SanDisk (NASDAQ: SNDK) reported its fourth-quarter earnings on Wednesday. The flash-memory maker had great results for the quarter, but its outlook for 2014 was weak compared to analyst expectations.
On the conference call, analysts pressed management about price declines in the face of competition from Micron Technology (NASDAQ: MU) and the company's progress in China. Meanwhile, the the company focused on its opportunity in the enterprise solid-state drive, or SSD, space, where it competes with legacy hard-drive manufacturers Western Digital (NASDAQ: WDC) and Seagate (NASDAQ: STX)
Let's look at some of the key quotes from SanDisk's management during the conference call.
SanDisk is focused on capturing more of the high-end market and gaining revenue share against its competition, even if that means losing bit share. However, the company's forward guidance indicates that it expects its gross margin to decline through 2014, indicating pressure on pricing. Further, a report from DigiTimes indicates that prices for NAND flash memory fell 3% to 5% in the first half of January.
CFO Judy Bruner had this to say regarding price declines:
In a healthy environment, we expect that over time, industry price decline is probably roughly correlated or similar to industry cost decline. And as a result, we expect that industry price decline in 2014 is somewhat more than industry price decline in 2013.
We expect that we can continue to do better in terms of our overall blended price decline than the industry price decline as we continue to execute on our strategy of ... shifting our portfolio, to higher value added solutions.
In other words, SanDisk can't deny that secular pressure will cause the price of its products to decline, but it will focus on capturing a bigger share of the high-end market from Micron and Samsung just as it did in 2013.
Advances in China
One area of focus for SanDisk has been getting its products into the hands of more Chinese consumers and OEMs. The emerging markets represent an excellent opportunity for SanDisk's embedded solutions, which mostly show up in mobile devices, and also its retail segment.
CEO Sanjay Mehrotra had this to say about the company's performance in China:
Our China market initiative has strengthened our position with the entry in mid-range OEMs, as well as with the emerging companies who are developing premium solutions for both the domestic, China and international markets.
He later added this tidbit about retail revenue upon questioning:
More than half our units sold are in the emerging markets.
Contracts with Chinese OEMs will be a key factor in SanDisk's 2014. It's good to see the company making inroads in the emerging markets with both retail and commercial sales, which ought to support one another as the company continues its initiatives in China.
SanDisk will face tough competition from Micron, however, in its embedded-solutions segment. Micron is aggressively pursuing OEMs and grew its embedded-solutions revenue 37.1%, year over year, last quarter. Although Micron still trails SanDisk in revenue share, SanDisk's embedded-solutions segment actually saw a decline in revenue, as downward pressure on the high end offset increases in its low-end products.
SanDisk's enterprise advantage
In his prepared remarks, Mehrotra pointed out that SanDisk has excellent strengths in its fastest-growing segment: enterprise SSDs. The secular growth in SSDs has been of great benefit to SanDisk and its competitors, but Mehrotra believes his company is poised to capture a larger portion than competitors like Micron, Western Digital, and Seagate.
This young market is evolving along multiple dimensions each with a different set of products performance requirements and varying implementation schemes of flash depending on the customer type, such as storage and server OEM, hyper scale and others. While the resulting business dynamics vary in terms of products requirements pricing and support, the strength of our vertical integration allows us to address these diverse enterprise opportunities.
When Mehrotra points to SanDisk's vertical integration, he's referencing the company's strength in software solutions as well as its competitive flash-memory technology. He previously said that software as a stand-alone product is an opportunity for the company, and could potentially be used to support NAND memory from a competitor like Micron or Samsung, but currently wants to leverage the advantage into more hardware sales.
Additionally, SanDisk has the advantage over Western Digital and Seagate as enterprises make the transition to SSDs from legacy hard drives. Western Digital has partnered with SanDisk to create a hybrid drive to achieve the best of both worlds. Seagate, however, has chosen to go it alone producing its own SSDs and hybrid drives.
SanDisk has lots of opportunities in 2014. It's continued initiatives in China should lead to more embedded solutions designs in Chinese OEMs and continued retail growth. It also has great strength in the enterprise SSD market, where it holds a software advantage over its hardware competitors. It will, however, face pricing pressure as the supply demand balance shifts with new entrants like Seagate and continued competition from Micron and Samsung.
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