Shares of SanDisk Corp. (SNDK) slumped 7.1% in after-hours trading yesterday, after the company reported tepid fourth-quarter 2014 results and provided weak first quarter and fiscal 2015 revenue guidance Also, lower operating profit and higher expenses impacted the share price.
The company posted adjusted earnings of $1.15 per share, which were in line with the Zacks Consensus Estimate. Earnings per share decreased 28% from the year-ago quarter. Adjusted earnings per share (on a proportionate tax basis) exclude amortization of acquisition-related intangible assets, inventory related expenses and convertible debt interest but include stock-based compensation expense.
Revenues
Total revenue increased a marginal 0.4% on a year over year basis to $1.735 billion but lagged management’s guided range of $1.800 billion–$1.850 billion. Also, reported revenues fell short of the Zacks Consensus Estimate of $1.771 billion. Reported revenues missed management’s guided range primarily due to supply constraints.
Nevertheless, the year-over-year revenue growth was primarily attributed to strong demand in both client and enterprise SSDs. Also, the acquisition of Fusion-io contributed to the year-over-year increase. Notably, sales from SSD contributed 31% of total revenue during the quarter, up from 21% in the year-ago quarter. The increase was primarily due to better-than-expected sales from enterprise SSDs.
Furthermore, revenues from Commercial channels (69% of fourth-quarter revenues) increased 12% year over year, primarily attributed to better-than-expected demand in enterprise SSDs. Embedded revenues (part of commercial revenues) were up 10% sequentially, primarily due to solid growth in custom embedded revenues.
However, SanDisk’s revenues from retail channels (31% of fourth-quarter revenues) decreased 18% year over year due to shrinkage of the imaging market coupled with supply constraints and low inventory levels. Removable products contributed 33% of fourth-quarter revenues, down from 43% in the year-ago quarter.
SanDisk launched various products that include USB flash drive and memory cards to cater to pent-up demand during the quarter.
Operating Results
SanDisk’s adjusted gross profit (including stock-based compensation but excluding other one-time items) for the quarter came in at $775.7 million, down 11.5% form the year-ago quarter. The year-over-year decrease was primarily due to unfavorable retail mix, lower-than-expected demand for OEM (original equipment manufacturer) products as well as for certain ULLtraDIMM products.
Adjusted gross margin also decreased 604 basis points (bps) on a year-over-year basis to 44.7% primarily due to higher cost of sale. Also, price per gigabyte decreased 4% sequentially.
SanDisk’s adjusted operating expenses increased 14.4% year over year to $397.8 million. As a percentage of revenues, operating expenses were up 279 bps from the year-ago quarter. The increase was primarily due to the Fusion-io acquisition, higher research and development expenses, sales and marketing expenses and general and administrative expenses.
This in turn impacted operating performance. The company reported operating profit (including stock-based compensation but excluding other one-time items) of $377.9 million, down 28.6% from the year-ago quarter. Moreover, operating margin declined 883 bps from the year-ago period and came in at 21.8%.
Excluding the amortization of acquisition-related intangible assets, inventory related expenses, convertible debt interest expense and related tax adjustments but including stock-based compensation expense, net income for the fourth quarter came in at $260.7 million or $1.15 per share compared with $368.6 million or $1.60 per share in the year-ago quarter.
Balance Sheet & Cash Flow
Cash and short-term investments were $2.26 billion versus $2.30 billion in the previous quarter. Long-term marketable securities were $2.76 billion. SanDisk had $1.19 billion of convertible long-term debt in its balance sheet.
SanDisk generated $487.8 million in cash from operating activities compared with $587.7 million in the prior quarter. During the quarter, SanDisk repurchased stocks worth $500 million and paid dividends amounting to $65 million.
SanDisk also declared a cash dividend of 30 cents per share for the first quarter of fiscal 2015, payable on Mar 23.
Outlook
Management remains positive on embedded solutions and enterprise SSD revenue growth, favorable product mix and better supply/demand metrics in 2015. SanDisk also remains positive on the strong demand from OEM customers and enterprise demand for 19-nanometer and 15-nanometer technology node. The company also expects revenues from enterprise SSD to surpass $1 billion in 2015.
Management further expects bit supply growth to be in the range of 35% to 40% in 2015. Also, the company expects its wafer capacity to be approximately 5% in the first half of 2015. The company however expects client SSD revenue to decline in 2015 primarily due to enormous customer shift from this solution.
SanDisk expects revenues for the first quarter to be between $1.400 billion–$1.450 billion, lower than the Zacks Consensus Estimate of $1.608 billion. Lower-than-expected demand from both iNAND products and retail sides of the business led to the weak revenue outlook. Uncertainty at smartphone makers also contributed.
The company expects its first quarter non-GAAP gross margin to be approximately 45%. SanDisk expects operating expenses in the range of $365 million to $375 million, reflecting expenses related to the Fusion-io acquisition and restructuring expenses.
For full year 2015, SanDisk expects revenues to be between $6.5 billion–$6.8 billion, lower than the Zacks Consensus Estimate of $7.33 billion. The company expects its fiscal 2015 non-GAAP gross margin to be in the range of 47% to 48%. SanDisk expects operating expenses to be approximately $1.5 billion and expects non-GAAP tax rate to be 31% for fiscal 2015.
Our Take
SanDisk posted tepid fourth-quarter 2014 results with the top line missing the Zacks Consensus Estimate, while the bottom line matched the same. Nevertheless, revenues from Commercial channels were strong, aided by enterprise class SSD sales. Moreover, the strategic acquisitions of Fusion-io Inc and SMART Storage Systems are expected to expand SanDisk’s offerings in the Enterprise SSD segment. However, the company provided a dismal first quarter and fiscal 2015 revenue guidance. Also, declining price per gigabyte, primarily due to unfavorable product mix, could impact the company’s results.
Several fast-growing markets, such as client and consumer PCs, smartphones and tablets, are using more NAND memory. Additionally, the yet-to-take-off ultrabooks will also use more NAND. In such a scenario, weaker-than-expected sales from NAND flash memory chips could be an indication of market share loss.
It is also worth mentioning that Apple Inc. (AAPL) is currently a major customer of SanDisk. However, reportedly, SanDisk didn’t get a significant boost from its sales to Apple, which in turn could be a near-term headwind for the company.
Going forward, lackluster PC sales, competition from Micron Technology Inc. (MU) and currency fluctuations will add to the woes.
Currently, SanDisk has a Zacks Rank #5 (Strong Sell).
A better-ranked stock in the technology sector is Avago Technologies Limited (AVGO), which sports a Zacks Rank #1 (Strong Buy).
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