SanDisk’s founder, President and CEO Dr. Eli Harari, is gung-ho about what lies ahead for the flash memory market. He’s walking around the Consumer Electronic Show at Las Vegas oozing pride. He is quick in showing SanDisk’s mini SD card preloaded with the Rolling Stones album: ‘A Bigger Bang.’ “You can play it on 120 different cell phones in the world” he exclaims.

The Sunnyvale, California based maker of flash storage cards and products recently introduced a new 6-gigabyte MP3 player: Sansa e270 to take on Apple’s 4-gigabyte Nano. SanDisk entered the MP3 Player space a little over a year. Today it has about 29 percent of the MP3 flash category market, while Apple has about 49 percent, according to NPD Group, an industry research firm. Sanjay Mehrotra, co-founder, COO and EVP of SanDisk firmly believes that the new models will help the company increase its market share.

Along with MP3 audio player, at the CES, SanDisk also announced a slate of new gadgets including new USB drives. Following this, SanDisk’s (NASDAQ: SNDK) shares, which have traded between $20.25 and $69.39 over the last year, hit a new 52-week high of $74.40. Many analysts either maintained SanDisk’s stock as “Overweight” or an “Outperfomer.” SanDisk was the No.1 performing stock in 2005, with a return of over 150 percent.

SanDisk is the worldwide leader in removable memory cards making it one of the biggest beneficiaries of the soaring demand for cell phones, digital music players, digital cameras, and game consoles. Revenues have surged an average of 70 percent over the past three years and are on track to rise 19 percent this year, to $2.1 billion.
“2006 is going to be challenging and will be better for us,” Harari says, “The markets are growing.” He wants a large pie of the growing market. And he has worked out his strategies to play the cards right.

Storage demand shows no sign of slowing. The digital still camera, USB, mobile handsets, MP3Players, gaming consoles—all have an absolutely voracious appetite for flash memory. “These markets are all real, multi-billion dollar in nature and none of them are really mature. My opinion is the best is yet to come for the flash industry as a whole. We are No.1 in the U.S. with 45 percent market share in the flash memory segment. We will continue to be at the top,” affirms Mehrotra.

Sandisk is also keenly watching to tap into the billion new customers in India, China, and Eastern Europe. The growing middle-class who have the appetitive for buying memory cards, look for affordable products. It is here that Sandisk’s India Design Center in Bangalore comes to its advantage. “We are tapping on the large pool of engineering talent who are known for their technical competence. The cost advantage and quality work also are factors we considered while setting up design shop in India,” Thakur notes.
SanDisk operates in a market where prices are not just competitive—they’re continually cascading. So if any of SanDisk’s rivals get aggressive, they can torpedo prices and hurt the company’s revenues. SanDisk has proven in the past that it can keep margins high despite the rapidly falling prices.

The firm’s ability to remain profitable while the competition just struggles to stay alive is due to its partnerships and technological advantage. SanDisk has also poured money into research and development. More than 500 engineers of the 1100-man SanDisk army, each day figure out clever ways to cut costs and introduce innovative products.

As the inventor of flash memory, not only does SanDisk lead in sales and margins but also the intellectual property licensing guarantees that it gains from the very competition that is snapping at its heels. SanDisk, which has 315 U.S., patents and 160 foreign patents, today boasts of fat IP revenue. Last year, the company registered a 96 percent year-over-year increase in high-margin royalty revenue.

A key strategy that has played well for SanDisk is its partnerships with leading companies—right from design of memory cards to its distribution. One area where SanDisk does not have partnership is the design of the controller chip. SanDisk believes that owning the entire R&D of controller logic gives it an edge in the marketplace.

Shifting Paradigm
Three bright engineers—Eli Harari, Sanjay Mehrotra and Jack Yuan—founded SanDisk in 1988. What’s unique is that even after 17 years the founding team is still intact.
Earlier SanDisk focused on the OEM market. About seven years ago, SanDisk made a strategic decision to enter the retail space and sell its products directly to end customers. As it turned out, the exercise was fruitful. “Today our products are sold at more than 140,000 stores worldwide. Our retail revenues represent 80 percent of the total revenues, OEM representing the balance,” says Mehrotra.

The prospects for SanDisk are huge. If royalty revenue continues to accelerate, sales volume increases, and the market grows then the company has all the markings to continue to be at the top.