Sanford Bernstein 29 Annual Strategic Decisions Conference Sanjay Mehrotras21.q4cdn.com/620650385/files/doc_presentations/2013/BR-conf... · Sanford Bernstein 29th Annual Strategic

Sanford Bernstein 29th Annual Strategic Decisions ConferenceSanjay MehrotraPresident and Chief Executive OfficerMay 29, 2013

May 29, 2013 2

Agenda

Market, SanDisk Overview

Technology Leadership

Industry Environment

SanDisk Capacity Planning

Sanford Bernstein 29th Annual Strategic Decisions Conference, New York

May 29, 2013 3

Forward-Looking StatementDuring our meeting today we will be making forward-looking statements.

Any statement that refers to expectations, projections or other characterizations of future events or circumstances is a forward-looking statement, including those relating to revenue, unit sales, pricing, market positions, market growth, product sales, industry trends, expenses, gross margin or other financial measures, capital investments, cash flow, use of cash, strategic transactions, competition and competitive advantages, future memory and other technologies, production capacity, technology transitions and future products.

Actual results may differ materially from those expressed in these forward-looking statements including due to the factors detailed under the caption “Risk Factors” and elsewhere in the documents we file from time-to-time with the SEC, including our annual and quarterly reports.

Reconciliations between Non-GAAP and GAAP results presented are included in the appendix of the financial presentation.

We undertake no obligation to update these forward-looking statements, which speak only as of May 29, 2013.


May 29, 2013 4

Flash Is at the Core of All Our Digital Experiences


NAND Flash’s Legacy of Disruption…

…Continues in Enterprise Storage


May 29, 2013 6

Embedded and SSD Growth Drives Flash Opportunity

Source: SanDisk estimates

11.4 14.7

4.6

7.82.8

7.47.1

7.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

2012 2016E

Embedded Client SSD Enterprise SSD Removable & Other

Rev TAM in $B

SanDisk Focus1. Strengthen portfolio of

Value-add solutions in these markets

2. Revenue share to outperform bit share

3. Drive for best combination of revenue, profits and cash flow


May 29, 2013 7

Global Leader in Flash Memory Storage Solutions

Global Retail Share Leader1 Out of 2 Cards Sold in the U.S.

The Leading Retail Brand In Key Markets

Technology LeadershipGlobal Operations

4,700+ Employees

RankingsFabs World Class

NAND Capacity19nm Leading Memory

Process Node4,500+ Patents

4 of the Top 7 Storage OEMs are

SanDisk Customers

Enterprise, Client and Retail SSDs

SanDisk Client SSD Design Wins at

11 Leading PC OEMsClose to Half of Industry Bit OutputTogether with Manufacturing Partner Toshiba°

All Leading Handset & Tablet Manufacturers Use SanDisk

Trailing 4 Qtr. Financials

$5.2B Revenue$4.3B Net Cash*$590M R&D*

Investment

* Net Cash = [Cash + cash equivalents + short-term & long-term marketable securities] less [debt at maturity value] as of the end of Q1-2013. R&D is non-GAAP, see appendix for non-GAAP to GAAP definitions and reconciliations. Financials, headcount and patent count as of the end of Q1, ’13. ° Gartner Forecast: NAND Flash Supply and Demand, Worldwide, 1Q’ 11-4Q ‘13, 3Q ‘12 Update, Dec ‘12. NPD Estimate, Jan ‘13. Estimates of the memory card & USB markets from NPD (Jan ‘13) and GfK Retail and Technology, Oct ‘12.


