3 Takeaways From SanDisk's Earnings Results

How did the flash-memory maker stack up against expectations on three key metrics?

Jan 24, 2014 at 10:45AM

SanDisk (NASDAQ:SNDK) reported its fourth-quarter results on Wednesday. In the earnings preview, we looked at three things that investors should pay particular attention to in the report:

  • The effect of the SMART Storage Systems acquisition on the Enterprise SSD business with server companies like IBM (NYSE:IBM)
  • The company's ability to improve its embedded solutions revenue in the face of competition from Micron Technology (NASDAQ:MU)
  • Its ability to control costs

Let's see how it did, and how this impacts long-term investors.

How did the SMART acquisition affect Enterprise SSD?
The SMART acquisition is already starting to pay off. The company set a new revenue record for enterprise SSDs in the fourth quarter. The company has used SMART Storage Systems' solutions to achieve several new design wins, and management says there are more in the pipeline.

Ulltradimm
Source: SMART Storage Systems

Earlier this week, SanDisk announced that IBM will use its new ULLtraDIMM enterprise SSD in its x3850 and x3950 X6 servers under the brand name eXFlash DIMM. The technology, which SanDisk acquired in the SMART purchase, provides best-in-class latency performance. IBM's early adoption of the technology is interesting, considering Big Blue has under-invested in its server business, and it has agreed to sell the division to Lenovo for $2.3 billion. The server business may be better off in the hands of Lenovo, and Lenovo could do what it did with IBM's PC business with its x86 server business.

Moreover, working with Lenovo may better suit SanDisk. Lenovo has a growing consumer-device business with its IBM-acquired PCs and its mobile devices. A closer relationship with the Chinese manufacturer may allow SanDisk to achieve further design wins.

In the fourth quarter, Enterprise SSD was the fastest-growing business at SanDisk, and the company expects that trend to continue. Currently, SSDs make up nearly a third of the company's commercial sales. With the SMART Storage Systems Guardian technology replacing SanDisk's previous architecture, it believes it will be able to scale better.

Embedded revenue growth
SanDisk's embedded solutions didn't generate as much revenue as they did last year, and the segment fell to just 26% of revenue from 32% in the year-ago quarter. Of course, SSDs more than made up the difference, and surely some of those commercial channel SSDs are in mobile devices.

Inand

Source: SanDisk

One bright spot in the segment was SanDisk's iNAND product line, which is targeted at entry-level and mid-range OEMs. iNAND and MCP iNAND revenue was up over the year-ago period, indicating that SanDisk's initiatives in China to gain share on the low end are succeeding. As the high-end mobile-device market saturates, low-end devices ought to return SanDisk's embedded solutions segment to revenue growth in 2014.

SanDisk faces some aggressive competition from Micron in embedded solutions. President Mark Adams indicated on the company's first-quarter conference call that it's going to pursue growing its market share. Last quarter, Micron grew its embedded-systems revenue 31.7% over the prior-year period, to $366 million. That still lags SanDisk's embedded revenue share of $449 million.

Cost reduction
Once again, SanDisk benefited from a weakening yen. The company sources its flash memory from a joint venture it has with Toshiba, Flash Ventures, located in Japan. Thus, as the yen weakens, SanDisk is able to increase its purchasing power via U.S. dollars. The company saw an increase in its yen-per-dollar exchange rate to 97 in the fourth quarter, up from 93 in the quarter prior. The company has hedged an exchange rate of 99 yen per dollar for the upcoming quarter, and expects to take advantage of further weakness throughout 2014.

Long-term investors shouldn't count on a weak yen to improve the cost structure of the company, however. More permanent cost improvements came in the form of SanDisk's transition to 1Y technology from 19 nanometers. Production of the more cost-effective process was higher than the expected 15% of total output in the fourth quarter, indicating that 1Y is ramping well.

Overall, SanDisk's cost per gigabyte declined 6% sequentially, but operating expenses grew more than expected. The SMART acquisition added significant costs, but that was already expected. There were $16 million of one-time expenses, including a $5 million bonus related to the company's excellent 2013 results, which was baked into the company's guidance. In total, one-time and seasonal expenses overshot SanDisk's outlook by $7 million.

Mixed results
SanDisk's stock was like a roller coaster in after-hours trading Wednesday. Great top- and bottom-line results had the stock up initially, but a weak outlook for fiscal 2014 caused the exuberance to die quickly.

The details of SanDisk's fourth-quarter results are somewhat mixed. Enterprise SSDs continue to grow exceptionally well, but the lack of embedded-systems growth isn't great. As the low-end mobile-device segment grows, SanDisk will have to compete with Micron for design wins, particularly in China. The company is doing well controlling costs, but with pricing pressure on flash memory, its operating expenses will need to stay in check.

Big changes are under way in tech. Here are 3 ways to play them:
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers