SanDisk Corp.’s (SNDK) second quarter 2011 adjusted earnings of $1.10 per share surpassed the Zacks Consensus Estimate of 97 cents. The adjusted or non-GAAP earnings per share exclude amortization of acquisition-related intangible assets, operating expense adjustments, convertible debt interest and tax gains, but includes stock-based compensation expense. Shares surged 3.08% in after market trade.
Revenue
Total revenue for the second quarter was $1.38 billion, up 16.6% on a year-over-year basis. The revenue growth was driven by strong demand for SanDisk’s flash memory products in emerging markets, as well as strong performance by its retail and OEM (original equipment manufacturer) channels, globally.
Segment wise, Product revenue increased 17.5% year over year to $1.28 billion, while License and Royalty revenue was $93.0 million, up 6.0% year over year.
Operating Results
Product gross margin in the quarter was 41.3% on a non-GAAP basis versus 42.4% in the year-ago quarter. Total gross margin decreased 140 basis points year over year to 45.3%.
The margin decline was due to the negative impact of the yen exchange rate, start-up cost for a new fab as well as price declines. All these factors tempered the positive effect of cost control measures.
Operating margin on a non-GAAP basis was 29.2%, compared with 31.9% in the year-ago quarter. The company’s total operating expenses increased 24.8% on a year-over-year basis.
Net income on a GAAP basis for the quarter was $248.4 million, or $1.02 per diluted share, compared with $257.9 million, or $1.08 per share 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 $269.0 million, or $1.10 per diluted share, compared to net income of $257.8 million, or $1.08, in the year-ago quarter.
Balance Sheet & Cash Flow
SanDisk generated $269.2 million in cash from operating activities, compared with $398.6 million in the prior quarter. Cash and short-term investments were $2.69 billion versus $2.97 billion in the previous quarter. Huge cash used in investing activities have lowered the cash balance for this quarter. Convertible long-term debt for the quarter was $1.76 billion, up from $1.73 billion reported in the previous quarter. Long-term marketable securities were $2.58 billion.
Third Quarter & Fiscal 2011 Outlook
SanDisk expects third quarter revenue to range between $1.375 billion and $1.425 billion. For the full year, management now expects total revenue of $5.6 billion to $5.7 billion, compared with the previous range of $5.3 billion to $5.7 billion. Management expects the third quarter gross margin to remain depressed due to Fab 5 start-up costs and currency exchange.
Our Take
SanDisk posted decent second quarter 2011 numbers surpassing the Zacks Consensus Estimate. Both OEM and retail sides of the business progressed, enabling solid product revenue. Though revenue guidance was decent, margin guidance was disappointing, as SanDisk continued to see memory price declines and currency headwinds.
We understand that demand for flash memory could grow in the coming years, backed by the popularity of devices such as smartphones and tablets such as Apple Inc.'s (AAPL) iPad. But we think that slower cannibalization of PC could hurt the demand for SanDisk’s memory products and rationalize revenue growth, going forward. Also, customer concentration risk, competitive pressure and European weakness are headwinds for the company.
Currently, SanDisk holds a Zacks #5 Rank, implying a short-term Strong Sell rating.
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