Enterprise SSDs Drive SanDisk’s Q3 Results

SanDisk (NASDAQ:SNDK) announced its third quarter earnings on October 16, with revenues of $1.75 billion up 7.5% over the year ago period. Revenues were higher than the company’s guidance given at the end of Q2 due to continued growth from solid state drive (SSD) sales, which rose by 48% y-o-y to $480 million for the quarter. SSDs contributed 27% of SanDisk’s net revenues in Q3, up from 20% in the prior year quarter. The company also witnessed strong demand for custom embedded storage products during the quarter, leading to a 32% sequential increase in embedded storage revenues to $420 million for the quarter. ^[1] SanDisk expects to generate revenues of over $1.8 billion in the fourth quarter to take its full year revenues to $6.7 billion.

SanDisk’s non-GAAP gross margin improved by over a percentage point over the prior year quarter to 49% during Q3 2014, primarily due to the increasing mix of SSD product sales and a higher use of X3 memory. Relatively high demand for low-margin custom embedded storage products kept gross margins lower than the first two quarters of 2014 – in line with the company’s expectations. The company has given non-GAAP margin guidance of 47-49% for the December quarter. We have a revised $93 price estimate for SanDisk’s stock, which implies a 10% premium to the current market price.

See our complete analysis of SanDisk here

Enterprise SSDs Witness Solid Growth

SanDisk generated 27% of its revenues from SSDs in the third quarter. Comparatively, the contribution of these high-margin SSDs was 19% in 2013. ^[2] Keeping up with the trend in the last two quarters, the company witnessed strong y-o-y growth in enterprise SSD sales. Keeping in mind the strong demand for enterprise-grade products, SanDisk management mentioned that the company is now in a position to generate $1 billion in revenues from only enterprise SSD sales in 2015 – one year ahead of schedule. The company expects the SSD growth to stay around Q3 levels in the fourth quarter due to the strong demand for its flash-based enterprise storage solutions.

Additionally, SanDisk expects its $1.1 billion acquisition of Fusion-io to start being accretive to its earnings from mid-2015. The acquisition could help SanDisk overtake its nearest rivals in the enterprise SSD market, as management believes that the company now has the “broadest portfolio of enterprise and consumer flash solutions” in the storage industry.

Wafer Demand Up

SanDisk increased its wafer production capacity by 5% driven by a 30-40% increase in storage bit demand. The industry-wide transition from existing 1Y technology to 1Z leading to higher utilization of SanDisk’s X3 chips drove the demand for wafers and components. Moreover, after getting acquired by SanDisk, Fusion-io began sourcing chips from the storage giant further contributing to wafer sales. As a result, SanDisk’s wafers and components revenues rose by over 6% sequentially to over $100 million for the quarter. We forecast SanDisk’s wafers and components revenues to remain around prior year levels despite a decline in revenues during the first half of 2014. In the long run, this division is likely to witness strong growth on the back of a new Toshiba-SanDisk joint fab facility being constructed in Japan to mass produce 3-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.

Declining Embedded Storage Revenues

Revenues generated by SanDisk’s embedded storage unit were down by 16% year-on-year to about $420 million during the third quarter. However, it was a 32% sequential rise over the June quarter. The sequential increase was driven by a comparatively higher proportion of custom embedded storage products and iNAND storage sold during the quarter. The company expects embedded storage to sequentially pick up further in the fourth quarter due to seasonality. Additionally, one of its major OEM customers, Apple (NASDAQ:AAPL), increased the capacities of its existing mid-tier and top-tier devices to 64GB and 128GB, from 32GB and 64GB, respectively. As a result, SanDisk is also positive about year-on-year growth in embedded storage revenues in the fourth quarter. We currently forecast SanDisk’s embedded storage revenues to be about 8-9% lower than 2013. However, with increasing storage capacities of high-end storage and growing adoption of SanDisk’s iNAND storage, these revenues could pick up in the long run. (See: Key Growth Drivers For SanDisk’s Embedded Storage Division)

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1. SanDisk Earnings Call Transcript Q3 2014, Seeking Alpha, October 2014 [↩]
2. SanDisk Quarterly Metrics, SanDisk Investor Relations, October 2014 [↩]