iXpand Flash Drives For Apple Devices To Overhaul SanDisk’s Removable Storage (Part 2)

by Trefis Team
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SanDisk Corporation (NASDAQ:SNDK) recently announced the launch of its iXpand flash drives for Apple (NASDAQ:AAPL) devices running on both iOS 7 and iOS 8. [1] In the first part of the article, we gauged the potential market size for iXpand flash drives. Furthermore, we looked at the revenue potential for SanDisk by iXpand sales. In this article we estimate the impact of these drives on SanDisk’s removable storage division as a whole. Additionally we take a look at how making products for Apple impacts SanDisk’s revenues and margins.

We have a $93 price estimate for SanDisk’s stock, which is slightly lower than the current market price.

See our complete analysis of SanDisk here

Trends In SanDisk’s Removable Storage Division

Revenues generated by SanDisk’s removable storage division through the first three quarters this year have stayed flat over prior year levels, with the contribution to net revenues declining from 43% of overall revenues in 2013 to about 39% this year. [2] Removable storage revenues peaked in 2011 and 2012 at about $3.3 billion, which have since declined to about $2.6 billion in 2013. One of the main reasons for the decline has been the continual decline in average selling prices per GB of storage products including USB storage and removable memory cards for imaging devices and other SD and micro SD cards. The decline in price per GB could continue at a faster rate than the growth in units sold, according to unit forecasts provided by the company and the expected fall in prices. According to our estimates, USB flash drives and memory cards for imaging devices in the removable storage division contributed $530 million and $714 million, respectively. Comparatively, other removable storage products such as SD and microSD cards for tablets, smartphones, gaming consoles, portable music players and eReaders combined generated about $1.4 billion in revenues. We currently forecast all three revenue streams to decline gradually, due to which divisional revenues could gradually decline to about $2.2 billion through the end of our forecast period.

The general trend in removable storage in the last couple of years has been a worldwide rise in unit sales, but a relatively higher decline in price per unit owing to newer storage technologies including cloud storage, personal clouds and wireless storage providing alternatives to users. This is where iXpand drives could plug the gap for SanDisk and boost its flash drives revenue stream owing to a huge customer base for these drives and a higher unit price for these drives.

Margins Could Improve Despite Apple’s Involvement

Apple is one of SanDisk’s largest customers, sourcing embedded memory storage for its devices. Almost a fifth of SanDisk’s net revenues are generated by selling products to Apple. Although this is a significant contribution to net revenues, the margins realized by SanDisk are comparatively lower compared to its other revenue channels. Apple makes solid margins on selling high-end high margin products, but seldom shares much of its profits with suppliers. [3] [4]

Apple recently 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 positive about growth in embedded storage revenues in the coming quarters. However, a higher contribution of revenues coming from Apple is likely to push margins down for SanDisk. On the other hand, SanDisk will sell iXpand drives via its retail channel, which will provide SanDisk the flexibility to price its products without losing out on margins.

In the most recent quarter, SanDisk’s non-GAAP gross margin improved by over a percentage point over the prior year quarter to 49% in Q3 2014, which the company attributed to an increasing mix of SSD product sales and a higher use of X3 memory. However, relatively high demand for low-margin custom embedded storage products kept gross margins lower than the first two quarters of 2014. Moreover, the expected demand for high-end low margin embedded storage for Apple products could weigh on margins in Q4. As a result, the company has given non-GAAP margin guidance of 47-49% for the December quarter. [5] Going forward, SanDisk could reap the benefits of manufacturing Apple products as a retailer rather than facing pricing pressure as a supplier. You can modify the interactive chart below to gauge the effect a change in adjusted gross margin for removable storage division would have on our price estimate for SanDisk.

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Notes:
  1. SanDisk Introduces New iXpand™ Flash Drive for iPhone and iPad, SanDisk Press Release, November 2014 []
  2. SanDisk Quarterly Metrics, SanDisk Investor Relations, October 2014 []
  3. Does SanDisk’s margin have scope for expansion?, Market Realist, November 2014 []
  4. Will SanDisk Be Bullied By Apple Again This Quarter?, Seeking Alpha, October 2014 []
  5. SanDisk Earnings Call Transcript Q3 2014, Seeking Alpha, October 2014 []
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