it right now for the applications that we need it for.
And I want to be clear that phase change kind of memories are really not targeted for these high-capacity storage applications such as NAND. And we constantly look at what other technology opportunities that are out there in the industry and we absolutely want to make sure that the best capabilities are in our tool kit as well. And we continue to believe that 3D resistive RAM is really the ultimate technology. And yes, we absolutely look at what does EUV cost mean to the 3D memory. And we would not be pursuing it if we didn't think that the 3D -- it would not become cost effective. So 3D really has a lot of potential. Like Ritu said, vertical stacking of cells is where the key will be in terms of cost reduction capability.
Yes. Two questions, just wanted to -- Sanjay, Judy, first on the -- if you can give us a qualitative, I know you don't want to give ASP trends, but if you can give us some kind of qualitative perspective on how SSD ASP trended last year versus regular-trade NAND that would be helpful. At least qualitatively, how did ASP decline through 2011? And second as a follow-up, if I take your midpoint of your guidance, how should we think about earnings growth for 2012?
So in terms of the ASPs of SSDs I think it's really a little too early in terms of our experience with SSDs to talk about the reduction in ASP of those products versus others. What we actually experienced in 2011 and we'll see more of this in 2012 is that the ASP itself of these products is very different. And it's impacting our ASP statistics because of the mix, right? So the ASP per gigabyte of selling an enterprise drive is a much different ASP per gigabyte than as the ASP per gigabyte of a card or a USB drive. And so there's a mix effect there. Over time, I believe that the ASP per gig of those products will come down. And -- but it's a little too hard to say, whether it'll come down at the same rate, maybe not as much as a card or a USB drive over time. I think it will depend a lot on the value that we've added to the solution and how we're differentiating our solutions.
And I do believe that as we add capabilities such as some of the software competencies that we described to you today, these will definitely give us greater stickiness, greater value with our customers. And those should have improved trend in terms of overall ASP decline trends for our business, on the SSD side and wherever we are able to provide higher-value differentiated opportunities to our customers.
And I'm sorry, what was the second part of your question?
I just wanted to find out, given your midpoint of your '12 guidance, how should we think about earnings to grow this year?
Well, I think you can do the calculations. But clearly, it is our objective to grow our earnings and we're working very hard to ensure that we maintain margins as strong as we can so that we can grow our earnings.
Hi, 2 questions. First up, if you can quantify the dollar opportunity from software upgrades from the FlashSoft acquisition on a stand-alone basis, maybe the next 3 years, is that opportunity big for the company from the upgrades in the fields on a stand-alone basis? And then secondly, Judy, the upper end of your cost reduction assumption, down 35%, is that aligned with the upper end of your operating margin guidance of 27%?
So I think, Sumit, you can take the first one.
Yes, so -- can you hear me? Okay. So as far as the Enterprise software market is concerned, we have done a lot of work in targeting FlashSoft to survey the market and understand some of the potential. One thing that is clear is that the flash in the enterprise is such a new way of architecting the entire enterprise around it, that really the opportunity is in its very early phases of growth, so it is somewhat premature to talk about the size of the market. But certainly, on the software side alone, we think, at least right now and could go from there, that it's a few hundreds of millions of dollars market at the outset. And we feel very good about our position in the market and the kind of technology that we have acquired.
So the second part of the question in terms of the range of cost reduction and the range of operating margin, it's not quite as simple as to say that the high end of the cost reduction range leads to the high end of the operating margin range. When you think about it, it's -- really, it's a combination of cost reduction and price reduction and mix of the products and solutions that we sell. And you could get to the lower end or higher end of the operating margin range with a number of different combinations there. And what I think I would tell you is we're working to try to optimize where we land. And we're working to try to maintain cost reduction as high as we can and maintain the best balance we can in terms of supply-demand, so that price reduction also is aligned with cost reduction, and then we're optimizing our solutions in terms of product mix.
I was wondering in the SSD space, if you could comment on maybe your units or market share, and if you have any visibility or expectations into what that might bias towards one way or another. And then somewhat separately, on the stand-alone SSD drive, when we're talking about the 128-gig densities, is there any price elasticity that you're starting to see there that can maybe get consumers biasing up towards higher densities that they're accustomed to with the hard disk drives?
