SanDisk Corp.
's (
SNDK
) second quarter 2012 adjusted earnings of 15 cents per share
missed the Zacks Consensus Estimate of 17 cents. The adjusted or
non-GAAP earnings per share exclude amortization of
acquisition-related intangible assets, convertible debt interest
and tax gains, but include stock-based compensation expense. The
weakness was mainly due to lower demand for its mobile cards at
some OEMs (original equipment manufacturers) and weak pricing.
Despite the miss, the company's shares surged 11.17% in
after-market trade reflecting positive investor sentiment on the
back of strong second half guidance.
Revenue
Total revenue for the second quarter was $1.03 billion, down 24.9%
on a year-over-year basis. The quarter's result came slightly above
the Zacks Consensus Estimate of $1.02 billion. The revenue
deceleration was due to weak performances in the OEM vertical,
partially offset by strength in Retail.
Segment wise, Product revenue decreased 26.3% year over year to
$945.2 million, while License and Royalty revenue came in at $87.1
million, down 6.4% year over year.
Sales of SSDs (solid state drives) grew sequentially due to the
ramp up of enterprise SSD solution offerings. Management believes
that the product will continue to perform better with support from
the acquisition of enterprise Storage Software Maker Schooner
Information Technology in June.
Operating Results
Reported gross margin in the quarter was 27.2%, down from 44.6% in
the year-ago quarter. The margin decline was due to higher cost as
well as price declines. Cost per gigabyte improved 35% year over
year. The negative impact from Yen conversion also affected the
gross margin.
Operating margin was 3.5% versus 27.6% in the year-ago quarter. The
company's total operating expenses increased 4.3% on a
year-over-year basis. Higher operating expenses were mainly due to
4.9% and 8.4% year-over-year increases in research and development
and selling and general expenses, respectively. But this was
partially offset by lower general and administrative costs.
Net income on a GAAP basis was $13.0 million or 5 cents per diluted
share compared with $248.4 million or $1.02 in the year-ago
quarter.
Excluding the amortization of acquisition-related intangible
assets, convertible debt interest expense and related tax
adjustments, but including stock-based compensation expense,
non-GAAP net income for the second quarter was $36.8 million or 15
cents per diluted share compared with $269.0 million or $1.14, in
the year-ago quarter.
Balance Sheet & Cash Flow
SanDisk generated $19.1 million in cash from operating activities,
compared with $209.6 million in the prior quarter. Capital
expenditure was $96.1 million. Cash and short-term investments were
$2.54 billion versus $2.67 billion in the previous quarter.
Long-term marketable securities were $2.72 billion. Convertible
debt for the quarter was $1.65 billion, up from $1.63 billion in
the previous quarter.
Outlook
Management has provided an upbeat outlook for the second half of
fiscal 2012. It believes that price declines could moderate in the
second half. Management also expects higher demand for its mobile
and SSD solutions, which will likely boost its revenue growth in
the third and fourth quarters.
The company expects a host of new launches by the coming quarters
that will expand its portfolio as well as strengthen fundamentals.
Specifically, SanDisk forecasts a growth in mobile embedded revenue
as well as SSD sales.
The company also mentioned some market dynamics that would be
catalysts for SanDisk during the second half. It expects the launch
of several new smartphones and tablets, Ultrabooks and other
end-client PCs, running on SSDs. This will boost demand for NAND
Flash gadgets aka SSD.
Also, the flash-drive maker anticipates a cut in the supply as the
industry is reducing its capacity. Constrained supply coupled with
growing demand for SSDs due to continuous launch of next-gen
technologies would create an encouraging pricing environment.
Anticipating the changing market scenario, SanDisk now expects
third quarter revenue in the range of $1.20 billion, plus or minus
$50 million.
The company expects non-GAAP gross margin to remain flat
sequentially at approximately 28% (+/- 2.0%). The company expects
price declines to get balanced with cost decline, allowing gross
margins to stabilize. Non-GAAP operating expenses will be roughly
$235 million for the third quarter. Non-GAAP other income is
expected to be approximately $5 million, and the tax rate is
projected at approximately 30% on a non-GAAP basis.
For the fourth quarter, the company expects to benefit from
continued sequential growth in sales of the mobile embedded
products and SSDs, as well as retail seasonality. Gross margin will
keep on improving in the fourth quarter with a continued favorable
supply-demand environment and an increasing mix of higher
value-added product sales.
For fiscal 2012, non-GAAP operating expenses are expected to be
$910 million, down from the previously expected $920 million. The
company also expects total capital investment of approximately $1.2
billion, including about $700.0 million at the fab joint ventures
and about $500 million of capital expenditure.
Zacks Consensus Estimate for third quarter and 2012 are pegged at
37 cents and $1.63 per share, respectively.
Our Take
SanDisk posted a weak second quarter with the bottom line missing
the Zacks Consensus Estimate. Revenues from OEMs continued to lack
luster, somewhat offset by strength in retails. Second half
guidance was encouraging, which was enough to turn on the mood of
the investors.
Though lackluster PC sales, European issues, competition from
Micron Technology Inc.
(
MU
) and currency fluctuations are headwinds, we remain positive on
management's commentary of a turnaround story in the second half of
the year and strong secular demand for NAND flash.
Currently, SanDisk holds a Zacks #3 Rank, implying a short-term
"Hold" rating.
MICRON TECH (MU): Free Stock Analysis Report
SANDISK CORP (SNDK): Free Stock Analysis Report
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