May 29, 2013 8

Leading Provider of Storage Solutions through the Retail and Commercial Channels

Retail (38% of Q113 Revenue) Commercial (62% of Q113 Revenue)OEM, Enterprise and IP Revenue

30% of Retail Industry Revenue* 14% of Commercial Industry Revenue**

* Retail industry revenue comprised of cards, USB Flash Drives, SSDs sold through retail channels** Commercial industry revenue comprised of cards, USB Flash Drives, embedded products, SSDs, wafers and components sold through OEM and Enterprise channels


May 29, 2013 9

• Most Efficient and Scalable 3D NAND Architecture• Positioning for Industry Leadership• System Solutions Being Defined

SanDisk Technology Leadership Strategy

19-NM 1Y-NM

1Y-NM 1Z-NM

1Z-NM ??

2D NAND

• 32 Gb Test Chip Successfully Made on 24nm node• Potential to Scale Below 10nm • Ultimate Scalable 3D technology

3D BiCSBit Cost Scalable NAND

3D ReRAM3D Resistive RAM


May 29, 2013 10

SanDisk Die Size Leadership Drives Cost Advantage in 2D NAND

mm2/GBDie Area/GB

Current Highest Volume Technologies

Company A Company B Company C SanDisk/Toshiba

19nm


May 29, 2013 11

1Z

Leadership Expected to Continue into 3D NAND

Competitor 3D NAND Technology SanDisk/Toshiba BiCS SanDisk/Toshiba 1Z

Gen 1

Gen 2

Gen 3Gen 1 - Pilot

Gen 2Gen 3

Breadth of Customer Applications (Cards, USB, Embedded, SSD…)

mm2/GB

* Estimates based on analysis of published 3D NAND architectures

Estimated die area*


May 29, 2013 12

Email, Music, & Video

MultitaskingApps

Computing

Deep Systems Expertise Keeps Us Ahead of Market Needs

Bridging Diverging Gap Through:

BCH/LDPCError Correction

BCH/LDPCError Correction

Read Retry/Adaptive Programming

Read Retry/Adaptive Programming

Advanced Defective Block ManagementAdvanced Defective Block Management

SoftwareSoftware


Adaptive Flash Management™

Technology

May 29, 2013 13

$348 $396 $513 $562

$189 $199$189

$209$144 $132

$144$135

2009 2010 2011 2012

$ in Millions

R&D S&M G&A

Investments in R&D and S&M 3-Pronged Memory Technology Strategy SSD Solutions Development & Go-To-Market

R&D, S&M, G&A and total operating expenses are non-GAAP – see appendix for non-GAAP to GAAP definitions and reconciliations.

% of Revenue 19% 15% 15% 18%

$681 $727

$846 $906


May 29, 2013 14

34% 30%

14% 18%

36% 43%

16% 9%

2011 2012NAND 3D Technologies System/Product Development Operations + Fab Start-up

-42%

+30%

-4%

+46%

100% 100%Total

Y/YR&D $ Change

+10%R&D Spending Mix

R&D Growth in 3D Technologies & System/Products

R&D Expense is non-GAAP – see appendix for non-GAAP to GAAP definitions and reconciliations.


May 29, 2013 15

Newer 2D NAND Technology Nodes Providing Lower Bit Growth

Scaling Challenges– Less bit growth from technology transition

Longer Technology Node Life Cycles– Driven by OEM / Enterprise requirements

Shallower Annual Cost Reduction Rate

Reduced Annual Bit Growth Rate


May 29, 2013 16

Increasing Manufacturing Process Complexity Leading to Lower New Capacity Additions

Capex spending levels and ROI considerations leading to lower rate of new capacity additions

2D NAND Pushing Scaling Limits– New process modules required– New materials, more tools, more steps

Industry Approaching Transition from 2D to 3D

Increasing Capex for Technology Transitions

Uncertainty about ROI on New Capacity


May 29, 2013 17

1

10

100

1,000

10,000

100,000

2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F

Industry PB - Log Scale

Industry Supply Bit Growth Moderating

2013: 30-40%

2014: 30-40%

’05-’09 Bit Growth CAGR 132%

’09-’12 Bit Growth CAGR 72%

2013E 2014E

Source: SanDisk estimates


May 29, 2013 18

SanDisk Memory Capacity Planning Current SanDisk capacity 2.5M wafers/year in Fab 3, Fab 4, Fab 5 combined

