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by Michael Tan, Singapore

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Surprising statements from SanDisk CEO

May 23, 2009 13:24

Now and then, I read something so different from my outlook that I'm forced to write something about it. This is one of the times. I didn't want to, because it's boring stuff, but now, amidst a stockmarket collapse and then a recovery rally right now, though with danger not over, I think a little piece of my ignorant mind would help some people save some money.

Take this piece from Reuters: SanDisk CEO upbeat on 2009

The title of the piece is so much opposite to what I've been reading on the Net that I was forced to write down some of my thoughts. Because to me, SanDisk has nothing to be upbeat about for 2009! Here's a chronology of events, from my point of view, which is based purely on what I've chosen to read on the Net.

The buzz on SanDisk started to be a loud din with the ITC ruling that Phison Electronics Corp, a manufacturer of flash controllers, did not infringe on all five patents which SanDisk asserted against dozens of companies, including Phison. Reference here.

This ruling quickly turned everybody's attention to SanDisk's negotiation with Samsung on renewing its patent licensing agreement which is expiring on August 2009. Samsung is the world's largest flash memory producer, and its licensing contributions to SanDisk are extremely hefty, estimated at US$353.8 million, according to a report here.

Now, licensing fees play a BIG part in SanDisk's profitability. I don't know how SanDisk accounts for licensing fees, but most of the time licensing fees are almost accounted for as extremely high percentage profit margins, minus the cost of licensing, enforcement, etc.

Looking at SanDisk's Q1 2009 results summary here, it lost US$208 million, yet received US$71.4 million in licensing revenue during that time. Losses might have approached US$300 million without the licensing component to buffer it up. Even when SanDisk MADE money, in good times like Q1 2008 before the economic collapse and when the world was happy, it made a US$11 million profit with US$125.9 million in licensing. Clearly, on its current business model, it really needs LICENSING FEES in order NOT to make losses. Without licensing fees, it LOSES money in the current flash memory business climate.

Now that its patents are much weaker bargaining chips due to the ITC ruling in favor of Phison, SanDisk's current licensing negotiation with Samsung is definitely not going to be easy, and definitely there is going to be AT LEAST a significant reduction in licensing fees.

If Samsung takes the risk of totally forsaking the need of a licensing agreement for all five patents asserted against Phison, and instead dares to go on WITHOUT a licensing agreement, or for greater confirmed protection licenses from Phison instead, then SanDisk loses a substantial part of the licensing revenues it gets from Samsung.

The SanDisk CEO also mentioned ominously that if no agreement with Samsung is reached, it goes to Plan B. It is a matter of speculation, but a possible move that Plan B is the "scorched earth" plan. This is when SanDisk may dump all the flash it can dump at a low price, depressing worldwide flash prices.

In addition, SanDisk has been selling, and selling almost all its flash manufacturing capacity to Toshiba, with an option to buy back, of course. But without CASH, it's difficult to buy back. If flash memory prices rebound, without the fabs, it is more difficult for SanDisk to gain maximum profit.

So if SanDisk has reduced the intellectual property value and has no immediate wafer fab, does 2009 still look so upbeat to you? So I'm probably missing something. SanDisk has more than 8,000 patents. It's a mountain of paper. Will some of the patents within these 8,000 patents hold enough water to replace the power of the five patents which were weakened? Does SanDisk have sufficient pricing guarantees and contracts with Toshiba to get cheap flash even if the flash prices go up? Will SSD adoption increase so much (it's not good currently) that flash prices will go up and SanDisk can exercise those patents involving SSD to make more money?

I don't know. Well, it better have something up its sleeve, which I haven't written about here.

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About Michael Tan

Michael Tan is lucky enough not to have to choose between his job and his passion. He is the responsible for all aspects of developing new businesses and sourcing new productlines for a regional IT distribution company. He also oversees the company's legal affairs as General Counsel. In real life, he is a technology enthusiast, from both the fun and business viewpoint. The only choices he has to make are whether to play with his astro telescopes, his PC games, his Wii console, hit the track, tweak his car, or refine his biofilters, post his blogs, research for a new digicam, scour every forum to feed his habit further, play with his son… You can reach Michael at michaeltanyk@gmail.com ALL BLOGPOSTS ONLY REFLECT MICHAEL'S OPINIONS AND NOBODY ELSES'.