Yes. So over the last year, we're obviously just establishing ourselves in the mainstream SSD space. So it's probably a little bit early to be talking about market share significantly. We feel that with the growth in the opportunity in the market and the strength that SanDisk brings, that we will see increased market share over the next year, and very much see that as a positive opportunity. In terms of the elasticity in -- 128 gigabyte is seen as the mainstream capacity there, because 60 gig is a little bit too small with the images of the OS, et cetera. So in that 128 gigabyte, a generally accepted rule of thumb is that as soon as the cost comes below $100 to the end user that, that as an option against even 1 terabyte of rotating storage is where people will start to gravitate towards that. I think it's a little bit hard to know if that's true or not. We've heard $1 per gigabyte. We've heard a number of different easy numbers to get our heads around to see that. I think, though, that where we sit today at around that $1 per gigabyte point, that we do start to see this being adopted in greater numbers and are starting to see an inflection point.
I will just add that from a share perspective, as we showed you that last year, our revenue, approximately 3% from SSD, total contribution of SSD on our revenue. So that last year, our share particularly on the client side is small. However, we are on a fast revenue ramp rate on this part of the business and we absolutely expect to be gaining share there, on our march toward -- SSD is becoming 25% of our revenue. So it's a huge opportunity ahead for us.
And I was wondering also with X3, where is it in terms of endurance and how close is it to maybe meeting some of the capabilities that the SSD market might want it to have?
So in the client space, I would say that based upon our experience, especially in the entry-level space and some of those other opportunities apart from the mainstream computing, that X3 probably does have some very interesting applications there. And you can expect probably to hear more about this from us in the future.
If I could get a little bit more granularity on the gross margin guidance. When you talk about the midpoint of the range being about a 340-basis-point reduction versus last year, and then throughout 2011, you gave the breakdown. I'm specifically interested in both the yen impact and the tech cost versus price decline. Because the cost and price decline seen in 2011 to have been very equal, and yet you still eked out a 370-basis-points gain. And then in your comments, you said that primarily, the reason why you're going down 340 basis points this year is due to the yen. So the question is, do you -- are you not seeing that tech cost and price decline boost? And then vis-à-vis the yen, what are you estimating for the yen this year? Because versus last year, it doesn't seem like you're getting much of the same kind of difference or the appreciation in the yen.
Okay. So in terms...
Oh, and then also if you could comment, how big is the stock buyback you announced?
Okay. You may have to remember help me remember your 3 questions along the way. So the yen, the yen that we have locked in, as I said, is at a rate of about JPY 78. The market rate, at least as of yesterday when we checked, was also about JPY 78. And that is a 4% to 5%, closer to 5%, appreciation relative to the average yen rate that we experienced in our cost of sales in 2011. And so that will result in a 2- to 3-point impact on our gross margins. That 4% to 5% appreciation in the yen results in a 2- to 3-point impact on our gross margin. And so that really is the bulk of the difference if you take the midpoint of that gross margin guidance. Okay? And...
And then the cost and the price [indiscernible].
Yes. So we're not giving specific cost and price guidance. But I think your question was how did we eke out the 3.7 points that I showed you? And remember, I showed you that if you stripped out the yen and the noncaptive mix increase in the Fab 5 startup costs, you would have gotten cost reduction for us in the high-30% range, okay? And that compared to a price reduction of 34%. So without those 3 factors, our cost reduction in 2011 was several points higher than our price reduction. And that's where we got that positive impact, okay? And then your third question about the stock buyback. We announced in the fourth quarter of last year that the approved stock buyback plan was a $500 million plan and that it had a 5-year life.
Yes, can you talk about the growth opportunities in the enterprise storage for PCI Express-based accelerator storage versus SAS and SATA? And where the SanDisk portfolio seems to have the best fit? And also when you move to the SSD-based enterprise storage, will that change the spending patterns within data centers between CPU dollars and storage dollars and how that will trend going forward?
