SanDisk Corporation (NASDAQ:SNDK) agreed to be acquired by hard drive manufacturer Western Digital (NASDAQ:WDC) for $19 billion, or $86.50 per share, in late October. SanDisk has endured a tough year, with its revenues declining by 18% year-over-year to just over $4 billion through the first three quarters of the year. SanDisk witnessed a massive slowdown in its client SSD business this year, as revenues fell by 54% year-over-year to $444 million through the first three quarters. Similarly, SanDisk’s removable storage revenues dropped by 18% annually to $1.6 billion for Q1, Q2 and Q3 combined. On the other hand, SanDisk’s most lucrative business – enterprise SSDs – grew by almost 32% y-o-y in the same period to $522 million. The growth in enterprise storage is expected to continue in the coming years, which prompted Western Digital to pay a premium of over 50% to SanDisk’s rolling 3-month stock price before the announcement. Below we take a look at how SanDisk’s various divisions performed through 2015 and highlight future growth prospects for Western Digital-SanDisk. The acquisition is likely to close by the third quarter of 2016. 
A Tale Of Two SSDs – Client And Enterprise
- SanDisk Beats Consensus On Revenue, EPS As Removable Storage Sales Rebound
- SanDisk Earnings Preview: SSD Sales To Continue To Drive Results
- How Has SanDisk’s SSD Division Performed Over The Last Few Years?
- What Is SanDisk’s Fundamental Value Based On Expected 2016 Results?
- What Will SanDisk’s Revenue And EBITDA Look Like In 5 Years?
- SSD, Embedded & Removable Storage: What’s SanDisk’s Revenue & Earnings Breakdown?
SanDisk’s SSD revenues include consolidated revenues generated by SSD sales for both the enterprise and consumer markets. Enterprise SSDs consist of high-end enterprise-class SSDs used mostly in data centers, while client SSDs include embedded/internal SSD storage in tablets, smartphones and computers. Most of the company’s revenue streams suffered through the year, with the exception of enterprise SSD revenues, which witnessed a massive 32% y-o-y increase to $522 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.  The 2.5″ form factor SSD is ideal for usage in latency-sensitive environments including 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. 
The company also announced caching support data service for VMware’s (NYSE:VMW) flagship vSphere product during the quarter.  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 vSphere platform. More recently, the company announced a collaboration with data center hardware maker QCT to provide an all-flash storage solution for data centers. 
On the other hand, SanDisk’s client SSD sales through the first three quarters of the year were down by over 54% y-o-y to $444 million. The trend was evident in Q3, with client SSD product sales falling by over 51% on a y-o-y basis to $145 million. SanDisk’s management mentioned that it registered a decline in client SSD revenues due to losing a major customer in the market. It was widely believed that the major customer was Apple (NASDAQ:AAPL), which switched to Samsung (PINK:SSNLF) for sourcing SSDs.   Moreover, the company attributed the decline to a production issue related to the material used in a new embedded SSD component.
Removable and Embedded Storage Also Decline
Revenues generated by SanDisk’s removable storage unit were down by 5% year-on-year to about $2.5 billion in 2014. This was roughly the same as the 6.5% annual decline faced by the company in this division in the previous four years. However, SanDisk reported an 18% decline in revenues to $1.6 billion through the first three quarters of the year. The declining average selling prices limited revenue growth despite growth in sale volumes for USB storage, memory cards for imaging devices and SD and micro SD cards over the years. SanDisk made efforts to revamp its product line over the last few months in order to boost revenues. The company introduced the world’s highest-capacity micro SD card earlier this year, 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 upcoming 48-layer 3D NAND technology which SanDisk plans to include in removable storage products, could actually boost revenues in the coming years.
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 about 24% in 2015 thus far. Moreover, revenues were down by about 6% y-o-y to $975 million. Although, the second half of the year is typically a strong period for the company, which could lead to sequential improvement in revenues, the company is not very optimistic about a sustained year-over-year growth in the same period.
According to SanDisk’s early estimates, its total addressable market (TAM) for smartphone, tablet and other portable device storage is expected to grow at a CAGR of over 6% to become an $18 billion market by 2020. Increasing smartphone penetration in regions such as Asia-Pacific is likely to boost sales numbers for embedded storage products. However, much of the growth in Asia and other developing economies is expected to come from lower-cost smartphone manufacturers.  As a result, this could lead to a reduction in average selling prices per gigabyte for storage companies despite improving sales numbers in the long term.Notes:
- Western Digital is buying SanDisk for $19 billion, Engadget, October 2015 [↩]
- SanDisk Enables Performance & Density Gains for Cloud Infrastructures with New SATA SSD, SanDisk Press Release, August 2015 [↩]
- SanDisk Earnings Call Transcript Q2 2015, Seeking Alpha, July 2015 [↩]
- SanDisk Unveils Integrated Data Service for VMware vSphere with Next Generation FlashSoft Software, SanDisk Press Release, August 2015 [↩]
- SanDisk and QCT Deliver Next-Generation Performance & Capacity Solutions to Hyperscale Data Centers, SanDisk Press Release, December 2015 [↩]
- SanDisk cuts revenue outlook, Market Watch, March 2015 [↩]
- Samsung seals big SSD chip deal with Apple, Korea Times, March 2015 [↩]
- With Mobile Internet Ad Spending Growth of 210%, China Is The New Leader In The Industry, Daze Info, September 2014 [↩]