No new wafer capacity planned for 2013- Focus on productivity improvements- Last new wafer capacity added was in January 2012

Fab 5 Phase 1 space expected to be fully utilized 1H-2014- Primary utilization as tool space for 1Y technology transition

Fab 5 Phase 2 space construction expected to be completed in 2014

- Primary utilization as tool space for 1Z technology transition and BiCS pilot line


May 29, 2013 19

348%

175% 187%

38% 72% 77% 86%20% 25%-35%

2006 2007 2008 2009 2010 2011 2012 2013E 2014E

SanDisk Captive Supply Bit Growth2013 Estimate: – Tech Transitions – complete 19nm; begin 1Ynm in 2H-2013– Wafer Capacity – productivity improvements only

2014 Estimate:– Tech Transitions – 1Ynm across the year– Wafer Capacity – productivity improvements, limited potential Fab 5 Phase 2 capacity addition

Y/Y Captive Supply Bit Growth


May 29, 2013 20

NAND Industry in an Extended Stable Environment

Lower Bit Growth from ScalingIncreasing Capex for Tech TransitionsROI ConsiderationsFewer Capacity Additions

Moderate Supply Growth

Favorable Pricing EnvironmentExtended Stability

Pervasive in Consumer ElectronicsRobust Mobile DemandGrowing Penetration in Personal ComputingFlash Disrupting the Enterprise

Strong Demand


May 29, 2013 21

Position of Strength

2009-2012 $19.1B $4.6B $3.5B $2.9B

Cumulative Revenue

Cumulative Operating Income

Cumulative Operating Cash

Flow

Cumulative Free Cash Flow

Net Cash Position: $4.3B(As of March 31, 2013)

Operating income is non-GAAP – See appendix for non-GAAP to GAAP definitions and reconciliations.Net Cash = [Cash + Cash Equivalents + Short-term & Long-term Marketable Securities] LESS [Debt Value at Maturity].


May 29, 2013 22

Cash Priorities to Maximize Shareholder Value M&A

Flexibility to act fast Cash is optimal currency Targets:

Expanded solutions IP Talent

Return of Cash to Stockholders Target method = share repurchase More than $300M spent 2013 YTD

Future Capital Requirements Potential usage for 3D technologies


May 29, 2013 23

Well-Positioned for Long Term Success

Brand, Industry Recognition Deep engagement with customers, partners1

Diverse Portfolio #1 Retail brand worldwide; Mobile, SSD, Software solutions2

Financial Strength $4B+ of net cash – flexibility to invest; return of cash to shareholders3

Vertical Integration, Scale State-of-the-art fab and manufacturing operations with large scale4

Focus5Focused on Flash Memory – Global leader in Flash Memory storage solutions


May 29, 2013 24

Thank You!


