SanDisk to Slash 10% of Jobs

Plunging flash memory prices continue to take their toll.
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Updated from 4:48 p.m. EST

With no end in sight to the plummeting flash memory prices,

SanDisk

(SNDK)

said it would slash its head count by 10%, as profit margins will remain under "significant pressure" for several quarters.

In an announcement after Friday's close, the Milpitas, Calif., chipmaker announced a series of cost-cutting measures designed to save $30 million to $35 million a year.

"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," said CEO Eli Harari in a statement.

Among the measures, SanDisk will eliminate 250 employees from its payroll, roughly 10% of the company's head count. The job cuts will occur primarily in March and will reflect the company's recently announced decision to de-empahsize the USB flash-card business it acquired as part of its M-Systems deal.

SanDisk also said it would reduce salaries in its executive ranks, including a 20% pay cut for Harari, 15% for its president and executive vice president, and 10% cuts for other vice presidents. Salaries for all other employees will be frozen, as will new hiring, save for strategic areas such as development of next-generation flash technologies.

Shares of SanDisk recently fell 4.5%, or $1.81, to $38.32 in extended trading.

Excess supply of NAND flash chips, combined with seasonally weak first-quarter demand has caused prices of NAND components to deteriorate by 50% in the past two months, said Harari.

In order to maintain market share, Harari said SanDisk was cutting its prices by 30% to 40% sequentially, a steeper rate than expected.

"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," said Harari.

SanDisk's news comes a week after

Micron

(MU) - Get Report

spooked investors when it noted during its analyst meeting that NAND flash prices would be down 30% to 40% sequentially in the current quarter.

Micron paired up with

Intel

(INTC) - Get Report

in 2005 to create IM Flash Technologies,

a joint venture manufacturing NAND flash memory.

NAND flash memory, which stores data even the power is switched off, is a key component in new digital gadgets such as MP3 players, digital cameras and increasingly cell phones.

The opportunity has lured new players such as Intel and Micron into the market, while prompting established firms like SanDisk,

Toshiba

and

Samsung

to ramp up production of flash chips. The increase in supply, combined with the lack of any

hot new consumer electronic product to drive demand for the chips, has created the current market glut, in which prices have fallen off a cliff.

Harari said he was confident the lower price points would accelerate demand for flash in cell phone handsets and stimulate new markets for flash memory. He said the company would continue to invest in advanced manufacturing facilities to meet expected global demand in 2008-2010.

"Given the strength of our market position and our balance sheet, we believe that our actions will allow us to weather current challenges and emerge an even stronger market leader the next wave of growth in flash products emerges," said Harari.

SanDisk said it expects the layoffs to result in a $15 million to $20 million restructuring charge, the majority of which will occur in its first quarter. Roughly 50% of the restructuring charge is stock compensation expense related to the terms of the M-Systems acquisition.

SandDisk is scheduled to hold its annual briefing with analysts on Feb. 26.