SSDs To Drive SanDisk’s Q4 Results As iNAND, Retail Sales Stagnate

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SanDisk

SanDisk (NASDAQ:SNDK) is scheduled to announce its fourth quarter earnings on Wednesday, January 21. The company witnessed a 7.5% year-over-year growth in net revenues to $1.75 billion in Q3 on the back of solid performance from its solid state drive (SSD) division. SSDs contributed 27% of SanDisk’s net revenues for the quarter – up from 20% in the prior year quarter. Moreover, SSD revenues grew by 65% y-o-y through the first three quarters of 2014 to $1.4 billion. Despite the expected growth in SSD revenues, the company has revised its revenue guidance for Q4 to $1.73 billion, lower than the previously estimated range of $1.80-$1.85 billion. [1] SanDisk expects lower revenues due to weakness in its retail channel and iNAND product sales.

SanDisk’s non-GAAP gross margin in Q3 improved by over a percentage point over the prior year quarter to 49%, 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 also revised its non-GAAP gross margin guidance from about 48% previously to about 45% now. [2] We have a $94 price estimate for SanDisk, which is over 15% higher than the current market price. SanDisk’s stock traded at around $100 in November and December before plummeting to around $80 after the company revised its revenue and margins guidance.

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See our complete analysis of SanDisk here

Solid State Drives To Sustain Growth

The SSD division has been the fastest growing segment within the company, with revenues through the first three quarters of 2014 nearly 65% higher than the year-ago period at $1.4 billion. [3] The division has accounted for about 28% of SanDisk’s net revenues in the same period, up from only 19% in 2013. 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. [4] SanDisk announced the acquisition of flash-based storage provider Fusion-io for $1.1 billion in June, after which the company claims to have the “broadest portfolio of enterprise and consumer flash solutions” in the storage industry. 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 SSD storage providers such as Intel (NASDAQ:INTC), Western Digital (NASDAQ:WDC) and Samsung (PINK:SSNLF). [5] In addition to fueling SanDisk’s top line growth, this division also adds to the company’s overall profitability as SSDs are high-margin products. The company expects the contribution of SSDs in Q4 to stay at similar levels seen through the first three quarters due to the expected growth in enterprise storage demand and its new products.

Embedded Storage And Retail Channel

SanDisk’s embedded storage division, which includes non-SSD storage products attached to a host board, has witnessed a decline in revenues due to an increasing mix of embedded SSDs used in tablets, smartphones and other portable devices. As a result, the contribution of embedded storage to SanDisk’s net revenues has dropped from 27% in 2013 to just over 20% in the first three quarters of 2014. Revenues generated by SanDisk’s embedded storage division in the three quarters of 2014 were down by almost 20% y-o-y to under $1 billion. However, revenues rose 32% sequentially in Q3, which the company attributed to a comparatively higher proportion of custom embedded storage products and iNAND storage product sales. Additionally, one of its major OEM customers, Apple (NASDAQ:AAPL), increased the capacities of its existing mid-tier and top-tier devices in Q4 to 64GB and 128GB, from 32GB and 64GB, respectively. As a result, SanDisk was initially positive about year-on-year growth in embedded storage revenues in the fourth quarter. [6] However, the company revised its revenue guidance for Q4 due to lower than anticipated iNAND product sales through the quarter. We currently forecast SanDisk’s embedded storage revenues for the full year to be about 8-9% lower than 2013.

SanDisk’s removable storage division witnessed sustained demand for storage products during the year, with revenues flat over the prior year 9-month period at just over $1.9 billion. Despite flat revenues over 2013 levels, the contribution of removable storage to net revenues declined from 43% of overall revenues last year to about 39% this year. The company 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. Although management mentioned that retail product sales were lower than anticipated in Q4, sales volumes could rise in the long run with declining average selling prices (ASP).

Additionally, the company introduced removable flash drives for Apple and Android-based smartphones and tablets in the quarter to boost its retail channel product sales. According to IDC forecasts, smartphone sales are likely to grow at a CAGR of 9.8% from 2015 through 2018, with a base figure of 1.4 billion smartphone sales in 2015. [7] Furthermore, tablet sales are expected to grow at about 5% annually from 235 million units sold in 2015 to 286 million tablets sold in 2018. [8] This gives a huge market space to SanDisk’s newly introduced flash drives. We currently forecast SanDisk to sell about 120 million USB drives in 2015, with more than a quarter of global flash drive sales.

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Notes:
  1. SanDisk Provides Business Update and Sets January 21 to Discuss Fourth Quarter Financial Results, SanDisk Press Release, January 2015 []
  2. Non-GAAP to GAAP Gross Margin Reconciliation Table for FQ414 Business Update, SanDisk Press Release, January 2015 []
  3. SanDisk Quarterly Metrics, SanDisk Investor Relations, October 2014 []
  4. Flash Memory Is Changing How Companies Buy Storage, Forbes, November 2013 []
  5. IBM Officially Biggest All-Flash Array Shipper, The Register, June 2014 []
  6. SanDisk Earnings Call Transcript Q3 2014, Seeking Alpha, October 2014 []
  7. Worldwide Smartphone Sales Forecast, IDC Press Release, December 2014 []
  8. Worldwide Tablet Sales Forecast, IDC Press Release, November 2014 []