I am writing again this week about SanDisk Corporation (Nasdaq:SNDK), because on Thursday it made a little bit of history, when its founder, CEO Dr. Eli Harari, held his final quarterly conference call before his resignation at the end of this December.
Also, I was bombarded with questions from around the world, asking if perhaps I had information from anonymous sources which led me to write last week that in my opinion, SanDisk is on its way to becoming a private company by being bought by private equity firms.
Well, obviously I have no information, nor even a hint, and I wrote that this is my estimation based on an analysis of the company’s situation. The role of private equity funds is to step into action when there is a very big gap between the market value and the actual current value, but primarily the potential future value, of companies, and in recent months this gap has been very large at SanDisk.
In addition, on Thursday, in the post-results conference call, I understood that most analysts don’t have the slightest idea of this gap, which comes from technological developments and marketing breakthroughs, which I will elaborate on a bit further on.
In any case, on Thursday, after 15 years since its IPO, and after 60 quarterly conference calls, founder Harari took his leave of the analysts, and he is apparently very happy to step away from the headache known as a conference call.
Harari has had somewhat euphoric conference calls, such as when Apple (Nasdaq: AAPL) chose flash solutions for its iPods five years ago, which sent SanDisk’s share price shooting up to a record $80. There were also more than a few difficult conversations, when hedge funds shot down the share price on one forecast or another, to the point where he understood that he must not report the day before options expirations because his share had become a favorite for options speculators.
In lieu of tearful words of goodbye, at the end of the conversation, analysts heard from Harari only a loud yell, so American and not Israeli, of “Go SanDisk”, as his associates on the call laughed heartily. Harari also had a round of farewell interviews with Barron’s, The Wall Street Journal, and CNBC veteran reporter Maria Bartiromo, who interviewed him after nearly every publication of results in recent years.
In these interviews, Harari repeated two things over and over: that the world of mobile and online video, which stems, among other things, from social networks, is a tremendous potential for SanDisk for many years; and that Apple, led by Steve Jobs, is leading this world, and as such is leading the way for them. Harari declines to discuss the relationship between the two companies, but the Chipworks site revealed last week that inside Apple’s new iPod nano are SanDisk’s flash chips.
It is clear to me that between these two companies there is a tight development connection, so that it will be possible to place NAND flash into as many Apple products as possible, as an ideal information storage solution.
This is a tremendous marketing breakthrough for SanDisk, which the analysts with the exception of Daniel Amir are missing.
Instead of competing with the iPod with its own player the Sansa, which did not take off SanDisk decided that it is better to link up with Apple with advanced flash solutions, which will match up for Jobs, and lower its profile with regard to the supposed competition which there may have once been between the two companies.
The jewel in the crown of the results reported on Thursday, and of Harari’s last conference call, was gross profit margin of 52%, an all-time record and much better than what the most optimistic analyst and there aren’t many like that forecast.
It would be interesting to know if Harari timed his departure for when he knew that he was going to report a quarter in which profit would beat analysts by a wide margin. In a video call with “Globes” back in the beginning of August, he referred to the timing of the departure, saying, “It was very important that the company be in a successful situation, and that we will have visibility for the fairly long term.” But there were several analysts, with recommendations of “Neutral” and “Sell”, who did not believe him, and along with them were many short-selling funds.
SanDisk reached this record in gross profit primarily because it manufactures more than 50% of its chips with the X3 technology. But paradoxically, precisely because of that technology, the analysts with negative recommendations fell hard, because in the summer the price of X3 chips collapsed and those analysts rushed to bury SanDisk. Auriga analyst Daniel Berenbaum wrote that the company relies heavily on X3 chips, and that because of a more than 30% drop in the price, its profits would shrink significantly. His “Sell” recommendation captured headlines, and many short sellers followed it on the eve of the results.
It turns out that X3 chips which led to the price collapse were those of other makers, because through today, the others do not succeed in reaching performance levels of SanDisk. Harari describes it as a secret recipe, which allows SanDisk to produce excellent X3 chips which others, in the meantime, don't have anything similar to. That is the reason that Samsung, for example, was forced to sell large quantities of X3 chips at floor-level prices to cheap flash card makers in Taiwan, a market from which SanDisk distanced itself in the quarter, which surprised analysts and caused them to make a big mistake in their profit forecast for the quarter.
In Thursday's conversation, SanDisk executives elegantly avoided any answer that would reveal the extent of their success in placing X3 chips in applications with high gross profit, such as phones, tablets, and SSD for laptops, such as those Apple launched last week.
As deep as their success will be the depth of the hole that the analysts with negative recommendations will fall into, since not even one changed his or her stance after the conference call. Their excuse was guidance for a drop in gross profit in the fourth quarter, despite the fact that the range of 43-46% that SanDisk gave was considerably higher than the long term goal which it provided at the last analysts' day in February.
Published by Globes [online], Israel business news - www.globes-online.com - on October 26, 2010
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