SanDisk Up on Q1 Earnings Beat

Shares of SanDisk Corp. (SNDK) went up 5.8% in after-hours trading following better-than-expected results in the first quarter of 2014. The strong results were mainly attributable to strong client and enterprise solid state drive (SSD) sales, strength in retail businesses and favorable supply/demand metrics.

SanDisk’s first-quarter adjusted earnings of $1.32 per share came ahead of the Zacks Consensus Estimate of $1.17. Moreover, earnings per share increased 70.2% from the year-ago quarter. Adjusted earnings per share exclude amortization of acquisition-related intangible assets, convertible debt interest but include stock-based compensation expense.

Revenues

Total revenue in the first quarter increased 12.7% on a year-over-year basis to $1.51 billion. It was not only toward the higher end of management’s guided range of $1.450 billion–$1.525 billion but also ahead of the Zacks Consensus Estimate of $1.49 billion. The year-over-year revenue growth was primarily attributed to strong demand in both client and enterprise SSDs. Notably, sales from the SSD jumped 61% on a year-over-year basis and comprised 28% of total revenue.

Furthermore, SanDisk’s prudent mix of high-margin embedded and client and enterprise class SSD solutions and products boosted Commercial revenues (65% of first-quarter revenues), which grew 18% year over year. However, mobile embedded revenues (part of commercial revenues) remained flat on a year-over-year basis, primarily due to strong demand from iNAND offerings, which offset a decline in custom embedded solutions. The decline was due to a shift by a customer to client SSD solutions.

Additionally, SanDisk’s revenues from retail channels (35% of first-quarter revenues) increased 4% year over year driven by growth in USBs, SSDs and mobile cards.

During the quarter, SanDisk unveiled the 128GB Ultra microSDXC UHS-I memory card. The newly-launched card that will be available worldwide is expected to improve the computing experience (especially on mobile devices). In a separate development, SanDisk also introduced an enhanced version of iNAND Extreme embedded flash drive (:EFD).

Operating Results

SanDisk’s adjusted gross profit (including stock-based compensation but excluding other one-time items) for the quarter came in at $770.9 million, up 42.4% form the year-ago quarter. The year-over-year growth was primarily aided by higher SSD product mix, strong growth in branded retail channels and low revenues from custom embedded solutions.

SanDisk reported 17.8% year-over-year increase in adjusted operating expenses. As a percentage of revenues, operating expenses were up 92 basis points (bps) from the year-ago quarter. The increase was primarily due to higher research and development expenses, sales and marketing expenses and general and administrative expenses.

The company reported operating profit (including stock-based compensation but excluding other one-time items) of $446.4 million, up 67.8% from 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, net income for the first quarter came in at $304.6 million or $1.32 per share compared with $191.5 million or 79 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Cash and short-term investments were $2.81 billion versus $2.91 billion in the previous quarter. Long-term marketable securities were $3.51 billion. SanDisk had $1.17 billion of convertible long-term debt in its balance sheet.

SanDisk generated $357.6 million in cash from operating activities compared with $616.8 million in the prior quarter. SanDisk repurchased stock worth $90 million and paid dividends amounting to $52.0 million.

SanDisk also declared a cash dividend of 22.5 cents per share for the second quarter of fiscal 2014, payable on May 27.

Outlook

Management is positive about embedded solutions and enterprise SSD revenue growth, favorable product mix and better supply/demand metrics in 2014. SanDisk expects bit supply to remain unchanged in the range of 25% to 35%. Also, the company expects to increase its wafer capacity by approximately 5%.

SanDisk expects revenues for the second quarter to be between $1.550 billion–$1.625 billion while the Zacks Consensus Estimate for the same period is pegged at $1.580 billion.

SanDisk reiterated its fiscal 2014 revenue guidance in a range of $6.4 billion to $6.8 billion. The Zacks Consensus Estimate for the period is pegged at $6.676 billion.

The company expects its second quarter non-GAAP gross margin to be in the range 47.0%–49.0%. The company raised its fiscal 2014 gross margin forecast and expects it to range between 47% and 49% (previous guidance 45% to 48%).

SanDisk expects operating expenses in the range of $315 million to $325 million for the second quarter and $1.250 billion to $1.275 billion for full year 2014 (previous guidance $1.225 billion to $1.25 billion). Thus, non-GAAP operating margin is expected to range between 27% and 31% in 2014.

Our Take

SanDisk posted solid first-quarter results, with both its top and bottom lines surpassing the Zacks Consensus Estimate. It also provided an encouraging guidance. Revenues from commercial and retail channels were strong, aided by higher mobile embedded and client and enterprise class SSD sales. Moreover, the acquisition of SMART Storage Systems is expected to expand SanDisk’s offerings in the Enterprise SSD segment.

Lackluster PC sales, competition from Micron Technology Inc. (MU) and currency fluctuations could hurt fundamentals to some extent. However, we remain positive on management’s commentary of a turnaround in the coming quarters and strong secular demand for its storage products.

It is also worth mentioning that Apple Inc. (AAPL) is currently a major customer of SanDisk. Hence, we believe that with price and cost benefits as well as a long-term NAND supply agreement with the likes of Apple will help SanDisk to outperform in the NAND market.

Currently, SanDisk has a Zacks Rank #2 (Buy). A better-ranked stock in the technology sector is Juniper Networks, Inc. (JNPR), sporting a Zacks Rank #1 (Strong Buy).

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