May 29, 2013 25

AppendicesBasis of Presentation for Non-GAAP to GAAP Reconciliations

Non-GAAP to GAAP Reconciliations for Historical ResultsCopyright & Trademarks


May 29, 2013 26

To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles(GAAP), we use non-GAAP measures of operating results, net income and net income per share, which are adjusted from results basedon GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user'soverall understanding of our current financial performance and our prospects for the future. Specifically, we believe the non-GAAPresults provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains andlosses that we believe are not indicative of our core operating results and because it is consistent with the financial models andestimates published by many analysts who follow the Company. For example, because the non-GAAP results exclude the expenses werecorded for share-based compensation, amortization and write-off of acquisition-related intangible assets related to acquisitions ofMatrix Semiconductor, Inc. in January 2006, msystems Ltd. in November 2006, Pliant Technology, Inc. in May 2011, FlashSoftCorporation in February 2012 and Schooner Information Technology, Inc. in June 2012, non-cash economic interest expenseassociated with the convertible debt, non-cash change in fair value of the liability component of the repurchased portion of theconvertible debt and related tax adjustments, we believe the inclusion of non-GAAP financial measures provides consistency in ourfinancial reporting. These non-GAAP results are some of the primary indicators management uses for assessing our performance,allocating resources and planning and forecasting future periods. Further, management uses non-GAAP information that excludescertain non-cash charges, such as amortization and write-off of acquisition-related intangible assets, share-based compensation, non-cash economic interest expense associated with the convertible debt, non-cash change in fair value of the liability component of therepurchased portion of the convertible debt and related tax adjustments, as these non-GAAP charges do not reflect the cash operatingresults of the business or the ongoing results. These measures should be considered in addition to results prepared in accordance withGAAP, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP measures may be different thanthe non-GAAP measures used by other companies.

Basis of Presentation for non-GAAP to GAAP Operating Results


May 29, 2013 27

Purchase Convertible

% of Share-based Accounting Debt % of

Non-GAAP Revenue Compensation Adjustments Interest Other GAAP RevenueProduct revenues 3,154,314$ 88.4% -$ -$ -$ -$ 3,154,314$ 88.4%License and royalty revenues 412,492 11.6% - - - - 412,492 11.6%Total revenues 3,566,806 100.0% - - - - 3,566,806 100.0%

Cost of product revenues 2,257,224 71.6% (a) 12,427 (b) - - - 2,269,651 72.0%Amortization of acquisition-related intangible assets - 0.0% (a) - 12,529 (c) - - 12,529 0.4%Total cost of product revenues 2,257,224 71.6% (a) 12,427 12,529 - - 2,282,180 72.4%

Product gross prof it 897,090 28.4% (a) (12,427) (12,529) - - 872,134 27.6%Total gross profit 1,309,582 36.7% (12,427) (12,529) - - 1,284,626 36.0% (a)

(a)Research and development 347,759 9.7% 36,399 (b) - - - 384,158 10.8% (a)Sales and marketing 189,267 5.3% 19,247 (b) - - - 208,514 5.8%General and administrative 143,872 4.1% 27,487 (b) - - - 171,359 4.8% (a)Amortization of acquisition-related intangible assets - 0.0% - 1,167 (c) - - 1,167 0.0%Restructuring and other 38 0.0% - - - - 38 0.0%Total operating expenses 680,936 19.1% 83,133 1,167 - - 765,236 21.4% Operating income 628,646 17.6% (95,560) (13,696) - - 519,390 14.6%

Other income (expense) 38,865 1.1% - - (54,454) (d) - (15,589) -0.5%Income before income taxes 667,511 18.7% (95,560) (13,696) (54,454) - 503,801 14.1%

Provision for income taxes 240,304 6.7% (26,251) (5,150) (20,475) (99,937) (e) 88,491 2.5%

Net income 427,207$ 12.0% (69,309)$ (8,546)$ (33,979)$ 99,937$ 415,310$ 11.6%Net income per share, diluted 1.84$ 1.79$ Diluted shares used in computing net income per share 232,300 231,959Effective tax rate 36.0% 17.6%

(a)(b)

(c)(d)(e) Income taxes associated w ith certain non-GAAP to GAAP adjustments.

Percent of revenue calculations for cost of product revenues and product gross prof it are based on product revenues only (license and royalty revenues are excluded).Share-based compensation expense. The fourth quarter and full f iscal year 2009 include a one-time cumulative adjustment of $16.2 million to increase share-based compensation due to the w ay in w hich the Company's third-party softw are application incorrectly accounted for estimated forfeitures in share-based compensation calculations. This cumulative adjustment relates to the nine months ended September 27, 2009 and the three years ended December 28, 2008, and is not material f i i dAmortization of acquisition-related intangible assets, primarily core and developed technology related to acquisitions of Matrix Semiconductor, Inc. (1/06) and MusicGremlin, Inc. (6/08).Incremental interest expense relating to the non-cash economic interest expense associated w ith the Company's cash-settled convertible debt.

