SanDisk Earnings: NAND Prices, SSD Growth And Gross Margins In Focus

by Trefis Team
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SanDisk Corporation (NASDAQ:SNDK), a leader in flash memory storage solutions, is set to release its Q2 Fiscal 2013 earnings on Wednesday, July 17. We expect the company to post double-digit growth on a year-over-year basis, mainly on the back of SSD products. A significant depreciation in the Japanese yen should also result in a substantial improvement in its gross and operating margins. In Q1 earnings, we saw signs of NAND price stabilization and a sequential improvement in average selling price (ASP) for the second consecutive quarter. We will be closely watching Q2 earnings to see how well this trend continues to benefit the company.

In Q1 fiscal 2013 earnings, the company beat market expectations with total revenues of $1.34 billion, an 11% increase on a year-over-year basis. [1] Operating income surged over 32% to cross $2.5 billion. Below we take a look at key trends impacting SanDisk during Q2.

See our complete analysis of SanDisk here

NAND Flash Prices Stabilizing

While the demand for NAND flash has been rapidly growing in line with smartphones sales, a major drag on SanDisk’s profitability over the last year has been a decline in NAND flash prices. However, there have been signs of some improvements in the NAND flash industry pricing as a whole due to favorable demand/supply scenario. A large number of NAND flash manufacturers have kept cutting capital expenditures over the past couple of months, which has helped bring stability to NAND flash prices. In Q1 2013 earnings, while the ASP declined 18% on a y-o-y basis, the company reported a sequential price increase of 2%. [2] This was on top of a 7% price increase in Q4 2012. We will be closely watching what SanDisk’s management has to say about NAND flash prices to better understand how it fared compared with its competitors. In Q1, SanDisk’s ASP’s improved when compared with a slight decline witnessed by its competitor Micron (NASDAQ:MU). [3]

SSD Will Be The Major Growth Driver

SanDisk’s SSD sales contribution to company’s total revenues jumped significantly in Q1. It now makes up approximately 20% of the total revenues, up from 10% in the Q4 Fiscal 2012. We expect the division to continue to register rapid growth as SSDs seem to be taking over traditional hard drives as the primary form of storage on laptops and enterprise servers. The key for SanDisk in this segment is enterprise SSD demand, which is being fueled by the movement towards the cloud. Cloud servers need fast hard drives to locate consumer data quickly, and SSDs are the best options for enterprise servers at present. The company now supplies SSDs to 10 leading PC OEMs. These partnerships with OEMs should help the company establish an even stronger foothold in a growing industry.

Yen Weakness To Continue To Boost Margins

SanDisk reported solid gross margin growth the last quarter and we expect this trend to continue due to continued depreciation in Japanese yen (JPY). SanDisk’s yen based wafer purchases constitute close to two third of its cost of sales and weakness in JPY makes SanDisk’s yen based wafer purchases cheaper. It is worth noting that the company’s yen exchange rate in its cost of sales was approximately 90 JPY per dollar in Q4 2012 and around 95 JPY in Q1 2013. Yen has fallen since then to cross 100 JPY per dollar. These wafer purchases are reflected in cost of sales with approximately a 3-month lag. This means that its gross margins will be helped by continued yen weakness for at least the next two to three quarters.

We currently have a $65 price estimate for SanDisk, which is approximately 5% above the current market price.

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Notes:
  1. Press release, SanDisk, April 17 2013 []
  2. SanDisk Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 17 2013 []
  3. Second Quarter 2013, Micron, March 21 2013 []
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