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Analysts cut SanDisk forecast with Samsung's royalty threat

Posted: 28 Feb 2007 ?? ?Print Version ?Bookmark and Share

Keywords:SanDisk? Samsung? SD card? memory card? NAND?

Financial analysts at WR Hambrecht and Co. have lowered their estimates of SanDisk's revenue for 2007 and 2008 due to concerns that Samsung might dictate a change to the royalties it pays on secure digital (SD) flash memory cards.

Samsung is estimated to have contributed around 90 percent of SanDisk's royalty revenues in recent years. WR Hambrecht analysts have lowered SanDisk's expected royalty revenues for 2007 from $373 million to $327 million, and from $500 million to $405 million for 2008; drops of $46 million and $95 million respectively.

In addition, the analysts have downgraded SanDisk's stock from "buy" to "hold" status. "In the past, Samsung has paid an 8 percent royalty fee to SanDisk on NAND MLC. As Samsung began making finished SD cards using NAND MLC it was obligated to pay an additional 6 percent royalty fee to the SD Card Association for the cards, of which 2 percent of that went to SanDisk as a founding member of the association," according to WR Hambrecht.

"The result is that SanDisk has collected a staggering royalty fee from Samsung on its finished SD cards. We have learned that Samsung decided to no longer make those payments and therefore only pay a 2 percent royalty fee to SanDisk on any SD card that Samsung makes and no longer pay the 8 percent MLC NAND royalty," the analysts noted in a statement. The analysts estimated that Samsung's move puts at risk around 15 percent of SanDisk royalty revenues as early as Q2 of 2007 and about 25 percent of the MLC royalty payments that Samsung currently pays SanDisk.

"Outside of going to court and trying to sue, there are not that many options open for SanDisk," the analysts said.

One reason which could encourage such behavior by Samsung could be the rapidly declining prices of NAND flash memory. As Samsung barely profits in this business it may be stimulated to act more aggressively towards SanDisk, in terms of royalty payments and entering the private label card business.

According to the note, "Though SanDisk holds key patents on the NAND side, a possible collision with Samsung could occur, especially considering SanDisk no longer purchases much NAND supply (less than 10 percent) from Samsung." The WR Hambrecht note also refers to other legal disputes concerning SanDisk's market.

In this context, the analysts expect Hynix to hold off concluding a deal with SanDisk until Hynix's lawsuit with Toshiba is resolved. In addition to that, the pending case between SanDisk and STMicroelectronics (ST) is expected to come to a resolution in front of the ITC in July. SanDisk claims that ST had violated its MLC patent. Despite the fact that the first SanDisk MLC patent expires in 2009, WR Hambrecht expects the company to be able to defend its patents and collect from other NAND vendors.

- Amir Ben-Artzi
EE Times Europe

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