Reconciliation of Non-GAAP to GAAP Condensed Consolidated Statement of OperationsFor the year ended January 3, 2010 (in thousands, except percentages and per share amounts, unaudited)


May 29, 2013 28

Reconciliation of Non-GAAP to GAAP Condensed Consolidated Statement of OperationsTwelve months ended January 2, 2011 (in thousands, except percentages and per share amounts, unaudited)

Purchase Convertible% of Share-based Accounting Debt % of

Non-GAAP RevenueCompensatio

n Adjustments Interest Other GAAP RevenueProduct revenues $4,462,930 92.5% $- $- $- $- $4,462,930 92.5%License and royalty revenues 363,877 7.5% - - - - 363,877 7.5%Total revenues 4,826,807 100.0% - - - - 4,826,807 100.0%

Cost of product revenues 2,546,367 57.1% (a) 5,821 (b) - - - 2,552,188 57.2% (a)Amortization of acquisition-related intangible assets - - (a) - 12,529 (c) - - 12,529 0.3% (a)Total cost of product revenues 2,546,367 57.1% (a) 5,821 12,529 - - 2,564,717 57.5% (a)

Product gross profit 1,916,563 42.9% (a) (5,821) (12,529) - - 1,898,213 42.5% (a)Total gross profit 2,280,440 47.2% (5,821) (12,529) - - 2,262,090 46.9%

Research and development 396,270 8.2% 26,292 (b) - - - 422,562 8.8%Sales and marketing 198,863 4.1% 10,934 (b) - - - 209,797 4.3%General and administrative 131,942 2.7% 34,543 (b) - - - 166,485 3.5%Amortization of acquisition-related intangible assets - - - 1,672 (c) - - 1,672 -Total operating expenses 727,075 15.0% 71,769 1,672 - - 800,516 16.6%

Operating income 1,553,365 32.2% (77,590) (14,201) - - 1,461,574 30.3%

Other income (expense) 64,757 1.3% - - (68,898) (d) - (4,141) (0.1%)Income before income taxes 1,618,122 33.5% (77,590) (14,201) (68,898) - 1,457,433 30.2%

Provision for (benefit from) income taxes 517,799 10.7% (26,720) (5,297) (25,699) (302,792) (e) 157,291 3.3%

Net income $1,100,323 22.8% $(50,870) $(8,904) $(43,199) $302,792 $1,300,142 26.9%

Net income per share, diluted $4.60 $5.44

Diluted shares used in computing net income per share 239,042 238,901

Effective tax rate 32.0% 10.8%

(a) Percent of revenue calculations for cost of product revenues and product gross profit are based on product revenues only (license and royalty revenues are excluded).(b) Share-based compensation expense.(c) Amortization of acquisition-related intangible assets, primarily core and developed technology related to acquisitions of Matrix Semiconductor, Inc. (1/06) and MusicGremlin, Inc. (6/08).(d) Incremental interest expense relating to the non-cash economic interest expense associated with the Company's 1% Sr. Convertible Notes due 2013 and 1.5% Sr. Convertible Notes due 2017.(e) Income taxes associated with certain non-GAAP to GAAP adjustments and valuation allowances on deferred taxes.

