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  (Source: AFP/Getty Images)
Struggling Fusion-IO lost its CEO and CFO last year, but has $1M+ contracts with over a dozen enterprise clients

Milpitas, Calif.-based SanDisk Corp. (SNDK) has announced a major acquisition -- a $1.1BUSD purchase of Fusion-IO, Inc. (FIO).  The move strengthens the ongoing war for enterprise business that SanDisk is waging against some of the world's top semiconductor firms.
 
I. SanDisk: A Fabless Flash Pioneer
 
The roots of SanDisk lie in 1988.  That year, Intel Corp. (INTC) released the first commercial NOR storage -- the 64-kilobit (8-kilobyte) 27F64 module and the 256-kilobit (32 KB) 27F256 and 28F256 modules.  The size of the shoebox, these bulky products used a new memory we know today as "flash".  Intel boldly proclaimed that the new memory would one day supplant EPROM (cheap, but only one write) and EEPROM (expensive, but supported multiple writes) in the nonvolatile storage market. 
 
SanDisk was perhaps the first true flash memory startup, or at least the most successful.  Found in 1988 by Eli Harari, Ph.D and Sanjay Mehrotra -- both veterans of Intel -- plus Jack Yuan, a Hughes Electronics veteran, SanDisk was a pioneer in a number of flash segments including pushing the format for digital photography and storage sticks.
 
After being fabless for much of its early existence, SanDisk flirted with fabricating in the late 1990s and early last decade.  In 1997 it invested $40M USD in a United Microelectronics Corp. (TPE:2303) fab in Taiwan.
 
And in 2000 it partnered up with Toshiba Corp. (TYO:6502), a Flash fabricator with which it had a growing relationship.  Toshiba's development of flash memory was more or less as old as Intel's.  While it was narrowly beat to market by Intel, Toshiba correctly prophesied the market would shift towards NAND Flash, which had slower read times than NOR flash, but higher densities and higher write/erase speeds [see: NAND vs. NOR Flash].
 

SanDisk

SanDisk continued to jointly operate fabs with Toshiba until 2009 when it divested itself fully from its remaining fab assets, going fully fabless.
 
II. Number One USB Stick and PC Card Maker Eyes Enterprise
 
That move proved a crucial one as the flash market recently sustained a major downturn after South Korea's Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) leveraged its fabrication expertise to unforgivingly permeate the market with low-cost NAND chips, a move that has sunk many of its rival fabs to losses.  While the market has since rebounded, the Flash fabrication business remains volatile and always trending towards lower prices.
 
Thus the fabless SanDisk is not only contending for the title of the flash market's most powerful player, but it is one of its most stable firms.  With an intellectual property portfolio of 4,900+ patents -- mostly on NAND flash storage technologies -- it owns perhaps the strongest flash-centric portfolio outside of Toshiba and Intel.
 
SanDisk narrowly escaped a $5.85B USD hostile takeover bid from Samsung in 2008.  Having almost doubled in value in the last year, it now has a market cap of roughly $22.9B USD.  SanDisk pocketed over $1B USD in net profit last year, as the market rebounded.
 
According to Gartner, Inc. (IT), SanDisk in Q1 2014 was the top seller of USB flash memory sticks and PC flash memory cards.  It was also a strong contender in the SSD market.
 
The Fusion-IO acquisition plays nicely into SanDisk's ongoing efforts to tap into the lucrative enterprise market, which features higher premiums on hardware than consumer electronics.  Among its recent acquisitions include:
  • 2011
    • Pliant Technology, Inc. -- enterprise SSD maker
  • 2012
    • Schooner Information Technology, Inc. -- enterprised targeted Flash database tech
    • FlashSoft Corp. -- a leader in Flash caching technology
  • 2013
    • SMART Storage Systems -- another enterprise SSD maker
Still, the pickup of Fusion-IO is one of the largest moves by SanDisk to strengthen its position in this market via acquisitions.
 
