"Industry wide NAND component pricing has deteriorated by approximately 50% in the past two months due to excess supply of NAND components coupled with first quarter seasonally weak demand. This is impacting pricing for our retail and OEM products at a steeper rate than we had been anticipating and in order to maintain market share we now expect to lower Q1 prices for many of our products to 30%-40% below fourth quarter levels," said Eli Harari, Chairman and CEO of SanDisk. "Although we believe there will be strong pickup in demand for our products in the second half of the year, we do not have visibility as to when the current aggressive pricing cycle will run its full course, and gross margins are likely to remain under significant pressure for several quarters."
"To strengthen SanDisk's profitability during this time of aggressive industry pricing, we are proactively taking a number of measures to reduce our product costs and operating expenses. At the same time we have identified a number of opportunities to focus and streamline the combined organizations of SanDisk and the former msystems(TM), Ltd. which was acquired on November 19th, 2006. We will continue to invest aggressively in strategic R&D programs and new market opportunities," said Harari.
The expense reduction actions include several employee-related measures:
-- A worldwide reduction in our employee workforce of up to 10% of headcount, or approximately 250 employees. These cuts will primarily occur in early March and impact all areas and will reflect, in part, the decision we recently made to de-emphasize the USB private label business in favor of the more profitable SanDisk branded business.
-- A reduction in salaries for all executives. This will include a 20% cut in base pay for the CEO, 15% for the President and EVPs, and 10% for other VPs.
-- A freeze in salaries for all other employees.
-- A freeze in new hire staffing levels for most areas, although the company will continue to hire in strategic areas including product innovation and future generation technologies, such as x4 and 3D.
Total annualized cash cost savings related to the reduction-in-force and salary related measures, excluding severance costs, are expected to be approximately $30 to $35 million including cash savings from the reduction-in-force of approximately $20 to $25 million. In addition the reduction-in-force will result in a decrease in stock compensation expense of approximately $10 million on an annualized basis. The company expects to incur a restructuring charge in connection with the reduction-in-force in the range of $15 million to $20 million, with the majority of the expense occurring in the first quarter of 2007. Approximately 50% of this restructuring charge is stock compensation expense related to the terms of the msystems acquisition.
"We believe that lower price points in the NAND industry will accelerate demand, particularly in the handset market, and will stimulate the emergence of new markets, fueling continued growth," said Eli Harari, Chairman and CEO of SanDisk. "We are determined to continue to lead the industry in innovation, technology and product cost reductions, and to continue investing in the leading edge capacity that we believe is essential to meet demand from our global customers in 2008-2010. Given the strength of our market position and our balance sheet, we believe that our actions will allow us to weather the current challenges and emerge an even stronger market leader when the next wave of growth in flash products emerges," Harari said.
SanDisk will hold its annual Analyst Day on February 26, 2007.
This news release contains certain forward-looking statements, including statements about our business prospects and outlook for the first quarter and fiscal year 2007 and beyond, including anticipated increased demand for our products, expected pricing levels for our products, increased demand in the handset market, demand for certain new products for new markets, market share and position, profitability of our branded business, seasonally lower retail and OEM sales, a decline in margins due to prevailing challenging market pricing for flash memory, market supply and demand, cost reductions, expected personnel reductions and timing thereof, expected cash savings and reductions in stock compensation expense, expected restructuring charges, expected technology innovation and leadership, continued investments in new market opportunities and hiring in strategic areas that are based on our current expectations and involve numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate and may significantly and adversely affect our business, financial condition and results of operations. Risks that may cause these forward-looking statements to be inaccurate include among others: slower than expected growth in market demand for our products or a slower adoption rate for these products in current and new markets that we are targeting, higher than expected restructuring charges or lower than expected cash savings or stock compensation expense savings related to our reduction-in-force and salary cuts, our cost cutting measures may not be sufficient to improve our financial performance, may take longer than expected to produce results and the charges related thereto may be taken over several quarters, future average selling price erosion may be more severe than our expectations due to decreased demand or excess industry capacity of flash memory from ourselves as well as from existing suppliers or from new competitors, that our cost cutting measures may harm our business, employee morale and retention and prospects, any interruption of or delay in supply from any of the semiconductor manufacturing or subcontracting facilities, including test and assembly facilities that supply products to us, slower than expected expansion of our global sales channels, fluctuations in operating results, unexpected yield variances related to our conversion to 56-nanometer NAND flash technology or the ramp-up of the 300mm flash fabrication facility, our inability to make additional planned smaller geometry conversions in a timely manner, less than expected growth in the average megabyte capacity per card, price increases from non-captive flash memory sources and third-party subcontractors, higher than expected operating expenses, higher than anticipated capital equipment expenditures, adverse global economic and geo-political conditions, including adverse currency exchange rates and acts of terror and war, the timely development, internal qualification and customer acceptance of new products that are based on 56-nanometer NAND technology, fluctuations in license and royalty revenues, business interruption due to earthquakes, hurricanes, pandemics, power outages or other natural disasters, particularly in areas in the Pacific Rim and Japan where we manufacture and assemble products, potential impact of high energy prices and other global events outside of our control which could adversely impact consumer confidence and hence reduce demand for our products, risks related to our acquisition of msystems, including that we may not realize the expected benefits of the acquisition due to integration challenges, the loss of customers, suppliers, distributors or other third parties or other issues, that we may incur substantial costs or other damages associated with pending or future litigation related to the merger or costs or damages related to msystems' prior stock option grant practices and that we may incur charges or other accounting changes as a result of the merger, and the other risks detailed from time-to-time under the caption "Risk Factors" and elsewhere in our Securities and Exchange Commission filings and reports, including, but not limited to, our Form 10-K for the fiscal year ended January 1, 2006 and our quarterly reports on Form 10-Q. Future results may differ materially from those previously reported. We do not intend to update the information contained in this release.
SanDisk is the original inventor of flash storage cards and is the world's largest supplier of flash data storage card products using its patented, high-density flash memory and controller technology. SanDisk is headquartered in Milpitas, CA and has operations worldwide with more than half its sales outside the U.S. www.sandisk.com
SanDisk, and the SanDisk logo are trademarks of SanDisk Corporation, registered in the United States and other countries. msystems is a trademark of msystems Ltd.
Lori Barker Padon, 408-801-1384 (Investors)
Jay Iyer, 408-801-2067 (Investors)
Bob Goligoski, 408-801-1036 (Media)