May 29, 2013 29

Reconciliation of Non-GAAP to GAAP Condensed Consolidated Statement of OperationsTwelve months ended January 1, 2012 (in thousands, except percentages and per share amounts, unaudited)

May 29, 2013 30

Reconciliation of Non-GAAP to GAAP Condensed Consolidated Statement of OperationsTwelve months ended December 30, 2012 (in thousands, except percentages and per share amounts, unaudited)

Purchase ConvertibleFY 12 Share-based Accounting Debt FY 12

Non-GAAP % of Rev Compensation Adjustment Adjustment Other GAAP % of RevProduct revenues $ 4,678,504 92.6% $ - $ - $ - $ - $ 4,678,504 92.6%License and royalty revenues 374,005 7.4% - - - - 374,005 7.4%

Total revenues 5,052,509 100.0% - - - - 5,052,509 100.0%

Cost of product revenues 3,319,288 70.9%(a) 7,459 (b) 3,326,747 71.1%(a)Amortization of acquisition-related intangible assets - -(a) 42,542 (c) - - 42,542 0.9%(a)

Total cost of product revenues 3,319,288 70.9%(a) 7,459 42,542 - - 3,369,289 72.0%(a)

Product gross profit 1,359,216 29.1%(a) (7,459) (42,542) - - 1,309,215 28.0%(a)Gross profit 1,733,221 34.3% (7,459) (42,542) - - 1,683,220 33.3%

Research and development 561,755 11.1% 41,010 (b) - - - 602,765 11.9%Sales and marketing 209,469 4.1% 14,585 (b) - - - 224,054 4.4%General and administrative 135,012 2.7% 15,389 (b) - - - 150,401 3.0%Amortization and write-off of acquisition-related intangible assets - - - 9,905 (c) - - 9,905 0.2%

Total operating expenses 906,236 17.9% 70,984 9,905 - - 987,125 19.5%

Operating income 826,985 16.4% (78,443) (52,447) - - 696,095 13.8%

Other income (expense), net 20,784 0.4% - - (89,963) (d) - (69,179) (1.4%)Income before income taxes 847,769 16.8% (78,443) (52,447) (89,963) - 626,916 12.4%

Provision for income taxes 265,360 5.3% (17,520) (3,495) (32,389) (2,444) (e) 209,512 4.1%

Net income $ 582,409 11.5% $ (60,923) $ (48,952) $ (57,574) $ 2,444 $ 417,404 8.3%

Net income per share, diluted $ 2.38 $ 1.70

Diluted shares used in computing net income per share 245,199 245,253

Effective tax rate 31.3% 22.3% 6.7% 36.0% 33.4%

(a) Percent of revenue calculations for cost of product revenues and product gross profit are based on product revenues only (license and royalty revenues are excluded).(b) Share-based compensation expense.(c) Amortization and write-off of acquisition-related intangible assets, primarily core technology, developed technology, customer relationships and trademarks related to the acquisitions of

Matrix Semiconductor, Inc. (January 2006), Pliant Technology, Inc. (May 2011), FlashSoft Corporation (February 2012) and Schooner Information Technology, Inc. (June 2012).(d) Incremental interest expense relating to the non-cash economic interest expense associated with the Company's 1% Sr. Convertible Notes due 2013 and 1.5% Sr. Convertible Notes due 2017.(e) Income taxes associated with certain non-GAAP to GAAP adjustments.

May 29, 2013 31

Copyrights & Trademarks

1GB = 1,000,000,000 bytes. Actual user storage less.

SanDisk, CompactFlash, SanDisk Ultra, SanDisk Extreme and SanDisk Extreme Pro are trademarks of SanDisk Corporation, registered in the United States and other countries. iNAND and iNAND Extreme are trademarks of SanDisk Corporation. Lightning is a U.S. registered trademark of SanDisk Enterprise IP LLC. FlashSoft is a trademark of SanDisk Enterprise IP LLC. microSD, microSDHC, microSDXC, SD, SDHC and SDXC marks and logos are trademarks of SD-3C, LLC. Other brand names mentioned herein are for identification purposes only and may be the trademarks of their respective holder(s).

© 2013 SanDisk Corporation. All rights reserved.


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Sanford Bernstein 29 Annual Strategic Decisions Conference Sanjay Mehrotras21.q4cdn.com/620650385/files/doc_presentations/2013/BR-conf... · Sanford Bernstein 29th Annual Strategic