Sure. On the last question certainly, we'd like to see them spend more dollars on storage than on the CPUs, but over time, it seems to always be a balance that if you give a more performance in the storage, you can use more in the CPU. You get more work done, new applications invent themselves and the cycle sort of continues on that capability. From where we are relative to the going-forward mix in the PCI and the SAS market, it's really quite interesting because, not to get into real technical details, but they're actually converging. The benefits of SAS as an infrastructure is very compartmentalized. It's very much a building block approach. So systems can be built to exact customer configurations, while using the same building blocks of components to be able to address a wide variety of needs. PCI has been pretty much mandated to single or dual slots that are available in server designs of today. So it's -- in some ways, think of it as kind of this landlocked, but as a protocol, it's pretty fast, and so there's a benefit. So what the industry is really doing is blending the best of both of these 2 types of techniques, as I talked about with NVM Express and SCSI Express, where they're using those kinds of protocols of SAS with an infrastructure of PCI. And they're starting to bring more and more PCI connectivity slots out from inside the server to potentially the edges of the servers.
So when we look forward a few years, there's a blurring between what we knew traditionally was a small form factor storage brick dominated by SATA or SAS as an interface, that they’ll speak PCI as well. And so as that kind of blurring happens, it's really going to be the systems designers to make internal decisions about performance of a system, power consumption of a system, architectural building blocks, how big does it have to scale for these different capabilities. So those things are all coming to play and all of the major Tier 1 players are figuring out their strategy. So today is a very interesting time. I know we'll be a lot smarter in a few years, but we're playing very strongly in both of those segments. Because the one consistency between them, again, I went back to my pitch on the enterprise is that predictable performance that the enterprise counts on. Regardless of interface, regardless of whether it's inside the box or external, they want to know every day, all day, what kind of performance can they expect for that system to deliver. That predictability is what the IT guy needs to be able to make it work. And we bring that benefit to both PCI, SAS as well as the other interface capabilities.
We have a question here.
So there seems to be 2 different timelines for when 3D ReRAM will be ready and when the EUV tools will be ready. Can you maybe speak a little bit about the potential time lag in the future?
Okay. So as everyone knows, EUV is behind its original schedule in terms of the production worthiness. And as I mentioned in my presentation, the promising 3D technology does require EUV. So as we mentioned, 3D resistive RAM technology is for beyond 2015. In the interim period, as a bridge, that is why we are working on the 3D NAND, which is BiCS. It does not require EUV. So I think in terms of the timelines, when the EUV systems are ready for production, it can be deployed. And of course, the cost and everything depends on the readiness of the EUV system. Right now, as everyone knows, the throughput of EUV system is not there yet, it still has long ways to go.
Particularly appreciate the enterprise SSD, very exciting opportunity for you. And I was hoping you could -- you talked a lot about the ASIC and you talked about the controller, and I was wondering if you could tell us, as we look at it today, how the captive versus noncaptive mix is and how we exit next -- exit the year and move into 2013 and get to your target of 2014, how that mix is going to look. That's my first question.
Okay, yes. Certainly, before joining SanDisk, we were a noncaptive basis for NAND supply for multiple investors, which was a uniqueness in the industry because most had locked up to one partner and designed their systems according to that. The enterprise takes long cycles for products, product introductions and most important, the proof points of reliability. So we're midst in the stage of transitioning from noncaptive to getting the benefits of the captive media from SanDisk. That transition is going pretty well. We'll start to see products in the second quarter that are fully SanDisk-enabled. As we move the portfolio forward, we'll continue to add SanDisk overall. So by 2013, I think we'll be completely choosing the best NAND alternatives from within SanDisk.
That was very helpful. And then when we look at the Enterprise market, you talked about the competitive landscape and you talked about the HDD suppliers versus the NAND suppliers. So now that you're part of SanDisk, how is your time to market improved in terms of this long design cycle that you're talking about? Has it improved in the sense of obviously, you being able to put products out faster, but are you able to qualify it faster because the enterprise cycle is very long, it's about what? 12 to 16, 12 to 18 months?
