The firm’s international growth strategy began to pay off in 2007.

In EMEA, the company outgrew the market in both cards and USB drives and the combined retail market share in that region grew by about 4 percentage points year-over-year through November.

In the highly-fragmented APAC market, the company’s market share continued to grow throughout 2007 and it currently holds the number one retail market share for cards and USB drives combined, according to GFK, an independent market research firm.

In Japan, the firm grew its share and achieved a clear number one position against entrenched competitors. The firm’s strategy of gaining new international customers on a country-by-country basis worked well in 2007 and this will remain a priority for in 2008 as well.

First Quarter Outlook

- The firm is forecasting first quarter total revenue, including both product revenue and license and royalty revenue, to be between $775 million and $875 million, compared to the $786 million reported in the first quarter of 2007, which included $53 million from the consolidation of the Twinsys joint venture. This Q1 revenue estimate reflects a sequential decline similar to the decline experienced last year. Within this total revenue, the firm expects license and royalty revenue to be between $115 million and $125 million. The firm expects product revenue to reflect fairly aggressive first quarter price declines and a sequential decline in megabytes sold.

SanDisk expects first quarter non-GAAP product gross margin to be in the range of 23% to 26%, with price declines and lower volumes being partially mitigated by continued expansion of 56-nanometer memory mix.

- Non-GAAP operating expenses are forecasted at $215 to $220 million in Q1 and interest income is forecasted to be approximately $25 million.
- The firm forecasts its non-GAAP tax rate for 2008 at approximately 34%.
- The charges to GAAP results for stock compensation and amortization of acquisition related intangibles are expected to be similar to the Q4 levels.
- The firm expects inventory dollars to increase and Q1 investments in the Flash joint ventures to be less than $50 million.

Fiscal 2008 Guidance

The firm is currently forecasting total revenue growth of 15% to 25%. This assumes continued softness in consumer demand but continued progress in growing the international market share and continued momentum in the mobile market. The firm expects license and royalty revenue to be between $450 million and $500 million.

The management expects both its megabyte growth and price declines to be more moderate in 2008 than in 2007.

Non-GAAP product gross margin for 2008 is expected to be 24% to 28%, compared to 24% in 2007, and this assumes usage of 5% to 10% non-captive memory.

The company has significantly slowed down hiring based on its assessment of the current NAND pricing environment and worldwide economic conditions. The firm will actively manage its expense profile based upon market conditions and the key investments required for the future. Balancing all of these factors, the firm is forecasting non-GAAP operating margin at 13% to 16%, compared to 13% in 2007.

Key questions and answers from the fourth quarter fiscal 2007 earnings call conducted by SanDisk Corporation on January 28, 2008.

Vijay Rakesh (Oppenheimer): You had said that eight companies have signed up for the cross-license agreements. Can you comment on how that’s going and who they are?

Dr. Eli Harari: We have eight companies so far signing multiyear agreements. We are in serious negotiations with a number of other of the companies that have been cited by us. We made a press announcement concerning the cross-license that we signed with PNY. We have not made separate announcements for the other cross-licenses that were signed.

Vijay Rakesh (Oppenheimer): Do you think 43-nanometer could get to 10% of your output by Q3, since you are starting it in late Q2?

Sanjay Mehrotra: The 40-nanometer production output will start in the Q2 timeframe and in terms of the ramp up of bit production output, it will follow a similar ramp as 56-nanometer technology did in 2007. In the Q3 timeframe, it will be more than 10% and will continue to increase in Q4 as well.

Vijay Rakesh (Oppenheimer): Can you comment on the X3 and how should we be looking at that?

Sanjay Mehrotra: The majority of our bit production in 2008 will be two bit per cell technology. With respect to three bit per cell, we have that product in 56-nanometer. We will start that production output in the March/April timeframe. Since 43-nanometer two bit per cell technology is lower cost than 56-nanometer three bit per cell, the vast majority of our output in 2008 will remain two bit per cell. Three bit per cell will constitute a relatively small percentage of our output in 2008. But in 2009 timeframe, we’ll be applying three bit per cell technology to 43-nanometer and that’s when we expect to significantly increase three bit per cell contribution to our total bit output.

Paul Coster (J.P. Morgan): Do you think that NAND based memory has run out of steam or is this truly something to do with people’s pocketbooks? Can you help us understand what’s behind this?