3 Things to Watch for When SanDisk Reports

SanDisk reports on Wednesday. Here's what to watch for long-term investors.

Jan 21, 2014 at 12:30PM

SanDisk (NASDAQ:SNDK) will release its fourth-quarter earnings on Wednesday as rapid growth in flash memory has propelled the stock to a price unseen since last decade. Competition heated up in 2013 as Micron Technology (NASDAQ:MU) increased its focus on solid-state drives, or SSDs, increasing revenue from the segment by 76% year over year. Meanwhile, legacy hard-drive makers like Seagate Technology (NASDAQ:STX) and Western Digital (NASDAQ:WDC) have taken steps in the faster growing SSD business, the latter partnering with SanDisk.

In the upcoming earnings release, I'll be paying attention to three metrics that should be important to long-term investors: the first full-quarter impact of SMART Storage Systems on the company's enterprise business, the company's embedded solutions as a percentage of revenue, and the company's ability to continue reducing costs.

Source: SanDisk.

A SMART acquisition
SanDisk closed the acquisition of SMART Storage Systems in the third quarter, but the fourth quarter will be the company's first full quarter integrating the business. The acquisition significantly strengthens SanDisk's Enterprise Storage Portfolio providing it with new enterprise customers to serve.

One reason for the acquisition was that SMART's Guardian technology is more scalable than SanDisk's. Enterprise SSDs is the company's fastest growing business, and the SMART acquisition should bolster that growth. The growth in enterprise SSD sales will be lumped into SanDisk's commercial channel, so look for more color in the 10-Q or conference call.

As SanDisk grows its presence in enterprise server farms, hard-disk manufacturers like Western Digital and Seagate are at risk. As the price gap between solid-state and hard-disk drives continues to decline, the benefits of flash-memory are beginning to outweigh the added cost. Western Digital has partnered with SanDisk to create a hybrid storage system to achieve the benefits of both products. Seagate has gone it alone and is producing its own hybrid and fully solid-state drives.

Embedding revenue growth
In the company's third quarter conference call, SanDisk earned 47% of its revenue from mobile products with the largest portion driven by embedded solutions. 23% of the company's revenue was tied to a single customer, thought to be Apple, in the third quarter.Apple accounted for 13% of total revenue in 2012, and its biggest customer in the third quarter that year -- again, probably Apple -- accounted for 16%.


Source: SanDisk.

A pre-report from Samsung earlier this month indicated that the Korean device maker, which also makes NAND flash memory to compete with SanDisk, might not have sold as many phones as it initially forecast. Better than expected sales of Apple's newest iPhones as well as competition from mid- and low-end handsets in China, which SanDisk targets with its iNAND product, are the likeliest reasons for lower than expected revenue from Samsung.

While SanDisk is increasing embedded solutions as a portion of its products mix, so is Micron. Micron President Mark Adams indicated on the company's first quarter conference call that it's focused on growing its share of the embedded market. Look for SanDisk to continue acquiring lucrative contracts with OEMs to fend off competition from Micron.

Reducing costs and improving profit
Analysts are expecting SanDisk to report earnings per share of $1.57, a 50% increase from the same period a year ago. Of course, the expected 10.6% bump in revenue helps, but SanDisk is also benefiting from declining costs.

One source of declining costs has been SanDisk's exposure to the Japanese Yen in its cost of goods. A declining Yen is good for SanDisk because it purchases its NAND flash memory from its joint venture with Toshiba, Flash Ventures, located in Japan. For the fourth quarter, the company expects its exchange rate to be around 97 Yen for one U.S. Dollar, but it could be higher as the Yen has climbed well over 100 in recent months.


Source: SanDisk.

More permanent cost advantages are derived from the company's improving technology. In the third-quarter, the management reported that its 19-nanometer process was fully ramped, so there's not much room to improve cost benefits from that process. It's next technological leap is its 1Y process, which doesn't offer as significant of cost reduction as the 19-nanometer process. The company expects 15% of its production will be on 1Y in the fourth quarter, though, so there should be a small bit of reduction there.

SanDisk will face increased costs from a full quarter of SMART Solutions operations, and the company's focus on SSD, which has a higher cost per gigabyte than most of its other products, will also increase the company's costs. Watch to see what the company is doing to offset these costs as it ramps up its 1Y process.

Another solid report
SanDisk has beat earnings estimates in each of the last four quarters, and it wouldn't be unthinkable for it to do it again. In a seasonally strong retail quarter, pay closer attention to what the company is doing in its commercial channels -- specifically, enterprise and embedded solutions. Improvement in those categories is more important to long-term investors as they're the company's biggest growth drivers going forward. Also pay attention to cost reductions, and any upside the company receives from the Yen exchange rate. Focus on what's permanent and what's non-permanent.

More compelling ideas from The Motley Fool
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information