Yes, we haven't seen dramatic improvement in the qualification stage just because of where we are at this stage yet. But the support you get internally as part of the team you get -- is better than you get being external support from a supply standpoint. The timeframe for our customers is really a different benefit than necessarily just our time-to-market, but it allows us to intersect NAND earlier in the stage of its life cycle. And that allows us to offer to enterprise customers much longer product life cycles built upon that early access point to any generation in the technology. To our customers, that's a significant advantage, because if you look at the -- I'll call it the back-to-back cycles of NAND, if you wait until NAND is really mature, meaning it has high PE cycles, great robustness, great stability in the Fab and then start the enterprise qualification, you're going to be well behind the maturity curve, which means you're about ready to launch the product at the end of the technology node. That's not good for the enterprise customer who's the third step in that process. What they really want is get in and start earlier on that early-technology stage by partnering with the NAND technology. And then as it matures, the products release and now, the customers have a long life cycle. That’s we think a distinct advantage we've been able to offer to our customers since joining SanDisk.
I have 2 quick ones on SSDs. Firstly, in terms of the longer-term strategy for solid-state drive controllers. Are you -- longer term, are you planning on continuing with a dual internal and external controller strategy? And then secondly, in terms of how SSDs might affect your process node transition cadence longer term, I guess once Pliant and enterprise SSDs become a bigger percentage of your sales, and also given the long development cycles and potentially any requirements for stocking components on the supply chain shelves, does that stretch out how long each process node has to last? And will we see a less sharp transition over to process nodes with each generation?
So I'll take the second one first regarding the technology nodes lasting longer in production related to SSDs, whether Enterprise or Pliant, or other OEM parts of the business. And then, yes, certainly, there is that aspect. I mean, when we were all about retail, certainly, the retail product transitions would have been much, much faster in the marketplace. With respect to OEMs, whether on the consumer side or on the enterprise side, we are very much committed to supporting the requirements. In fact, that's what they love about us, that they have -- we have large captive supply production base, where we can understand the requirements and be committed to supporting them and not be faced -- they be faced with any challenges in terms of a support. So we will support our customers in terms of their qualification cycles, in terms of their requirements for keeping a given technology node potentially longer. So, yes, in that regard, the technology node cycles do last longer in production given OEM requirements. And we are fully committed to that. And now, I will let Kevin and Greg answer for their respective businesses the question on controllers.
So for the client space, we have used a combination of both internal and external controllers. Our plan is to continue doing that for the time being. It has given us the ability to bring products to market that bear the strength of the SanDisk brand in terms of our ability to bring our memory qualification production expertise to producing quality products and we'll continue that for the time being, and we'll do so as long as it can sustain our ability to differentiate and innovate in this space.
Yes, the Enterprise is a little harder story to do, because -- since we are, in many cases, at the very leading edge, for instance, going back, we did the first generation SAS ASIC Controller. In those days, it was popular to do Fibre Channel or SATA, so you have to find a partner who is willing to take a risk on a business proposition, with a big chance that if they're not successful, they have nothing. And that's a hard thing to get into third-party marketplace. Also, the traditional ROI on third-party controllers is volume-based. And Enterprise is a smaller piece of the market than in unit volume, then say -- and Kevin’s in the client space. And so it makes the ROI much more difficult for them to just use those traditional models to make it work. But I think the couple of things that are truly demanding is that they have to really understand what enterprise performance means, which is a clean sheet of an architectural design. And secondly, you have to be anticipating these next generations of interface technologies, as well as have the close partnership on the NAND-side technology. So it makes it very difficult for third parties to really have leading-edge competitive solutions.
So I'll just add one other thing that even in situations on the client side when we do use third-party controllers. Oftentimes, we do use our internal firmware on those controllers to bring our SanDisk value. And then there are some cases, where it is an external controller, external firmware, but we do have situations where we have external controllers, internal firmware. And then of course, we have products that are just completely internally developed, including the controller and the firmware.
We have a question here.
Could you talk about on the enterprise side, where would you see the adoption happens first on the server side or do you think it happens on the SAN side or do you think kind of both go finally [ph] hand-in-hand?
I think if we look in history, we've seen it adopted across all different places. If I look at what EMC did, they were clearly leading in SSD adoption with -- inside of their SAN approach architecture. And finding for a specific need, if I look at Dell, they introduced it on both the PowerVault and the PowerEdge line, addressing both storage requirements and server requirements going forward. It's hard to tell, at any point, which of these 2 things are leading. I think with PCI, it is clearly helping to accelerate more in the server side just because of the configuration of the systems about application acceleration. And then it's fitting more, it's dragging, more if you want to call it more on the NAS than SAN market, where everybody wants to get a higher level of output from the systems that they deliver. So long term, I think it's going to be always moving back and forth.
