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SanDisk Earnings Preview: Enterprise And Embedded SSD To Drive Quarter

Posted
1/22/2014 1:51:00 PM
By: Trefis
Referenced Stocks:SNDK;SSD;STX;WDC

SanDisk ( SNDK ) is set to release its Q4 2013 earnings on Wednesday, January 22. We expect the company to meet its revenue guidance midpoint of $6.14 billion for the year, which would be a 20% year-on-year (y-o-y) increase from 2012. In the previous quarter SanDisk posted a strong set of results, beating its revenue guidance and generating record revenues of $1.63 billion. In the first three quarters of the year, SanDisk saw its net income increase by around 250% on a yearly basis, with earnings per share going up to $2.91 per share from 83 cents per share in the same period last year . According to the company's management, the yen devaluation played a major role in the reduction of its production costs, since the company sources many products from Japan. Additionally, a favorable product mix with increasing usage of its 19-nanometer NAND flash memory chips led to healthy margins in the last quarter.

In the wake of a strong Q3, the company revised its Q4 revenue guidance midpoint to $1.7 billion, which is around 3% more than its previous expectation. Additionally, we expect the company's margins to continue to benefit from the favorable yen environment in the near term and from a growing mix of high-margin solid state drive ( SSD ) products in the long run. We have a $70 price estimate for the company, which is in line with the current market price.

See our full analysis on SanDisk

Enterprise And Embedded SSDs To Drive Revenues

SanDisk's share of revenues from solid state drive ( SSD ) sales grew from 9% in 2012 to 19% in the first three quarters of 2013. The company is targeting 25% of its revenues to be generated from SSD sales in 2014. SSD products include both enterprise storage drives as well as embedded storage drives, primarily shipped for usage in tablets, smartphones and laptops.

With user data increasingly moving to the cloud, the storage demand from data centers is increasing. Since SSDs provide efficient storage through higher Input/Output per Second (IOPS) and low latency, they are increasingly becoming the preferred option for enterprises. The growth in enterprise storage requirements over the next few quarters should contribute significantly to SanDisk's revenues, though the company could face stiff competition from major storage providers such as Western Digital Corporation ( WDC ) and Seagate ( STX ) entering the enterprise SSD market.

Portable devices such as smartphones and tablets are dependent on flash-based storage provided by companies such as SanDisk, Hynix, Toshiba and Samsung. The explosive growth in the number of these portable devices over the last few years has increased the demand for embedded storage products such as internal flash storage for tablets and smartphones. Additionally, internal storage for laptops has also started gradually shifting to solid state drives in the last few quarters due to better performance of these drives, leading to a growing contribution from embedded storage products to SanDisk's top line. However, the rate of adoption of SSDs for laptops could slow down going forward, given the newly available cheaper alternatives for pure SSDs. Overall, the contribution of embedded storage products for smartphones, tablets and laptops to the company's top line increased from 24% in 2012 to more than 28% in the first three quarters of 2013. However, we expect the share of revenues generated by this segment to remain constant at around the current figure.

Improved Margins Due To Favorable Product Mix And Weakened Yen

According to the company's management, the low cost of sales over the last two quarters was primarily driven by yen devaluation and this should be reflected in the fourth quarter earnings as well. However, SanDisk doesn't expect the yen to give a similar boost to the bottom line figures in the coming quarters. Moreover, in its SEC filings, the company lists yen fluctuation as a possible risk to its production costs in the long term.

However, the company can look forward to technology advancements - most notably in the use of its 19-nanometer technology, whose mix in the overall sales improved to 85% from 80% last quarter - contributing to overall margin improvement. As a result, the company's gross margins improved significantly from 31% in the year-ago quarter to about 50% in the previous quarter.

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