SanDisk Corporation (SNDK)
Q2 2009 Earnings Call Transcript
July 22, 2009 5:00 p.m. ET

Executives

Jay Iyer - Director of Investor Relations
Eli Harari - Chairman and Chief Executive Officer
Judy Bruner - Executive Vice President of Administration and Chief Financial Officer

Analysts

Gary Hsueh – Oppenheimer & Company
Paul Coster - JPMorgan
Daniel Berenbaum - Auriga USA
Uche Orji - UBS
James Covello - Goldman Sachs
Edwin Mok - Needham & Company
Craig Ellis - Caris & Company
Bob Gujavarty - Deutsche Bank

Presentation

Operator

Good day, everyone and welcome to SanDisk Corporation’s second quarter 2009 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jay Iyer, Director of Investor Relations. Please go ahead, sir.

Jay Iyer

Thank you, Jamie and good afternoon everyone. Joining us on the call today are Dr. Eli Harari, Chairman and CEO of SanDisk, and Judy Bruner, Executive Vice President of Administration and CFO. Sanjay Mehrotra, our President and COO is away attending an off-site executive training program.

Before we begin, please note that any non-GAAP financial measures discussed during this call, as defined by the SEC in Regulation G, will be reconciled to the most directly comparable GAAP financial measure. That reconciliation is now available along with supplemental schedules on our website at sandisk.com/IR.

In addition, during our call today we will make forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the “Risk Factors” discussed in the documents we file from time to time with the SEC, including our Annual Report on Form 10-K/A for fiscal 2008 and our subsequent quarterly reports on Form 10-Q. SanDisk assumes no obligation to update these forward-looking statements, which speak as of the date hereof.

With that, I would like to turn the call over to Eli.

Eli Harari

Thank you, Jay. SanDisk delivered a profitable quarter in the second quarter for the first time in about five quarters. Resizing our organization in the fourth quarter of 2008 and restructuring our manufacturing joint ventures with Toshiba in the first quarter of 2009, coupled with strong execution in operations and technology are providing us new flexibility to achieve our financial objective.

In the first half we have been able to weather the slow economy by leveraging our diversified channels and global brand, with approximately 60% of our second quarter product revenues coming from outside the US and 41% coming from OEM customers.

In the third quarter, we expect demand for our products to grow at a modest pace, with growth primarily from OEM mobile customers. Industry bit supply is expected to also grow at a modest pace in the third quarter, as idle wafer capacity has largely returned to production and technology conversions will continue as well. We expect approximately 50% of our captive bit output in the third quarter to be on three-bits-per-cell architecture X3 on 43-nanometer technology. Our 32-nanometer transition has begun and we expect to ramp its production over the next several quarters.

Overall, we expect to sustain a highly competitive product cost in 2009 and 2010 in our captive supply base.

Since early July, we have been running our captive fab capacity at full utilization, however, our inventory is still on the high side and we may cut back the fab utilization rate late in the year or early next year, should the expected pickup in holiday sales fail to materialize.

The key to returning to sustained profitability is for the industry supply to closely track industry demand, as has been the case in the past six months, when industry-wide production cuts brought supply in line with demand. In the prior four years, the NAND industry had invested in substantial new wafer fab capacity to satisfy strong growth in demand from new markets. Some of these markets are maturing and growing at a slower rate, while new markets, such as solid-state drives, are still in their early days and their future bit growth trajectories will be closely tied to pricing that, except for enterprise SSD, may not deliver attractive margins, at least not initially.