And I'll just shift gear and ask a question on the retail space actually. So the retail business, in one of your slides, basically you’re -- if I recall you’re at the revenue level that you were in 2008, I mean after the decline and then going back up again. So I mean, how should we be looking at that business going forward? I mean, it's still a meaningful part of SanDisk given that we're focused a lot here on the SSD and OEM. But that business, I mean if it's not stable or at least slightly growing, I mean that could create a problem for your future growth anyway. So how should we be looking at the retail business? I mean is it a mid- to high-single digits like this year, it was 8% or is that a high bar considering that we still have that price declines in the market?
So I'll just take that and perhaps Shuki can comment on it further. Retail is definitely a very exciting business for us and we are very focused on it as you heard today. And we absolutely look at driving growth proportionately [ph] in that business going forward as well. And Shuki, certainly, he's managing long-term business considerations, I think he can address part of your question as well.
Yes, of course. Thanks for asking a retail question by the way. As I shared with you today, we -- SanDisk is very strong today in the retail market for flash. And we see growth opportunities in the market as well as through our own actions and leveraging on what we have. We can further grow business, whether it's the SSD aftermarket, whether it's the opportunity in emerging markets or whether it's growing the additional share in markets that as you said are more mature. They’re not growing at the same pace that they grew before. But still we can gain more shares with the strength of our brand, product offerings, et cetera. So I'm excited about the retail business.
Now we need to ask an OEM question.
Unfortunately, I don't have one for that. But -- so a few quick questions. So one, could you comment on the industry capacity? I know you kind of touched on that, but I heard that Samsung is starting up another fab in, I think, around Shanghai in second half, 2013. So how will that affect your pricing and just industry supply-demand dynamics going forward? That's question number one. You can answer it first, yes.
So I will just say that industry is definitely going to need more wafer capacity in the future to meet all the growing demand trends that we have talked about. We, ourselves, have our Phase 1 of Fab 5, which is at this point, 30% utilized. And a lot of opportunity for future expansion of that fab, and we certainly will have to be expanding that fab to meet the future requirements. So yes, I mean, additional wafer capacity will come online in the industry. I think all -- that industry, actually, have shown that it has managed capacity fairly prudently. I mean that's reflected in the demand-supply balance of the industry. And what all new capacity is going to be required and different suppliers will be adding it. For ourselves, we are well-positioned in Phase 1 of Fab 5 as well as with the vacant lot next to it for future capacity requirements.
That's fair. And then a question on retail. So it seems like from a large institutional buyer's perspective or investors' perspective, at least for your retail side, you're running out of room to grow at least with the developed markets. So it seems like you're investing in music players and then there's Memory Vault. So it seems like the returns on these investments are really low, and especially since these are -- they look like they're outside of your core competency. So it reminds me of Apple in the, I think, the '80s when they were in all these different types of accessories like printers and all that stuff. So are you getting out of your way to do things that you're not really focused on? And then question number 2 goes to Ritu. So when do you think these penny-sized SSD, the 128 gigabytes will reach an inflection point? Because Intel announced a chip with, I think, Micron, right? These 128-gigabyte NAND chips, I can basically fit on motherboards I think within 1 or 2 years. And so how will that affect you competitively? And the second one, what do you think of IBM's PCM chips?
I think first, Shuki?
About the IBM chip or the NAND?
So what I've tried to share with you here are the new things that were introduced in the last 12 months. The product portfolio of the -- I will not share with you that we added additional USB flash drives and additional microSD accounts, et cetera. So overall, no, we are not going out of our way in order to find growth opportunities. Each growth opportunity is being invested internally. In order to see that it can -- not only grow in terms of dollar but also support the bottom line. I think that as I mentioned, because of the infrastructure that we have, adding additional product definitely help bringing -- without a significant investment, we can bring more revenue and profits.
