SFD5 Prep Work: Sandisk

Sandisk are the other public company presenting at Storage Field. Their financial statements tell a very different story from those of EMC that we discussed previously.

Check this out:

Sandisk Headline FinancialsThat’s a pretty bumpy ride through the GFC. Here’s what it did for investors, in terms of Return on Equity:

Sandisk ROA and ROEOuch.

2008 was a horror year. What happened? Well, a couple of things.

Flash Crash

Firstly, the price of flash fell through the floor.Flash Prices 2007-2010Kaboom!


The GFC really hit the US in 2008, triggering the Great Recession. Sandisk flash mostly goes into consumer devices, which at the time were USB sticks, SD cards, MP3 players and that sort of thing. These are discretionary items, so to move product when no one is buying, you cut prices. When you combine this with the plethora of people who piled into the flash market prior to 2008, you get a rapid drop in price. Good for customers, not so good for producers like Sandisk.

Making flash devices means having large and expensive fabrication plants, and for Sandisk, most of their sales are at Christmas, meaning they’ve been building the products months beforehand to get them through the supply chain and into stores in time. When you have a retail price drop of this magnitude, that kills your margins, and that’s exactly what happened.sandisk-cost-perc-revenue

Variable costs at 98% of Revenue is technically known as “Very Bad”. The Total Costs figure here is a little misleading because of an extraordinary event, which is the second part of why 2008 was a bad year for Sandisk.

In 2006, Sandisk bought a little Israeli company called M-Systems, for $1.55bn in stock. They invented the flash drive, and the USB flash stick, which are now handed out like candy at trade shows. (8GB! On a thumb drive! Crazy!) Of that $1.55bn, about $760m was Goodwill. Sandisk also bought Matrix Technology, with Goodwill of $146m, so a total of about $905m.

What is Goodwill?

Goodwill is a type of intangible asset. When you buy a company you pay for all the stuff that physically exists that the company owns (called tangible assets, stuff like buildings, product inventory, machinery) and non-physical things the company has exclusive rights to use (intangible assets, like patents, trademarkts, etc.), but you also often pay somewhat more than that. The amount you pay over and above what the tangible and intangible assets are valued at is put in a bucket called Goodwill by the accountants.

The only what you can get Goodwill onto your books as a company is if you buy another company for more than the ‘book’ value of its tangible and intangible assets, excluding any Goodwill they might already have (from eating other, smaller companies).

Goodwill is like the ‘vibe’ for how cool a company is. You can’t build it yourself, just like you can’t tell other people you’re cool. Only someone else can tell you how cool you are.

Not Cool Any More

What happens when something isn’t cool any more? Well, sometimes it looks like Sandisk in 2008. There’s a thing called an impairment test (I won’t bore you with the details) that companies have to do to figure out if stuff they bought isn’t cool any more. The ‘cool’ value of M-Systems was zero by the end of 2008, so it got ‘written off’. The way that happens is that it’s classified as an expense, so it affects how much profit a company makes. In 2008, Sandisk wrote off a little over a billion dollars in cool.


However, there’s a thing you learn in MBA school that company executives would clearly never do deliberately called ‘taking a bath’. If your financial results are going to be bad anyway, you make them super-bad by deciding to do a bunch of stuff that temporarily hits your expenses, like writing off Goodwill, or restructuring. Then, the following year, profits rebound and everyone celebrates with tea and bonuses!

Not that I’m accusing Sandisk of that. Of course not. Some executives might do that. Not Sandisk.

Anyhoo, it looks like Sandisk paid too much for M-Systems, or took a big bet that didn’t pay off because the world imploded around them (remember, the GFC took most people by surprise, even Standard&Poors, but people still listen to them because reasons), but the company did recover from something that could very well have killed the company, and that is to be admired.

In an interview in 2010, retired Sandisk founder Eli Harari said that is was the people Sandisk acquired from M-Systems that made the difference when Sandisk changed strategy in 2008 to respond to the crisis. They switched from mostly retail (65% of revenues) to mostly OEM.

My read of things is a little different. M-Systems was structured completely differently from Sandisk (separate business units for each activity, compared to a more centralised, shared-services model for Sandisk) and converting one to another is always a painful, complex process and it rarely succeeds. The 2008 crisis may well have been a blessing in disguise, forcing Sandisk to write-off sooner what would have failed eventually anyway, but only after costing significantly more and distracting the company for far longer, possibly fatally.

Sandisk Now

Sandisk now have their overhead costs under better control:

Sandisk Common Size Income Cost Detail


as well as their overall costs:

Sandisk Common Size IncomeSandisk are still rather erratic, so it’ll be interesting to see what Sandisk have planned for the future. They need to be doing a lot better than 15% ROE in 2012 (compared to EMC’s 13.3%) to compensate investors for the additional risk, particularly when in 2012 EMC had ROE of 12.3% compared to Sandisk’s 8%.

The flash market is booming, as well as the broader storage market, as we know from the plethora of storage startups invading the marketplace. People keep buying smartphones, and tablets, and a variety of devices that all have flash in them, so Sandisk should be trying to grab a big chunk of this very active market. I want to hear about how they’ll do that.

I’m intrigued what they’re going to talk to the SFD5 audience about. I don’t associate Sandisk with corporate storage, and given we’ll be hearing from a bunch of other startup type companies (for the most part), it could make for a welcome change of pace.

Disclosure: I have purchased Sandisk flash as a retail customer, in various form factors including CompactFlash and SD cards, but not exclusively from Sandisk. I may well have more, because who knows what’s inside all these thumbdrives people keep giving me?

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