M-Systems' CEO talks about profits, market share, and tough negotiations with Samsung.
“I haven’t had a pay raise in seven years. I’ve been driving the same car for seven years, and all company employees make their business trips in economy class,” M-Systems Flash Disk Pioneers (Nasdaq: FLSH) president and CEO Dov Moran said yesterday, talking on the “Globes” chatline. “I’m not complaining, but we’re certainly not an extravagant company.”
Asked why M-Systems finds it difficult to produce a substantial net profit in the long term, Moran answered that the company is making strenuous efforts to develop new products, but had nevertheless posted a profit for 2003, and planned to earned a $16 million profit in 2004. “At the end of 2003, we had a 25% share in the global DiskOnKey (DOK) market. It’s true that 100% would have been nicer, but I don’t know of any company that has accomplished that,” Moran said. “I’m aware of the comments about the decline in our gross profit margins. I could easily sell less and report a 30% gross profit, instead of the 25% we actually had, and then everyone would have been more satisfied. I have to think about the company’s future, however, and make sure to conquer new market share. That affects our profit.
”Furthermore, we were under pressure in the third and fourth quarters of 2003 because of the difficult negotiations with Samsung (KSE: 830). We didn’t accept what they offered us. In order to demonstrate their power to us, they raised the prices of the products we buy from them, which increased the cost of our raw materials. We don’t want to raise our prices to the consumer, so we absorbed it through a fall in profitability.
”In any case, I predict that both our gross profit margin and our sales will improve in the first quarter of 2004.”
Q: After your last financing round, you have something like $200 million in the bank. What do you plan to do with it?
Moran: ”Grow. We’ll go on selling full tilt. I’ve got my challenges and goals. Growing and becoming a major company takes money, both for working capital and for investment in equipment. Specifically, we need the money to guarantee supply at a cheap price.
”Now, when I go to buy components, I get them at a better price than the Taiwanese do, but for that, I have to invest in Toshiba’s (TSE: 6502; LSE: TOS; XETRA, AEX, Paris: TSBA) fab. One way is to become a partner in the fab, and I’m not going to do that. That’s a billion-dollar game with a lot of risks.
”Another way is to give $100 million for the fab, so that it has more to invest. It sells to you at cost price, and you’re not a shareholder; you’re a playmaker. We call it being a partner instead of an owner. It involves a five-year agreement at $20 million a year. That’s not much; it’s even too little.
”In any case, we’ve got agreements with Toshiba and Samsung. Samsung doesn’t need money; they make enough money by themselves. Toshiba needs partners and customers in the market. That’s good for us, because we need things like that. We’re considering partnerships in five well-known fab owners, including Hynix Semiconductors, Micron Technology, and Renesas Technology. These are the companies that have announced that they’re going to make the components we need, and which also need a partner to give then the right technologies and a $100 million boost. We’ll get a lot more out of it.”
Q: It has been reported that you are preparing to found a large European subsidiary.
”That’s something that your reporters heard, and it’s unsubstantiated. It’s just a rumor smoke without fire.”
Q: M-Systems sometimes gives people the impression that every time it starts to make a profit, it invests in development of new products, and doesn’t achieve significant, consistent profitability.
”In 1999, we were close to a breakthrough, but we didn’t make it. We fell with the rest of the market, and we’ve been recovering since 2001. You can make a handsome profit, and then become nothing, or you can try to both earn a profit and invest. We’ve been around for 15 years.
”In the first ten years, we didn’t realize that it takes money to build a company. We raised $300,000 in our 1993 IPO; what a joke! It was peanuts. We thought it was a lot of money, but you can’t set up a company with it. It took us time to realize what had to be done. The equivalent company to us, SanDisk (Nasdaq: SNDK), was founded in 1998 with a $25 million investment.
”Anyone who looks only at profit, and not at the volume of business, is a fool, because you don’t buy a share because the company makes a profit; you buy it because of the company’s value.”
Q: Meanwhile, the capital market is staying aloof, and the share is far from its peak.
”What hurt us was the article that asked, ‘What kind of company is this, and would you invest in a company like this?’ That damaged us, and the share fell. I personally own a lot of shares in the company, and I sell shares every quarter at a fixed time, without exercising any control over it.”
Q: Does the security situation in Israel affect you?
”The security situation doesn’t affect products; it affect sales. We’re an openly Israeli company. We don’t hide behind other names or places. People regard Israel as an unsafe place, and also as an immoral place. That makes it harder to persuade companies like Microsoft and IBM (NYSE: IBM), and makes life in general harder, but it’s not extreme, nor does it made M-Systems a good or a bad company.”
Q: What about the memory card you’re developing?
”We’re going to develop a memory card. Sony (NYSE: SNE) has its Memory Stick, and there are others. Up until now, we haven’t had one. We want to enter this field. It will become part of wireless telephones. Because we’re familiar with the customers’ needs, we think we’ll have something very interesting to bring to market in the second half of 2004, with a very strong partner. We won’t see profit or revenue from it this year, but it has the potential to be worth millions of dollars in a few years.”
Published by Globes [online] - www.globes.co.il - on March 4, 2004
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