And I would just say that products like Memory Vault, absolutely they're very much in line with our mission, providing the storage solution that enrich people's lives, and very much along the lines of good competencies of SanDisk, vertical integration, product like that, product where you can store your precious data for up to 100 years, absolutely requires deep controller and memory understanding and expertise. So actually, that's right down our alley and an exciting growth opportunity for us for the future. And I think you had another question, which I'm sure Kevin is ready to answer.
Yes, so regarding the iSSD, we have actually seen some pretty good traction over the past year, mostly in the side-by-side caching-type configurations, where space is at a premium within the platform. So the small form factor of the high-performance SSD module has a lot of advantages. Today, we are the only ones in mass production of that product even though we have taken great lengths to standardize it and had other top-tier semiconductor companies as part of that standardization effort. So we do expect that with the addition of competition in that space, actually, it'll grow the opportunity. And that should happen in 2012. And then I think there was a phase-change question.
Yes, I hope you can hear me okay. So phase change technology is, like I think I mentioned in the last or Sanjay mentioned last time, is good for certain applications, certain niche applications. In our analysis, we don't see how it will scale down that aggressively like our choice of technologies do. It requires much higher energy to change states because it's a function of thermal energy requirement. And it needs to be multilevel cell, 2 bits or 3 bits per cell in order to compete with the kind of technologies that we need. So for certain applications, it may be good, where it will require high endurance, replacing, say, DRAM or replacing NOR kind of applications. But currently, we don't see how it can replace cost-sensitive, high-density, high-performance kind of NAND applications.
Just one quick question on Anobit. It sounds like that controller was sort of tuned to Hynix and Toshiba NAND who had shared their test mode with Anobit. Do you think they're going to continue to share test mode Anobit? And if not, will that controller go stale? And what's the impact now of sort of having 2 competitors out there selling NAND, who now sort of have no controller technology at all, does that bifurcate the market?
So regarding Anobit and test modes from other flash manufacturers, I do not know. I do not know what their plans would be in this regard. But the kind of Anobit solution demonstrates that how critical system expertise is really becoming in terms of delivering robust solutions for all of these applications that we talked about today. And again, I think the opportunity to point out that this is the kind of expertise that we have built over the last 23 years here at SanDisk, and we believe we are the best in the industry in this regard. And yes, to the extent that this capability is not available to other flash suppliers, given the importance of system expertise that we really talked about today in all of our markets, I do believe that it becomes a disadvantage to them, if they don't have these capabilities. That's why vertically integrated players, those not only memory manufacturers but owning system capabilities and other capabilities such as software are giving you differentiation opportunities, those that have all of this, I believe will be in a winning –- in a driver seat going forward.
I have a question here.
A few questions in -- from the past and some from the future and a couple from the present and also to the future. In the past, go back 3 or 4 years, when we talked about X4, and what has happened with that since -- has it gone to OTP or has it gone to the Memory Vault or is it just -- wasn't cost effective?
Okay. So let me take that. We do not produce X4 anymore. As we have mentioned, more than 50% of our production bits that we sell are in X3 memory. What's happening is that the memory technology as we keep emphasizing is getting more and more complex. So to get 3 bits out of the memory cell and to be able to apply it in such broad array of products and deliver the performance and the reliability that it requires absolutely, again, really needs everything that we have in our system expertise. 4-bit-per-cell bit technology continuing to get more complex is much harder at this point to produce. And really, what will end up happening here is that it will be in very small number of applications. And then that technology will really not deliver the merit of this -- capabilities. So we have decided not to pursue 4-bit-per-cell. However, the learnings that we had from 4-bit-per-cell technology related to things like strongECC, which is what was developed at the time of the 4-bit-per-cell. Today, it is being used for all of our products with 3-bit-per-cell and even those kinds of techniques are being applied now to SSDs and going also to 2-bit-per-cell as the technology roadmap advances for that. So we really benefited a lot from our 4-bit-per-cell work. But it is not -- 4-bit-per-cell NAND is not the technology of the future in terms of production.
