SanDisk Corp.’s (SNDK) fourth quarter 2011 adjusted earnings of $1.24 per share edged out the Zacks Consensus Estimate by a penny. 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. Following the earnings release, the company’s shares plunged 8.49% in after-market trade as the earnings dropped a significant 23.9% from the year-ago level. The weakness was mainly due to higher cost (fab expansion) and unfavorable currency exchange rate.
Revenue
Total revenue for the fourth quarter was $1.58 billion, up 18.8% on a year-over-year basis and above the Zacks Consensus Estimate of $1.57 billion. The quarter’s result also achieved the higher end of the company’s guidance range. Apple Inc.'s (AAPL) iPad and iPhone sales as well as Google Inc.'s (GOOG) Android smartphone sales was the bright spot during the quarter. The demand for flash memory, which is used in these gadgets, was also high in the quarter. The revenue growth was driven by strong demand for SanDisk’s flash memory products in the emerging markets, as well as solid performance by its retail and OEM (original equipment manufacturer) channels across the globe.
Segment wise, Product revenue increased 18.7% year over year to $1.47 billion, while License and Royalty revenue came in at $103.5 million, up 19.5% year over year.
Operating Results
Gross margin in the quarter was 42.0%, down 140 basis points (bps) from the year-ago quarter. 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 also mitigated the positive effect of cost control measures.
Operating margin on a GAAP basis was 26.4% versus 26.9% in the year-ago quarter. The company’s total operating expenses increased 12.2% on a year-over-year basis. Higher operating expenses were mainly due to a 30.8% year-over-year increase in research and development (R&D) costs, partially offset by lower sales and marketing and general and administrative costs.
Net income on a GAAP basis was $281.2 million or $1.14 per diluted share compared with $485.5 million or $2.01 per share in the year-ago quarter. The unfavorable year-over-year comparison was attributable to a tax benefit received in the year-earlier period.
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 fourth quarter was $305.1 million or $1.24 per diluted share compared with $394.1 million or $1.63, in the year-ago quarter.
Balance Sheet & Cash Flow
SanDisk generated $209.6 million in cash from operating activities, compared with $176.3 million in the prior quarter. Capital expenditure was $78.6 million. Cash and short-term investments were $2.85 billion versus $2.55 billion in the previous quarter. Long-term marketable securities were $2.77 billion. Convertible long-term debt for the quarter was $1.60 billion, up from $1.58 billion in the previous quarter.
First Quarter & Fiscal 2012 Outlook
During the conference call, SanDisk informed that weaker demand from some mobile device manufacturers would hurt its revenue in the first half of this year. Certain mobile OEM customers have reportedly lowered their NAND requirements owing to lower demand for their products. But at the same time, the flash memory vendor remained positive on its diversified customer base and solid momentum of its SSD (solid state drive) product portfolio, which would support its revenue growth during the second half of fiscal 2012.
But, the downside in NAND demand has led SanDisk to seize its Fab 5’s Phase I expansion till coming July. The new facility, after becoming operational, will ramp the production of 19-nanometer (nm) chip technology, which will expedite cost savings compared to the company’s prior transition to 24-nm technology. The 19-nanometer technology transition and the wafer capacity expansion in Fab 5 are expected to be the key growth drivers for 2012.
Though the company expects some cost benefit from the existing 24-nm technology, a major portion of it will be realized in the later half of the year. Along with the cost savings, management believes that higher mix of non-captive memory and an improved pricing environment could boost margins.
The company now expects first quarter 2012 revenue between $1.3 billion and $1.35 billion, compared to the Street’s expectation of $1.462 billion.
SanDisk expects gross margin in the first quarter of 2012 to remain depressed due to Fab 5 start-up costs and currency exchange. The company expects non-GAAP gross margin including license and royalty of 39% to 42%. Non-GAAP operating expenses are expected to remain unchanged sequentially.
For fiscal 2012, SanDisk expects revenue in the range of $6.2 billion to $6.6 billion, with major contribution estimated in the second half of the year due to the overall improvement in demand. Non-GAAP operating expenses are forecast at $225 million to $235 million, with the expected increase coming primarily from growth in the R&D investment level, and a seasonal increase in sales and marketing spending. Full year 2012 gross margin is expected in the range of 39% to 42% and operating margin in the 23%-27% range.
Our Take
SanDisk posted a mixed-bag fourth quarter 2011 with the top line surpassing the Zacks Consensus Estimate, but the earnings missing the same as well as the year-ago level. Both OEM and retail sides of the business progressed, enabling solid product revenue. Overall revenue growth was encouraging and management confirmed that the demand for its products sustain the momentum going forward. However, the first quarter guidance was feeble, citing some demand uncertainty from the smart phone makers. But we believe that the issue will have a short-term effect on the figures.
Though near-term visibility, memory price declines, lackluster PC sales, European issues and currency fluctuations are headwinds, we remain positive on the management’s commentary reflecting a turnaround story in the second half of the year and vibrant secular demand for NAND flash.
Currently, SanDisk holds a Zacks #2 Rank, implying a short-term Buy rating.
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