SSD Sales Offset Weakness In Retail Channel As SanDisk Posts Mixed Q4 Results

SanDisk Corporation (NASDAQ:SNDK) announced its fourth quarter earnings on January 21, with revenues of $1.73 billion flat over the year ago period. Revenues were slightly lower than the company’s guidance given at the end of Q3 due to weakness in its retail channel and lower iNAND product sales. On the other hand, growth from solid state drive (SSD) sales, which rose by over 48% y-o-y to $538 million for the quarter, offset the decline in revenues generated by removable storage products sold via the retail channel. SSDs contributed 31% of SanDisk’s net revenues in Q4 and 29% for the full year, up from 21% in the prior year quarter and 19% in 2013. ^[1] SanDisk expects to generate revenues of over $1.4 billion in Q1’15 and full year revenues to be around $6.5-$6.8 billion.

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Solid State Drives Continue Growth Spree

SanDisk generated 31% of its revenues from SSDs in the fourth quarter. Comparatively, the contribution of these high-margin SSDs was only 19% in 2013. ^[2] Keeping with the trend in the last three quarters, the company witnessed strong y-o-y growth in enterprise SSD sales. SanDisk’s enterprise SSD sales grew by a massive 140% over 2013 to $660 million for the full year. 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. Keeping in mind the strong demand for enterprise-grade products, 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 posted solid results in the client SSD space as well, with revenues growing by 36% y-o-y to almost $1.3 billion. According to our estimates, SanDisk’s share in the client SSD market has increased to nearly 18%, up from 15.4% in 2013. We currently forecast SanDisk’s share in this market to rise moderately to over 20% through the end of our forecast period. Management mentioned that the company could witness comparatively lower demand for client SSDs in the coming quarters as key customers are moving to embedded and enterprise-grade SSD solutions. As a result, the company could witness a slowdown in client SSD revenues.

Declining Removable Storage Revenues

Revenues generated by SanDisk’s removable storage unit were down by 22% year-on-year to about $573 million during the fourth quarter. It was also a 14% sequential decline over the September quarter. The company posted lower revenues due to weakness in the retail channel which was driven by both declining prices, supply constraints and low demand for certain aging products. Within retail products, demand for storage cards for imaging devices was especially low during the quarter – primarily across Europe and Asia-Pacific. Although imaging storage revenues were sequentially higher than the previous quarter owing to seasonality, the revenue growth did not make a material impact to overall removable storage revenues. Management attributed the low sales number in European markets to macroeconomic conditions and geopolitical issues – which may continue through the coming quarters. However, the company introduced removable flash drives for Apple (NASDAQ:AAPL) and Android-based smartphones and tablets in Q4, which could boost its retail channel product sales in the coming quarters – especially in North America (see: SanDisk Showcases New Products At CES 2015).

Impact On Margins

SanDisk’s non-GAAP gross margin compressed by 6 percentage points over the prior year quarter to 45% during Q4 2014, primarily due to weakness in the retail channel, which led to lower revenues of high-margin retail products. Moreover, management mentioned that certain products reached the end of their product life sooner than anticipated by the company, due to which the company used older X2 technology bits instead of X3 NAND. As a result, there was inefficiency in memory usage leading to higher costs incurred by SanDisk, due to which the company’s average production cost per GB rose by 3% while the average selling price (ASP) per GB decreased by 4% y-o-y during the quarter. SanDisk’s non-GAAP gross margin for the full year was slightly better than the previous year at 48% due to strong performances in the first half of the year.

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1. SanDisk Earnings Call Transcript Q4 2014, Seeking Alpha, January 2015 [↩]
2. SanDisk Quarterly Metrics, SanDisk Investor Relations, January 2015 [↩]