This summary is based on the second quarter fiscal 2008 earnings call conducted by SanDisk Corporation (SNDK: chart) on July 21, 2008.
Management:
Senior Director of Investor Relations: Lori Barker
Chairman and Chief Executive Officer: Eli Harari
President and Chief Operating Officer: Sanjay Mehrotra
Executive Vice President, Administration and Chief Financial Officer: Judy Bruner
Key Investors Issues
- EPS were a loss of 30 cents a share compared to earnings of 12 cents a share last year.
- Net loss was $68 million compared to earnings of $28 million for the same period last year.
- Revenue slipped 1% to $816 million.
Second Quarter Highlights
Product revenue of $688 million was down 5% on both a sequential and a year-over-year basis and came 61% from the retail channel and 39% from OEMs.
- ASP per megabyte declined 15% sequentially and 55% year-over-year, in line with expectations. However, demand was weaker than anticipated, with megabytes sold growing 14% sequentially and 120% year-over-year.
Retail revenue was up 1% sequentially and down 13% year-over-year.
- Retail average capacity increased by 15% sequentially; however, retail unit growth was weak at a 6% sequential increase.
- Retail sales in units and dollars were down sequentially in the U.S. and Asia but up in Europe. U.S. consumer demand was weak. In Asia, the company lost some share due to aggressive pricing, while Europe retail delivered solid revenue growth.
OEM revenue of $266 million was down 13% sequentially and up 13% year-over-year.
- OEM weakness came primarily from the mobile handset vendors, where the company experienced a sequential decline in unit sales of bundled mobile cards and flat average capacity.
License and royalty revenue of $129 million increased 2% sequentially and 20% year-over-year.
- The growth in license and royalty revenue came from both variable NAND component based royalty and card royalties.
- Non-GAAP product gross margin of 5.7% was 10 points below the middle of the gross margin range provided in April. Price reduction and product cost reduction were as estimated. The margin miss is attributable to inventory reserves, lower volume and regional mix.
- Seven percentage points of the gross margin miss was due to higher-than-forecasted inventory charges relating to lower-than-expected sales, higher Fab-4 output, and outlook that price decline in the second-half will be more aggressive. The majority of the inventory reserve was related to lower of cost or market. The remaining three percentage points of product gross margin miss are attributable to volume and mix.
- Because of the lower-than-expected sales volume, a smaller percentage of sales came from the more recent lower cost production and fixed cost of sales represented a larger percentage of lower sales. In addition, sales included a higher mix of international revenue where prices are more competitive and gross margins lower.
Non-GAAP operating expenses of $224 million were down 2% sequentially and included a $4 million restructuring charge related to employment reductions which impacted approximately 130 employees.
- Lower sales volume, coupled with higher inventory charges, resulted in a non-GAAP operating loss of $57 million or 7% of revenue. Other Income of $20.5 million was as forecasted, and the non-GAAP loss per share is 10 cents per share, compared to a non-GAAP profit of 21 cents per share in the first quarter and 30 cents per share last year.
- Cash and short- and long-term investments decreased from the first quarter by $484 million to $2.5 billion. Cash flow from operations was a negative $327 million, primarily reflecting the operating loss, growth in inventory, and increase in royalty receivables, which are paid bi-annually. Net inventory increased sequentially by $101 million, reflecting the strong output from captive fabs, and at $796 million represents more than a quarter’s worth of inventory.
- Channel inventory ended between eight and nine weeks, somewhat higher than at the end of the first quarter and the end of the second quarter last year, again reflecting a slowdown in sell-through, particularly in the U.S.
- Capital fab investments included a $97 million investment in the Fab-4 joint venture and the return of $24 million of investment from the 200-millimeter joint venture. The company guaranteed $282 million of incremental operating leases for purchase of equipment for Fab-4.
- Fab-3 and Fab-4 production wafers continued to provide excellent yields and the company continued to reduce cost structure through transitions to 43-nanometer MLC and the industry’s first commercialized 56-nanometer 3-bits per cell technology.
Third Quarter 2008 Outlook
