SanDisk Earnings Preview: Can Enterprise SSDs Make Up For Weakness Across Retail Product Line?

SNDK: SanDisk logo

SanDisk Corporation (NASDAQ:SNDK) is scheduled to announce its fourth quarter earnings on Wednesday, January 27. [1] The company has reported weak results through the first three quarters of 2015, with combined revenues declining by over 18% year-over-year to $4 billion. The fall in revenues was largely due to a massive slowdown in SanDisk’s client SSD business, which fell by 54% y-o-y to $444 million in the same period.

After a sustained period of weakness, SanDisk announced in late October that hard drive manufacturer Western Digital (NASDAQ:WDC) will acquire the company for $19 billion, or $86.50 per share. According to conditions of the deal, Western Digital will pay $85.10 in cash along with 0.0176 shares of Western Digital common stock per share of SanDisk common stock. If Western Digital’s Unisplendour transaction fails to go through, then Western Digital will pay $67.50 in cash and 0.2387 shares of Western Digital common stock per share of SanDisk common stock. We have a $66 price estimate for SanDisk’s stock, which is in line with the current market price.

See our complete analysis of SanDisk here

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Enterprise SSD Revenues To Continue Growth

Most of the company’s revenue streams suffered in the first three quarters of 2015, 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. [2] 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. [3]

The company also announced caching support data service for VMware’s (NYSE:VMW) flagship product vSphere during the quarter. More recently, the company announced a collaboration with data center hardware maker QCT to provide an all-flash storage solution for data centers. [4] At the end of Q2, SanDisk 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. 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.

Weakness In Other Divisions Still A Concern

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 in early 2015, with a capacity of 200 gigabytes; the iXpand flash drives for Apple devices and USB flash drives for Android-based devices in late 2014, 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 also witnessed a decline in revenues over the last couple of years 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 for the three quarters of 2015 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.

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. [5] [6] Moreover, the company attributed the decline to a production issue related to the material used in a new embedded SSD component. As a result, the company could continue to face weakness in client SSD sales over the next couple of quarters.

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  1. SanDisk Sets January 27, 2016 to Discuss FQ4-2015 Financial Results, SanDisk Press Release, December 2015 []
  2. SanDisk Enables Performance & Density Gains for Cloud Infrastructures with New SATA SSD, SanDisk Press Release, August 2015 []
  3. SanDisk Earnings Call Transcript Q2 2015, Seeking Alpha, July 2015 []
  4. SanDisk and QCT Deliver Next-Generation Performance & Capacity Solutions to Hyperscale Data Centers, SanDisk Press Release, December 2015 []
  5. SanDisk cuts revenue outlook, Market Watch, March 2015 []
  6. Samsung seals big SSD chip deal with Apple, Korea Times, March 2015 []