SanDisk Earnings Preview: Subdued SSD Sales And Falling Prices Could Impact Q1 Earnings

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SanDisk (NASDAQ:SNDK) is scheduled to announce its first quarter earnings on Wednesday, April 15. The company had a solid year for solid state drive (SSD) sales, with a 60% annual growth in SSD segment revenues to $1.9 billion. On the other hand, two of SanDisk’s key divisions witnessed a decline in revenues – embedded storage revenues fell by 10% y-o-y to $1.5 billion while removable storage were down by 6% y-o-y to $2.5 billion. The company observed weakness in its retail channel, which complemented by low iNAND product sales through Q4 led to year-over-year declines in removable and embedded storage product revenues (see SSDs To Drive SanDisk’s Q4 Results As iNAND, Retail Sales Stagnate).

In its Q4 earnings release, SanDisk’s management provided a revenue guidance of $1.40-$1.45 billion for the March quarter. However, the company revised its guidance to about $1.30 billion in late March due to the anticipated weakness in its fast-growing SSD division. The expected revenues for the quarter are about 15% lower than the comparable prior year period, while this is the second consecutive quarter that the company has revised its revenue guidance mid-quarter. As a result, SanDisk’s stock price plummeted by nearly 20% to $66 on March 26. Since then it has recovered slightly to about $71 at the end of last week.

We have an $86 price estimate for SanDisk’s stock, which is significantly higher than the current market price.

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See our complete analysis of SanDisk here

Expected Slowdown In Solid State Drives Sales

SanDisk’s SSD division has witnessed tremendous growth over the past few years, with revenues growing from around $150 million in 2011 to almost $2 billion in 2014. As a result, the contribution of SSDs to SanDisk’s net revenues jumped from 2.6% in 2011 to almost 29% in 2014. Within the SSD division, enterprise SSD sales grew by a massive 140% y-o-y to $660 million for the full year, while client SSD sales were up by 36% y-o-y to $1.25 billion in 2014.

Anticipating weakness in its SSD division this year, the company expects SSD revenues to stay at 2014 levels or roughly $1.9 billion. We currently forecast SanDisk’s full year enterprise SSD revenues to be about $920 million, compared to the $1 billion guidance given by the company at the end of Q4’14. Our estimates are still slightly optimistic because SanDisk’s $1.1 billion acquisition of Fusion-io is expected to be accretive to its earnings from mid-2015, which would be a huge positive for the company in the latter half of the year. 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). [1] As a result, Q1’15 revenues could remain depressed, in line with the company’s expectations.

The other major factor that could weigh on SanDisk’s SSD sales is the fact that the company lost a major customer in January. It is widely believed that the customer is Apple (NASDAQ:AAPL), which has switched to Samsung (PINK:SSNLF) for sourcing SSDs. [2] [3] SanDisk will provide more details on the matter in its Q1’15 earnings call. [4] We currently expect client SSD revenues to witness limited growth during the year due to the loss of the customer.

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 22% in through 2014. Revenues generated by SanDisk’s embedded storage division in 2014 were down by almost 10% y-o-y to under $1.5 billion. As indicated by the company, the trend could continue through 2015 with a similar revenue decline for the full year. We currently forecast SanDisk’s embedded storage revenues to decline to about $1.3 billion in 2015 and subsequently to about $1.2 billion by the end of the decade and SanDisk’s share in this market to decline from about 11.4% in 2014 to about 7.5% through the end of our forecast period.

SanDisk’s removable storage division witnessed sustained demand for storage products in 2014, with revenues 6% lower than the previous year at $2.5 billion. Correspondingly, the contribution of removable storage to net revenues declined from 43% of overall revenues in 2013 to about 38% in 2014. The company recently introduced the world’s highest-capacity micro SD card in March, with a capacity of 200 gigabytes. Additionally, it introduced the iXpand flash drives for Apple devices and USB flash drives for Android-based devices in the last few months and more recently introduced flash memory cards designed for use in the automobile industry. With a revamped product line and newer products to attract customers, the company’s removable storage unit shipments could be boosted in the long run. However, revenues could witness limited growth owing to constantly falling average selling prices (ASPs) of removable storage products.

Impact On Margins

SanDisk’s non-GAAP gross margin in 2014 improved by about 60 basis points over the prior year to 48.2%, 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 in the first half of 2014 kept gross margins lower than the first two quarters of 2013. However, higher SSD sales in the latter half of the year offset the margin decline in the first half. If SanDisk’s SSD sales remain suppressed in 2015, margins could be negatively impacted. We currently forecast SanDisk’s company-wide margins to improve by about 15-20 basis points through 2015.

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Notes:
  1. IBM Officially Biggest All-Flash Array Shipper, The Register, June 2014 []
  2. SanDisk cuts revenue outlook, Market Watch, March 2015 []
  3. Samsung seals big SSD chip deal with Apple, Korea Times, March 2015 []
  4. SanDisk Provides Business Update, SanDisk Press Release, March 2015 []