This summary is based on the first quarter fiscal 2008 earnings call conducted by SanDisk Corporation (SNDK) on April 17, 2008.
Management:
Chairman and Chief Executive Officer: Eli Harari
President and Chief Operating Officer: Sanjay Mehrotra
Executive Vice President, Administration and Chief Financial Officer: Judy Bruner
Senior Director of Investor Relations: Lori Barker
Key Investors Issues
- EPS were 8 cents per share compared to nil cents per share last year.
- Net income was $17.9 million compared to a net loss of $575,000 a year earlier
- Revenue rose to $850 million from $786.1 million last year.
First Quarter Highlights
Revenue of $850 million was in line with expectations, reflecting a seasonal decline of 32% from the fourth quarter holiday period, the same seasonal decline the company experienced in then first quarter of 2007.
Megabytes sold declined sequentially by 9%, much less than the 22% decline experienced in the first quarter of 2007. However, sequential price decline was steep at 29%. Even with this pricing, product revenue grew by 5% on a year-over-year basis, and the first quarter of 2007 included $53 million of revenue from the consolidation of the Twinsys joint venture, which the company has since exited. Excluding Twinsys, product revenue grew by 14% year-over-year with megabyte growth of 189% and price decline of 61%.
Retail revenue was $418 million or 58% of product revenue.
- Retail revenue grew 22% on a year-over-year basis, with 12% growth in North America and 36% growth internationally.
- OEM revenue of $306 million was down 14% year-over-year. OEM sales in megabytes grew 237% year over year. However, ASP per megabyte was down 70%. The price decline in the OEM business primarily reflects competitive pricing in the mobile OEM space, as well as a shift to higher capacity mobile cards.
- OEM average capacity grew 154% year-over-year.
- License and royalty revenue of $126 million increased 30% year-over-year. This strong growth rate reflects the addition of new licenses that did not exist in the year-ago quarter as well as growth in variable NAND component based royalty and card royalties.
Non-GAAP product gross margin of 20.9% was lower than forecasted in January as the company made more price moves than originally planned for the quarter, reflecting the competitive industry environment.
- The company recorded higher inventory reserves than originally forecasted related to the growth in inventory balances.
- Cost of sales included zero Fab 4 start-up costs and little non-captive memory. Non-GAAP operating expenses of $230 million were down 3% sequentially and up 30% year-over-year.
- Expenses came in above previous forecast of $215 to $220 million primarily because of legal expenses and increases to bad debt reserves.
- Non-GAAP operating income was $47 million or 5.6% of revenue, essentially the same dollar level and same percent of sales as last first quarter.
- Other Income of $26 million is down year-over-year due to lower cash and interest rates and up sequentially because the fourth quarter included a 200-millimeter Fab impairment charge.
- Non-GAAP EPS is 21 cents per share compared to 19 cents per share in the first quarter of last year, with the increase primarily due to a reduction in fully diluted shares and a reduction in the tax rate.
Cash and short and long-term investments increased from the fourth quarter by $128 million to $3 billion.
- Cash flow from operations was a positive $219 million, primarily reflecting the impact of bi-annual receipt of certain royalties.
- Accounts receivable declined reflecting seasonality and the impact of price protection and promotions.
- Inventory on balance sheet grew to $695 million, more than 90 days’ worth, reflecting the ramp in Fab 4 and the seasonally lower first quarter sales.
- Channel inventory ended at approximately 7 weeks.
- Related to capital investments in the Flash Ventures, the company invested $37 million of cash and guaranteed additional operating leases of $426 million.
Market conditions throughout the first quarter were similar to last year’s first quarter, characterized by excess supply, seasonally soft demand and aggressive pricing.
Demand for products was good in all regions, particularly in international retail. However, the sharp decline in market pricing exceeded cost reductions and resulted in unsatisfactory product gross margins. The company believes that some of the large NAND Flash suppliers liquidated substantial amounts of excess inventory in late fourth quarter and throughout the first quarter at prices that were at or below their cost, thus precipitating the depressed industry-wide margins.
- The company believes that conditions should improve gradually as the low-priced inventory is sold through the channels and as the U.S. government’s stimulus package gets consumers back into the stores in time for Mothers’ Day, Fathers’ Day and school graduations.
- NAND Flash component pricing has been inching up, and the anticipated 3G Apple iPhone and competitors’ new models are expected to fuel renewed demand for NAND Flash in the second half of this year. Additionally, the company believes the NAND Flash industry is self-correcting: NAND Flash component pricing has outstripped the competitiveness of 200-millimeter NAND production lines and is accelerating their decommissioning in 2008 and several competitors have announced plans to delay new 300-millimeter fabs and these actions should help to establish better balance between demand and supply in the second half of 2008 and into 2009.
