SanDisk Cautious About 2015 After Unimpressive Q1 Results

by Trefis Team
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SanDisk Corporation (NASDAQ:SNDK) announced its first quarter earnings on April 15th, with a 12% year-over-year decline in net revenues to $1.33 billion. Revenues were roughly in line with the company’s revised guidance given at the end March, anticipating weakness in its SSD product sales. Moreover, SanDisk’s gross margin (non-GAAP) for the quarter was over 8 percentage points lower than the comparable prior year quarter at 43% due to a lower mix of high-margin SSD products. [1] The company had a solid 2014 for solid state drive (SSD) sales, with a 60% annual growth in SSD segment revenues to $1.9 billion. However, SanDisk’s SSD product sales (including both client and enterprise SSDs) fell by 15% year over year to $360 million for the quarter. Moreover, removable storage product sales were also down by over 17% year over year to $506 million. However, embedded storage product sales rose by 10% over the prior year quarter to $333 million during the March quarter.

The company attributed the revenue shortfall to: 1)  product qualification delays that impacted embedded storage and enterprise SSD sales; 2) lower than anticipated demand in the enterprise storage market due to shifting market trends; 3) pricing pressure across segments; and, 4) and supply challenges. We have a revised our $74 price estimate for SanDisk’s stock, which is about 10% higher than the current market price. SanDisk’s stock price plummeted by nearly 20% to $66 per share on March 26 when the company revised its revenue guidance for Q1.

See our complete analysis of SanDisk here

Have SSD Sales Hit A Roadblock?

SanDisk’s SSD division has witnessed explosive 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. The contribution of SSDs to the company’s top line was slightly lower than 2014 levels at about 27% in Q1 with revenues declining by about 15% over the comparable prior year period to $360 million.

Within the SSD division, the client SSD revenues were down by a massive 48% on a year-over-year basis to $173 million for the quarter. The company attributed the decline to a production issue related to the material used in a new embedded SSD component, which was in the process of being qualified for use for one of its largest customers. As a result, the company is currently working on the fix while the re-qualification may take some time. SanDisk’s management mentioned that this decline was the largest contributor to the company-wide revenue shortfall and it could continue to impact both Q2 and full year revenues. The company posted solid results in the client SSD space last year, with revenues growing by 36% year over year to almost $1.3 billion.

On the other hand, SanDisk’s enterprise SSD sales doubled to $186 million in the March quarter. Although the rise in revenues was slightly lower than the 140% annual growth observed in 2014, it partially offset the revenue decline in the client SSD space. The company was cautious about its outlook in the enterprise SSD domain, citing lower expected demand for its PCIe SSD solutions. SanDisk expects the total addressable market for its enterprise SSD offerings to be lower than previously anticipated since it expects many of its customers to switch to low-end SATA enterprise-grade SSDs. However, management mentioned that it could only be a short-term trend lasting through 2015, with PCIe SSD shipments likely to pick up from 2016 onwards.

Embedded Storage

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. However, revenues were up by 10% to $333 million in Q1, while their contribution to  net revenues rose to 25%. Although, SanDisk expects embedded storage products to continue to post healthy numbers through the latter half of the year with sequential improvement in revenues, the company is not very optimistic about a sustained year-over-year growth in the same period. We currently forecast SanDisk’s embedded storage revenues to decline moderately 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.

Declining Removable Storage Revenues

SanDisk’s removable storage division has witnessed mixed demand for storage products in 2014 in the last few years, sales volumes rising across various product categories including USB storage, memory cards for imaging devices and SD and micro SD cards. However, the declining average selling prices have limited revenue growth. As a result, revenues generated by SanDisk’s removable storage division fell by about 6% year over year to $2.5 billion in 2014. Correspondingly, the contribution of removable storage to net revenues declined from 43% of overall revenues in 2013 to about 38% in 2014.

SanDisk has made efforts to revamp its product line over the last few months in order to boost revenues. The company recently introduced the world’s highest-capacity micro SD card in March, with a capacity of 200 gigabytes, the iXpand flash drives for Apple devices and USB flash drives for Android-based devices in December and January, respectively, and flash memory cards designed for use in the automobile industry. However, the combined revenues generated by removable storage products through the March quarter declined by 17% year over year to $506 million. Despite unimpressive Q1 figures, the company is optimistic about future revenues due to the upcoming 48-layer 3D NAND technology which it plans to include in removable storage products. We forecast combined removable storage revenues this year to be about 8-9% lower than 2014 levels at about $2.3 billion.

Forecast For 2015

SanDisk expects its Q2 and full year revenues to take a hit owing to recent developments. The company expects Q2 revenues to be around $1.2 billion, which is over 25% lower than the prior year quarter, primarily due to low client SSD sales through the quarter. Furthermore, the company expects full year revenues to be around $5.4-$5.7 billion, which is a 14-18% annual decline. As a result of low SSD sales, gross margins are also likely to be adversely impacted. The company expects expected Q2 gross margins to be as low as 37-40%. However, margins could pick up slightly in the latter half of the year due to expected increase in high-margin product sales of both SSDs and X3 memory. [1] We have a conservative forecast for SanDisk’s adjusted gross margins, which we expect to compress by about 3 percentage points through 2015.

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  1. SanDisk Earnings Call Transcript Q1 2015, Seeking Alpha, April 2015 [] []
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