Enterprise Storage Drives SanDisk’s Q1 Results, Embedded Storage Could Follow Suit

SanDisk Corporation (NASDAQ:SNDK) announced its Q1 2014 earnings on April 16. The company generated net revenues of $1.51 billion on the back of strong enterprise and client solid state drive (SSD) sales, exceeding the upper end of its revenue guidance. Despite outperforming for the quarter, management expects the company to stay within its previously expected revenue range of $6.4-$6.8 billion for the full year. ^[1] In line with our expectations, the company posted healthier margins in the quarter owing to a greater-than-anticipated mix of the more profitable enterprise-class SSDs. The growing mix of SSDs compared to embedded and removable flash storage in the last few quarters has resulted in consistent quarter-over-quarter margin improvement for the company. SanDisk’s non-GAAP margins for the quarter stood at an impressive 51% – over 10 percentage points higher than Q1 2013.

Looking ahead, the company has given revised guidance for its gross margins in the 47%-49% range for the full year. The average Yen rate was in line with SanDisk’s expectations, at about 99 Yen per U.S. Dollar during the quarter. The company believes it could witness further benefits in production costs in Q2, since it expects the favorable Yen exchange rate to continue in the coming quarter. However, due to the unpredictable nature of the conversion rate, the company has hedged approximately one-third of its Yen exposure.

We have a revised $77 price estimate for SanDisk’s stock, which is slightly below the current market price. 

See our full analysis for SanDisk’s Stock

Enterprise SSDs Drive Revenues, Improved Margins

SanDisk generated almost 20% of its net revenues from SSD sales in 2013, and had estimated that the revenue mix of SSDs would increase to around 25% in 2014. However, the mix of solid-state drives grew more than expected and generated around 28% of the company’s net revenues for the quarter. ^[2] Over the next few quarters, we expect the contribution of SSDs to go stay in a similar range and have revised our forecast to reflect this. If the company meets its expected target, it would provide a boost to the company’s earnings, owing to the higher margins of SSD products.

SanDisk attributed much of the growth in the SSD sales to its software-as-a-service (SaaS) portfolio. SanDisk upgraded its Flashsoft software in the last quarter to cater to the growing demand for software-defined storage. The software for enterprise storage solutions uses host-based caching for VMware’s (NYSE:VMW) vSphere environments, meaning that Flashsoft software enables a standard SSD to be used as high-speed caching memory for enterprise-level storage devices. The memory drive acting as cache increases its IOPS, which improves performance and reduces latency. Going forward, enterprise customers are likely to increase the adoption of the FlashSoft software layer, which should continue to drive SanDisk’s enterprise-class SSD revenues.

Margins To Decline Slightly As The Year Progresses

Going forward, the company expects the product mix of embedded storage products to gradually pick up in the coming quarters. The company expects the demand for embedded products, which include storage attached host system boards in portable devices such as smartphones and tablets, to increase in the latter half of the year as the iNAND solutions have just begun to gain momentum. However, management stated that the company has seen higher demand for custom embedded solutions compared to its multi-chip package (MCP) iNAND – which could bring down overall margins for the company, since customized embedded solutions have comparatively lower margins. The growth in sales of custom embedded solutions could slightly offset the margin improvement as a result of high SSD sales, due to which the company estimates that its overall gross margins could sequentially drop in the latter half of 2014 to bring the annual average to about 47%-49%.

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1. SanDisk Q1 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
2. SanDisk Quarterly Metrics, SanDisk Investor Relations, April 2014 [↩]