SanDisk (NASDAQ:SNDK) posted strong results with total revenues of $1.48 billion, a 43% increase on a year-over-year basis and a 10% increase on a sequential basis.  Strong demand and improving ASPs for NAND products helped SanDisk beat market expectations. Revenues also got a boost from robust sales of SSD products, which clocked over 125% growth and constituted 16% of total revenues during the quarter.  SanDisk reported a sequential improvement in average selling price (ASP) for the third consecutive quarter. But, what comes as a major positive is that ASP improved on a yearly basis, which has confirmed improving pricing trend in the NAND flash industry.
As NAND market dynamics are improving, SanDisk has raised its 2013 revenue target for the second time. It now expects 2013 revenue in a range of between $5.95 billion – $6.05 billion, up from a previous range of $5.6 billion – $5.75 billion.  A significant depreciation in the Japanese yen and technology advancements resulted in a substantial improvement in its gross and operating margins. Net income (excluding one time items) shot up to $299 million from just $51 million, a year earlier. ((ref:1))
We are revising our $65 price estimate for SanDisk to reflect improvement in ASPs and gross margins and a roll forward of our DCF terminal year. With rising mobile devices sales, increasing content growth across devices, improving NAND prices and growing SSD demand, we believe the overall memory and storage market is poised to see strong growth this year onward. We believe that SanDisk is well positioned to leverage future growth potential in the market.
ASP Continues To Improve
SanDisk’s ASP in Q2 2013 increased by 5% on a sequential basis, a third consecutive increase. While this was expected, what comes as a sign of significant improvement in the NAND flash industry is that ASP increased 6% on a yearly basis. This, coupled with an increasing demand, led to robust revenue growth. The rising global mobile shipments is one of the most important trends driving current demand for SanDisk’s NAND flash products. The revenue contribution from mobile devices grew to 47% compared with 39% in Q2 2012 and 41% in Q1 2013. The growing shipment of smartphones, tablets and SSDs should help gain momentum in NAND demand, and in the near term, we expect the pace of decline in ASP to stabilize as the industry goes through consolidation and significant production cuts. In the longer term, technology improvements are expected to drag prices lower. A higher density product mix in NAND will lower both ASPs and cost per gigabyte while increasing volumes.
The other factor helping the company is ballooning storage needs, which was evident from the continued increase in average capacity (GB) per unit. The figure almost doubled to 12.5 from just 6.5, a year ago. The high growth rate of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, back up and use digital content. A highly mobile and increasingly connected user base are increasingly accessing rich data and content. Further, as the quality of media content improves with higher resolution pictures and high definition videos, the demand for more local storage capacity is growing. A shift in product mix toward SSDs and embedded products also attributed to aforementioned increase in average capacity per unit. We expect this trend to continue to aid revenue growth going forward.
SSDs Sales Soar
In Q2, SanDisk’s SSD sales contribution to company’s total revenues jumped significantly. SSDs now make up approximately 16% of the total revenues, up from 10% in the last quarter. While this was below the 20% figure it achieved in Q1, we expect the revenue contribution to continue to increase going forward. With the expected decline in ASPs and increasing the need for disks with higher input/output operations per second (IOPS), SSD are expected to see robust growth going forward (Read our note SanDisk: A Closer Look At The Solid State Drive Division). SanDisk recently announced the acquisition of SMART Storage Systems, a manufacturer of enterprise class SATA and SAS SSDs. The acquisition is a good fit for SanDisk as it will expand SanDisk’s presence to a huge SATA-based SSD market (Read our note SMART Storage Systems Acquisition To Boost SanDisk’s SSD Portfolio). We believe SanDisk can leverage its expertise in the flash memory market area, its existing relationships with top tier customers and its strong distribution channel to gain more market share in the SSD market going forward.
Yen Weakness And Improving Pricing Boosts Margins
SanDisk reported solid improvement in the gross margins during the quarter. The metric improved t0 over 46.7% from around 27% in the same period in 2012. While a part of this increase is due to an improvement in ASPs, a reduction in its cost of sales owing to significant depreciation in the Japanese yen helped it the most.  Use of cheaper 19-nanometer memory in its end-products also led to cost reduction. The company’s yen exchange rate in its cost of sales was approximately 85 JPY per dollar in Q2 2013 and yen has fallen since then to around 100 JPY per dollar. These wafer purchases are reflected in cost of sales with approximately a 3-month lag. SanDisk expects further weakness in Yen going forward, which means that its gross margins will continue to be helped by continued yen weakness for the next couple of quarters.