SanDisk: Flash Sales 'Soft' in April at Retail

At the JP Morgan Technology Conference in Boston, chairman and chief executive Eli Harari of flash memory chip maker SanDisk (SNDK) is not doing much to help SanDisk’s shares, which are down over 8% at about $29.78 following a downgrade by JMP Securities on Friday. Even Apple (AAPL) is down on the news, though there’s nothing much specific about Apple in his presentation to suggest the 3% decline in Apple shares to $181.78.

Harari is talking about how SanDisk is “very well positioned” in “the depths of a very long down cycle” for the flash memory business.

What’s the problem? Could be the aggressive targets for building capacity — While much of the flash industry is consolidating, increasing capacity this year by only 120% to 140%, Harari says SanDisk will boost its own capacity by 150% to 170% this year. And while prices for flash in the spot market have been improving, “there is still excess supply purchased at depressed prices, and it could take all of the second quarter” to burn that off, confided Harari.

Could be Harari’s reiteration of operating profit margin of 13% to 16% of sales through 2010. No improvement in profit in sight, in other words.

Asked about the state of demand and prices for flash, Harari says “April retail sales continued to be soft in the U.S. — we’ll see what happens in the second half of the quarter.” The impact of $127-a-barrel oil upon the consumer “should not be underestimated,” said Harari.

Yuck. That’s not very encouraging. Nor did it help to hear Harari confide that SanDisk is behind on “MLC,” an important next-gen technology for flash-based disk drives.

On the brighter side, however, Harari says the company will be better prepared than competitors by lowering costs and focusing on leading technology. The company is moving its Fab 4 and Fab 3 chip foundries to 43 nanometer technology this year, and developing chips with store three bits per cell — a measure of flash memory information capacity.

These improvements will help SanDisk lower costs by as much as 55%, he thinks, which should match a 55% decline in flash memory prices across the industry this year. Last year, prices declined 60%, and Harari, like everyone else in his industry, is hoping the decline is less extreme this year.

SanDisk is at the top of its game in manufacturing, contends Harari, noting that SanDisk is turning out 110,000 wafers a month at Fab 4. “It’s very hard to do better than that” as a flash memory maker, he says.

Harari lays out the strategy for the three markets he hopes to conquer — consumer electronics, mobile phones, and solid-state disk drives. The consumer electronics business is in “about the fifth inning,” says Harari, while mobile phones, as a market for flash, are less developed — maybe the second inning. And the solid-state drive market “hasn’t even started yet.” Harari sees the prospect for flash chips completely replacing optical media, such as CDs and DVDs.

It may be the case that there won’t be any mass-storage media for content in future, with file downloads like Apple’s iTunes replacing it all. But if there is going to be a storage medium after Sony’s (SNE) Blu-ray plays itself out, he knows what that medium will be — flash memory. The reason. “People don’t have an optical drive on their phones,” for when they want to put a movie onto the phone. So, they may use chips with capacities of 32 gigabytes or 64 gigabytes, says Harari, in the form of

As for the solid-state drive market, “adoption of flash in enterprise will be higher than you think,” says Harari.

On another negative note, though, when asked about SanDisk’s revenue stream from intellectual property it licenses to Samsung, a license that is to expire next year, Harari didn’t say anything terribly encouraging. “We’ve said we want to negotiate a renewal with Samsung, and you should expect a renewal to be at a lower [license] rate,” said Harari. No details offered on when a renewal might come.

UPDATE: I had a chance to buttonhole J.P. Morgan analyst Paul Coster, who moderated Harari’s presentation. He confirmed that there was no specific news that’s negative for Apple, and no numbers on the financial side regarding SanDisk. But, “it was rather dour, wasn’t it?” he said of Harari’s presentation. “I think the main thing was that he [Harari] did say twice that we have real economic headwinds ahead of us.”

Comments

[chartguy:]

Why is it so difficult to understand that price pressures for SNDK translate to better margins for company's purchasing flash memory? In fact, prices have fallen so precipitously that companies like AAPL can increase unit purchases by 50% and still expect to pay less than in 2007. I don't expect SNDK to realize any significant appreciation until consumption of flash memory increases through broader adoption in phones and computers. Said differently, I am very reluctant to use SNDK as a proxy to determine AAPLs prospects for 2008 as it appears that AAPL is on track to exceed expectations with its flash based products (iPhone, iTouch, MBA). Too bad for SNDK that AAPL alone can't rescue it.

2008 May 19 07:31 PM

[Rafael Grillo:]

Harari's comments come to no surprise. There is nothing new. Oil prices are making a dent in consumers' budgets, and not only through prices at the pump. These high costs are permeating throughout the whole system. So, yes, we shall see a few difficult quarters ahead of us, for Sandisk, Apple and any company that depends on the consumers' truly disposable income. But flash memory is here to stay (and thrive!), and Sandisk is well positioned to take full advantage of the forthcoming growth. I am not that concerned by the lower prices; that is the normal trend with any product that is becoming mainstream, and are accompanied by lower costs. Lower prices get compensated by the increase in memory demand created by more devices and hungrier applications. Who buys a digital camera today that is not at least 8 MP? Just for the kicks of it, check out this artcile www.news.com/2100-1040... written 8 years ago. If we keep our eyes beyond the current economic turmoil, this should be a great opportunity to load on the leader of a technological revolution.

2008 May 19 11:16 PM