SanDisk Earnings Preview: Enterprise SSDs to Drive Results Again

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SanDisk

SanDisk (NASDAQ:SNDK) is scheduled to announce its third quarter earnings on October 16. The company posted slightly higher revenues than the upper end of its guidance of $1.6 billion in Q2 on the back of solid performance from its solid state drive (SSD) division. SSDs contributed 29% of SanDisk’s net revenues for the quarter – up from 28% in the previous quarter and 16% in the prior year quarter. Additionally, SanDisk’s non-GAAP gross margin improved by around 130 basis points over the prior year quarter to 48% during Q2 2014, primarily due to the increasing mix of SSD product sales. However, in line with the company’s expectations, margins were sequentially lower than the first quarter owing to higher demand for low-margin custom embedded storage solutions. SanDisk expects margins to remain similar to Q2 in the September quarter and net revenues to seasonally increase.

According to some news reports, SanDisk’s margins could take a hit in the present quarter due to the company’s deal with Apple (NASDAQ:AAPL). The increasing mix of embedded NAND chips that SanDisk supplies to Apple carry lower margins than the corporate average, which could affect the company’s overall profitability. [1] We have a $98 price estimate for SanDisk, which is over 15% higher than the current market price.

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See our complete analysis of SanDisk here

Solid State Drives To Maintain Growth

SanDisk generated 28% of its revenues from SSDs in the June quarter. Comparatively, the contribution of these high-margin SSDs was 19% in 2013. [2] With user data increasingly moving to the cloud, storage demand from data centers is increasing. Since SSDs provide efficient storage through higher Input/Output per Second (IOPS) and low latency, they are increasingly becoming a preferred option for enterprises. [3] The company expects the contribution of SSDs to stay around the levels seen in Q1 and Q2 through the latter half of the year due to the expected growth in enterprise storage demand and its new products. SanDisk announced the acquisition of flash-based storage provider Fusion-io for $1.1 billion in June. Although the Fusion-io acquisition could help SanDisk overtake its nearest rivals in the enterprise SSD market, the company will continue to face stiff competition from major storage providers such as Intel (NASDAQ:INTC),  Western Digital (NASDAQ:WDC) and Samsung (PINK:SSNLF). [4]

Key Trends in Other Divisions

SanDisk expects a higher proportion of wafer sales in the latter half of the year because of three main factors. First, sales of its X3 chips are seasonally higher in the latter half of the year. Secondly, Fusion-io will now source chips from SanDisk following the acquisition. Thirdly, the company expects a transition towards its X3 chips from existing 1Y chips. The company expects to witness an increasing mix of X3 wafers due to a 5% growth in wafer capacity. As a result, management mentioned that it expects comparatively lower 1Y sales in the last two quarters of 2014. [5]

Back in May, SanDisk announced its deal with Toshiba to produce 3-D NAND Chips. Both companies agreed to convert their existing joint facility in Japan to produce 3-D NAND chips starting in 2016. As the storage densities of currently available chips near the end of their physical limitations in terms of data storage, 3-D chips could be the next big thing as they can store up to 16 times more data than planar or 2-D chips. Over the next five years, SanDisk and Toshiba intend to capitalize on the expected growth in 3-D technology and compete with rival Samsung, which already has the first mover’s advantage. We currently forecast wafer and component revenues to grow 4% over 2013 to $321 million this year.

SanDisk’s embedded storage division includes non-SSD storage products attached to a host board. With an increasing mix of embedded SSDs used in tablets, smartphones and other portable devices, the contribution of embedded storage to SanDisk’s net revenues has dropped from 27% in 2013 to just under 20% in the first half of 2014. Although high-end smartphones and tablets that use the latest technology are expected to bring in significant revenues for storage manufacturers, it is likely that the SanDisk’s SSD division benefits from it more than the Embedded Storage division.

SanDisk introduced the world’s highest-capacity SD card in September, with a capacity of 512 gigabytes. This was more than a thousand-fold increase in capacity for a memory card since the company launched a 512 MB SD card in 2003. The targeted customers for the Extreme PRO card are users that need large file handling capabilities, such as videographers who shoot ultra-HD (high resolution) videos. The card is steeply priced at $800, while lower capacity versions – 256GB and 128GB – are available for $360 and $190, respectively.

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Notes:
  1. Apple Is A Factor In Why SanDisk Shares Are Falling, Market Watch, July 2014 []
  2. SanDisk Quarterly Metrics, SanDisk Investor Relations, July 2014 []
  3. Flash Memory Is Changing How Companies Buy Storage, Forbes, November 2013 []
  4. IBM Officially Biggest All-Flash Array Shipper, The Register, June 2014 []
  5. SanDisk Q2 2014 Earnings Call Transcript, Seeking Alpha, April 2014 []