SanDisk Earnings Preview: Can Enterprise Storage Revive Results Or Is An Acquisition Inevitable?

SanDisk Corporation (NASDAQ:SNDK) is scheduled to announce its third quarter earnings on Wednesday, October 21. ^[1] The company has had a weak start to the year, with its revenues declining by over 18% year-over-year to $2.6 billion through the first half of the year. SanDisk witnessed a massive slowdown in its client SSD business this year, as revenues fell by almost 56% year-over-year to $300 million through the first half of 2015. Similarly, SanDisk’s removable storage revenues dropped by over 26% annually to $661 million for Q1 and Q2 combined. With weakness expected to continue in its client SSD division, SanDisk expects its Q3 revenues to be around $1.4 billion, which is over 25% lower than the comparable prior year quarter. The company has maintained its full year revenue guidance at around $5.4-$5.7 billion, which is a 14-18% annual decline.

We have a $66 price estimate for SanDisk’s stock, which is slightly lower than the current market price. SanDisk’s stock price fell from about $100 at the beginning of the year to a 52-week low of $44 in late August before recovering to the present level. SanDisk’s stock price has risen by over 30% in the last month following speculation about a possible acquisition by companies such as  Western Digital (NASDAQ:WDC) or Micron Technology (NASDAQ:MU). ^[2]

See our complete analysis of SanDisk here

Enterprise Storage To Continue Growth Spree

Most of the company’s revenue streams suffered in the first half of 2015, with the exception of enterprise SSD revenues, which witnessed a massive 64% y-o-y increase to $360 million. In an attempt to further drive growth in the enterprise SSD space, SanDisk announced the release of the CloudSpeed Ultra Gen II enterprise-grade SSD for cloud service provider and software-defined storage vendor environments in August. ^[3] The enterprise-grade SSD is available in a capacity of 1.6 terabytes and can write 32,000 4K input/output operations per second (IOPS) at a throughput rate of 530 MB per second. Moreover, the SSD has a random read/write latency of as low as 80 microseconds while the average write latency is about 56 microseconds. ^[4] The 2.5″ form factor SSD is ideal for usage in latency-sensitive environments that include data centers for e-commerce businesses and collaborative online services. SanDisk’s management stated in its Q2 earnings call that the company intends to price products more competitively, thereby capturing a larger market in the coming quarters. ^[5]

The company also announced caching support data service for VMware’s (NYSE:VMW) flagship product vSphere during the quarter. ^[6] The new FlashSoft version includes write-back caching support for all VMware datastores such as Virtual Machine File System, Network File System, vSphere Virtual Volume and VMware Virtual SAN. Using the new FlashSoft enables automatic cache deployment, which can be managed on VMware vCenter storage policies. VMware has enabled the integration of third-party solutions (SanDisk in this case) for solid-state acceleration into the its flagship vSphere platform.

In the most recent quarter, the company reported a solid improvement in Fusion-io (PCIe SSD) revenues. With Fusion-io’s PCIe storage products and solutions in its offering, SanDisk claims to have the “broadest enterprise flash solution portfolio” in the industry. Moreover, it is the area where the company is most heavily investing in. We currently forecast SanDisk’s share in the enterprise SSD market to rise from 12.4% in 2014 to about 18% through the end of our forecast period.

Possible Acquisition?

At the end of last month, Western Digital announced that Chinese state-backed Unisplendour Corporation – a subsidiary of Tsinghua Holdings – would be investing $3.8 billion in Western Digital for a 15% equity stake. Western Digital’s management indicated that the equity investment by Unisplendour would help facilitate growth and future strategic initiatives. This triggered speculation in the market that the “future strategic initiative” could be a large-scale acquisition, with SanDisk as a potential target. Western Digital has been betting on hard drives for a long time, and has often been reluctant to switch over to the flash storage completely. SanDisk could fill that void perfectly, and the resulting combined entity could have a formidable presence in the storage market with both the hard drive business and flash-based storage under its belt.

Another party that could be interested in acquiring SanDisk is leading chip-maker Micron. Back in July, there were reports that the Tsinghua Unigroup was preparing a $23 billion takeover of Micron. After these talks subsided, ^[7] there were rumors that Micron could possibly look into acquiring SanDisk. It makes sense that Micron would be interested, since the falling prices of flash storage globally have put pricing pressure on flash chipmakers including Toshiba, SanDisk and Micron. Consolidation in this market could help stabilize prices and lead to healthier margins.

On the other hand, SanDisk would need approval from its business partner Toshiba for any acquisition bid. SanDisk uses Toshiba’s fab facilities to manufacture chips and both companies announced a joint decision to co-produce 3D chips last year. Toshiba is more likely to support a takeover from Western Digital since it directly competes with Micron in the memory chip market. Toshiba would lose significant business to Micron if the latter were to acquire SanDisk. ^[8] Moreover, things could get complicated with Micron’s existing deal with Intel (NASDAQ:INTC) to produce 3-D NAND Chips. None of the companies have responded to or made any claims regarding the acquisition thus far. SanDisk’s upcoming earnings call could make things clearer for what lies ahead for the company.

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1. SanDisk Sets July 22 to Discuss FQ2-2015 Financial Results, SanDisk Press Release, July 2015 [↩]
2. SanDisk Said to Be Working With Bank to Explore a Sale, Bloomberg, October 2015 [↩]
3. SanDisk Enables Performance & Density Gains for Cloud Infrastructures with New SATA SSD, SanDisk Press Release, August 2015 [↩]
4. SanDisk CloudSpeed Ultra Gen. II SATA SSD Announced, Storage Review, August 2015 [↩]
5. SanDisk Earnings Call Transcript Q2 2015, Seeking Alpha, July 2015 [↩]
6. SanDisk Unveils Integrated Data Service for VMware vSphere with Next Generation FlashSoft Software, SanDisk Press Release, August 2015 [↩]
7. Flash Memory Giant SanDisk In Sale Talks With Rivals Micron And Western Digital, Tech Times, October 2015 [↩]
8. Toshiba likely to bless a SanDisk-Western Digital deal, First Post, October 2015 [↩]