III. Fusion-IO -- Great Promise, But Can SanDisk Stop the Bleed?
 
Founded in 2005 as Cottonwood Technologies in Nevada, the firm eventually moved to Cottonwood Heights, Utah and in June 2006 was rebranded as Fusion Microsystems.  It raised roughly $111M USD in three rounds of venture capital funding before going public in 2011 with a valuation of nearly $2B USD.
 
Since then shares have been on a general downward slide, which has been exacerbated by a string of high profile defections.  In May 2013 Fusion-IO lost co-founders David Flynn (CEO) and Rick White (CMO).  And in Oct. 2013 Dennis Wolff, Fusion-IO's CFO also called it quits.
 
Still, Fusion-IO's technology --based on its 2007 ioDrive concept -- remains a valuable assets in the enterprise segment, accounting for the company's $432M USD in revenue last year.  Fusion-IO lost money on a GAAP basis last year, but it also ended the year with $238M USD in cash and key relationships with the likes of Hewlett-Packard Comp. (HPQ), International Business Machines Corp. (IBM), Facebook, Inc. (FB), and Apple, Inc. (AAPL).  In its Q2 2014 earnings report, Fusion-IO revealed it had $1M+ USD contracts with a total of twelve Silicon Valley firms.
 
A top goal for SanDisk will be halt the alarming pace of employee poaching which has seen much of the company's brightest talent jump ship to other firms -- including it own partners like Facebook.  SanDisk will also look to patiently grow Fusion-IO's relationships with its numerous enterprise clients.
 
Samsung flirted with acquiring Fusion-IO and was an early investor during its venture capital rounds.  Time will tell whether the bid -- which was a modest 21 percent premium on share prices ($11.25 USD/share versus Friday's closing values of around $9.30 USD/share) -- will pay off for SanDisk.  But SanDisk's savvy and long track record suggest the partnership should bear fruit.

Source: BusinessWire



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$1 billion in profit
By aurareturn on 6/16/2014 2:19:01 PM , Rating: 2
I'm honestly surprised that Sandisk squeezed in $1 billion in profit and stocks are doing great.

I haven't used a flash drive in 2 years because of my phone and cloud drives.

And it seems like there is tremendous competition in the SSD space. So how are they making so much money?




RE: $1 billion in profit
By ritualm on 6/16/2014 2:33:34 PM , Rating: 1
Enterprise business - the only market segment where you can sell a $1 toothbrush for $100 and customers will buy them in bulk.


RE: $1 billion in profit
By web2dot0 on 6/16/2014 9:59:03 PM , Rating: 3
Why do you think enterprise customers are whole bunch of idiots? Is it because they don't know how to make $$$$? Are you some sort of superior being?

They pay a premium for support. If they are charging customers millions of dollars on mission critical work, they can afford the price premium providing that FusionIO can deliver the performance.

That's how businesses work.

Wouldn't you? Well, unless you are not interested in making money. Yeah, that makes a lot of sense now ....


RE: $1 billion in profit
By someguy123 on 6/17/2014 1:19:09 AM , Rating: 2
quote:
They pay a premium for support.


I used to think this was true, but no, many companies pay massive premiums per item AND service subscription fees that are not only obscenely expensive but also only guaranteed for a very limited range of products, which includes accessories for said products that can quickly become discontinued to the general public (if sold all). For example, one of my past jobs had a contract with lexmark. We had these horribly old printers that would only get like 8~PPM (only 2 of these for an office of 30 mind you) and we had to constantly remind people to note the toner warnings because we had to order them directly from our lexmark contact since they were some odd model never before seen on the internet. Lexmark claimed the printers autonotified over the internet but it never worked. Things were over a hundred dollars more than comparable yield consumer lexmark catridges. Kept asking HQ to update at least one printer to improve efficiency but they weren't having it because of the insane cost and service renegotiation.