You've tried in different times to bring out content or content delivery. What happened with slotRadio and slotMusic? Is that still alive or was that another learning experience?
slotMusic and slotRadio has been, like you said, some of that we did in the content area, we don't continue these products anymore. They are still being sold through some of our retail partners but we don't see how we continue offering them in the future. However, we did take these security capabilities of using DRM for securing the content into some more interesting applications that we've had. One of them, we presented last year. It's the Muve Music card that Cricket is offering to their subscribers. So it's based on the very same technology. And actually, it takes the content, that they bring into [indiscernible] this package and they sell to their customers a package of data, voice and content combined. So the technology is coming from us, the content is bought by them.
I just want to point out that things like X4 or slotMusic, slotRadio, these are innovation technologies and approaches that we absolutely need to be able to bring out to the market. Through these, we really learn. And as it goes with any innovation, that some of them may not become a big marketer [ph], but they lead to other opportunities. Just like I mentioned for X4, we learned ECC and we are applying it to others. Same with slotMusic, slot video, as Shuki mentioned, with Cricket, the Muve Music, growing -- interesting opportunity with that customer. And I believe that it has given us a platform that in the future, we will be able to bring interesting content-related opportunities to the consumers, so stay tuned.
One last question on -- for Ruti, in terms of resistivity RAM, is the process fully defined and working at this point in time or is there still a lot to do with getting the basic parameters working and being able to stack it in a cross-point array?
We have a 24-nanometer test vehicle, which is designed to bring out all the optimizations we need for a real product, production-worthy kind of target for a real product. So that process has –- it’s done quite well so far.
Is there any way to use it for a RAM application besides just pure storage, random-access memory?
Well, 3D resistive RAM basically is random access. So it is a nonvolatile version of the random access memory, but I think if you're talking about like DRAM or SRAM kind of memory, then you can probably -- the parameters required for those memories are quite different. For example, DRAM and SRAMs, SRAMs require very high performance, extremely high performance, which are not needed in the nonvolatile kind of memory applications that we need. So I think the -- it's a different kind of match.
Okay. So we probably have time for 2 more questions and we have one over there.
Three questions, one for Sumit, one for Judy and one for everyone. The first question, regarding your work with the carriers. I think it's very challenging for people to understand who you're actually working with to reduce bandwidth and reduce cellular congestion. Is that with the operating system which would be Google? Is it with the OEMs? Is it with the carriers? Is it with everyone at the same time? Because it's -- you could -- there are multiple levels of responsibility there. That's question one.
Yes, it's a good question and the answer is we're working with all of them. And that is something that obviously takes a little bit of time and effort. SanDisk has had a long history of being able to work with an entire ecosystem of partners in order to create standards and then help push for devices that utilize those standards. And in fact, in this particular situation on the caching front, which I had mentioned earlier in terms of reducing cellular traffic and shunting them over to Wi-Fi networks and using caching on mobile devices, we have, in fact, now established an iEEE standard for this by working with a lot of the partners, and included in them are content companies, networks, operating system companies, chipset companies, so there are a lot of good players in that ecosystem that have been formally and informally working with us to further that effort. And already, implementations are starting to leverage some of that caching capability that we have been able to put in the standard.
Okay, second question. Judy, on the conference call, you discussed the idea that you didn't want investors to focus on supply and demand and price declines but rather on revenue, gross margins, EBIT and profitability. Can you discuss what you think the company needs to do or investors need to better understand for that transition to occur? Because as I read, the way the company has described it, it doesn't seem like we're that far along on that transition to looking at the company differently.
Yes, it's a fair question since I offered a cost reduction range today for the industry and for ourselves. But I want to clarify that the reason I did that is I feel that it's important for the financial community to understand that the cost reductions of the past are not repeatable in the next several years, right? I mean we're not going to be at these 50% plus or even 40% to 50% kind of cost reduction ranges. And that's something that needs to be considered when one is thinking about how we best manage and best optimize our business. It's not to say that supply-demand doesn't matter anymore. It really matters a lot and we are doing several things as I outlined to try to ensure that we maintain a good supply-demand balance in our industry and for ourselves in particular. However, as we think about next quarter's guidance, we're not focused on what do we think is the price decline next quarter and the cost decline next quarter. We're really trying to manage our mix and provide you with a revenue guidance and a margin guidance that we feel that we can achieve. And that was really what I was trying to say in the earnings call.