Another place had an SAP system that looked like it hadn't been updated since the late 90s. At one point the mobile RF scanner failed and we looked into getting a replacement instead of servicing it since it was so old and tattered, not to mention it was horrendously slow (had a screen for inventory checks). The price? Four thousand dollars. Would've gotten more work done with my phone tethered to a scanner off amazon.

Eventually, I found that the problem were these horrible contracts set up between companies, most often by friends of friends. They would all be fixed or inflating rate for not only services, but also for replacements, which meant that you'd have to pay 1997 prices in 2014, and you have no choice but to use the products you originally negotiated for unless the vendor decided to update your plan at no cost (yeah right). Imagine buying a mouse from 2004, having it die, then paying $100 for a refurbished version on top of your service fee. The only reason these types of companies survive is due to pushing all of the cost on the consumer, but it doesn't always work and sometimes they come crumbling down even with high revenue (see: brick and mortar).


RE: $1 billion in profit
By elleehswon on 6/17/2014 10:41:54 AM , Rating: 2
with fusionio, it's not even about the support. it's about having a block device locally attached to your server that can deliver 200k+ iops(last time i used one was 2 years ago). You are paying for the performance. Are they expensive? sure, $22,000 for a 2.6tb pci-e card is high, but when your search index is going on for 9 straight hours because of a san bottleneck, and you start cutting into the business day, it is well worth it.


RE: $1 billion in profit
By amanojaku on 6/16/2014 3:46:59 PM , Rating: 3
According to the 10-K, 2/3rds of Sandisk's $1B came from "commercial" sources, while 1/3rd came from "retail". The 10K defines the sources as follows:

Commercial - Our Commercial channel represents sales directly and through distributors to OEMs, system integrators and value-added resellers who bundle, embed or integrate our data storage solutions. Our Commercial channel addresses a large variety of applications, including mobile phones, tablets, notebooks, gaming devices, enterprise storage solutions, servers and other computing devices. We also sell our data storage solutions to customers in our Commercial channel that offer our products under their own brand name in retail channels. We generate license and royalty revenue related to intellectual property, or IP, and this revenue is also included in our Commercial revenue.

Retail - We sell our products directly and through distributors to consumer electronics stores, office superstores, photo retailers, mobile phone stores, mass merchants, catalog and mail order companies, e-commerce retailers, drug stores, supermarkets, convenience stores and kiosks in a wide variety of locations. We sell to our Retail channel through our direct sales representatives as well as through independent manufacturers’ representatives.

The 10-K explains the revenues as follows:
quote:
The increase in Commercial revenue is primarily related to increased sales of client and enterprise SSD products and embedded memory products for mobile devices, partially offset by decreased sales of cards for mobile devices due to continued OEM debundling and our allocation of less supply to private label channels.

The increase in Retail revenue is primarily related to increased sales of cards for mobile devices, USB drives and SSDs. While sales of cards for mobile devices through the Commercial channel are down on a year-over-year basis, increased sales in aftermarket retail mobile cards have partially offset the Commercial channel declines.


RE: $1 billion in profit
By amanojaku on 6/16/2014 4:11:03 PM , Rating: 2
Forgot to point out that 2/3rds of SanDisk's profits came from Asia-Pac. What's in Asia-Pac...? Oh, most of the world's electronics manufacturers and assemblers. Sounds like the bulk of its profits come from embedded memory and mobile memory - pre-installed memory in servers and phones, and flash cards for phones and tablets. Retail to the public is healthy, but direct to enterprise, primarily SSDs, is probably light.


RE: $1 billion in profit
By Samus on 6/16/2014 7:23:19 PM , Rating: 2
I also suspect SanDisk has decent revenue from licensing fees. They do have 5,000 patents and have never lost an IP dispute (most recently with PNY for 26 million.)

Being one of the pioneers of mass solid-state storage gives them a battle chest of probably well-deserved IP that should demand licensing from a number of companies.


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