Is it your belief that in this new cost decline paradigm, SanDisk will maintain its lead relative to the rest of the industry? I guess, that's not just a question for you but also for your colleagues.
Yes, very much so. We're focused on maintaining our technology lead so that we can maintain our -- the lowest cost position, which I believe we've had. And it's through our position in terms of technology nodes, die sizes and our high utilization of X3.
We'll take the last question from Doug.
Doug Freedman - RBC Capital Markets, LLC, Research Division
Great. One more question on the 3D technology. There, one of the 3D technologies is a bridge as you described it and you showed your 24 layers there. Can you talk about the toolset required to build that. You mentioned EUV for the resistive? But what is the toolset required for ASIC?
A good chunk of toolset required for the 3D NAND BiCS technology is common to the existing NAND. There'll be some tools, new toolset requirement but that's going to be minimum compared to 3D resistive RAM.
Doug Freedman - RBC Capital Markets, LLC, Research Division
And how do we think of the challenges of building a device that's 24 layers versus something that's built today that's one layer of NAND? How long is this product going to be in the fab? What challenges does that create? And how is that going to impact sort of total output out of your install base?
So anytime we have a new technology, we have to go through those challenges. We went through technology challenges from nMOS to CMOS, from logic to nonvolatile EEPROM, EEPROM to flash. And so here, we are going in third dimension and obviously, there will be new challenges. And that is why, that is what we need to work through. But as I showed you the cross section of finished wafer, it's starting to look decent. In the beginning, we had no life. And now, you see we can even show cell functionality. So I agree with you. There will be challenges and there'll be new kind of techniques that we may need to learn in terms of migrating from 2D NAND into the 3D NAND. But there are rewards at the end of the rainbow.
So I would just say that the BiCS structure there that we showed, that you're referring to here is the test chip structure. It does not mean that this is the same stack that will be used in the future, when this technology gets ready for production. You also had asked a question regarding what does it mean for throughput, ultimately, the 3D BiCS technology when in the future it’s ready for production, Of course, we'll have to provide more capacity, more gigabyte per wafer and cost reduction capability. So obviously, it will have to be delivering greater throughput in gigabyte production. And to the extent that any particular process equipment technology, equipment is needed for this, let's say, etching of vertical structures. Yes, of course, we will add those. But the benefit of the 3D BiCS technology is that is essentially mostly works on existing toolset, very little tool enhancement that likely would be needed.
Doug Freedman - RBC Capital Markets, LLC, Research Division
My last one is also on the same technology. At what point will you know if your competitors are encroaching your 3-dimensional IP? And at what point do you start having those discussions about licensing the 3D technologies?
So in general, we do not really discuss our IP strategy. And all I can say is that we are continuing to build a strong portfolio IP in all areas of memory development as well as other areas of system expertise that we are working on. And IP strategy discussions, we make on an ongoing basis based on a variety of business considerations.
Doug Freedman - RBC Capital Markets, LLC, Research Division
All right. Let me try one more then on the OEM front. One of the complaints, I think, investors have had is that –- there’s a question whether you're exposed to the right end customers. We're looking at Apple and Samsung doing extremely well in the smartphone market. Your exposure there is clearly limited. The question really is what are you doing to broaden your customer base, broaden the platforms? You mentioned that you felt like you got caught in the Q1 being limitedly exposed even at the customers that you have, you're working on expanding that. How do you think about going forward what that has done to your strategy?
Yes, absolutely. I wasn't sure that I'd get the bill. So yes, as we said. We have had some designs that didn't go as strongly as we would like and others, that not necessarily we're a part of -- were doing very well in the first half of this year. That said and I think if you go outside here, you can see that you can -- you will see design wins at basically all these OEMs. And developing the right product, the right configuration for each of them is something that we continuously do. And we believe that we are very well-positioned for the second half -- for a strong second half, including the names you mentioned and many others of course.
Okay. I guess that's all the time we have for today. I want to thank the management team for their time to explain the SanDisk story to you. And I want to thank you all for spending the time with us today to hear about SanDisk. Again, please do remember to fill out the evaluation forms so we can make this event even better next year. Thanks, again.
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