SanDisk (NASDAQ:SNDK) released its second-quarter earnings on Wednesday, and despite beating analysts' estimates for the quarter, management provided disappointing guidance for the third quarter. The biggest factor driving down guidance is that SanDisk is supply constrained. This left analysts with a lot of questions regarding how the company will manage strategic customers such as Apple (NASDAQ:AAPL), and how it plans to compete with SSD competition like Samsung (NASDAQOTH:SSNLF).
Following are three quotes from SanDisk's management that investors must read.
So, how does the company decide what customers it takes?
With limited supply, SanDisk is forced to become strategic regarding which customers it chooses.
Apple has become a very valuable customer, putting the NAND supplier's products in its iDevices and MacBooks. Last year, Apple accounted for 20% of SanDisk's revenue.
When asked when it would make sense to drop a strategic customer like Apple, Mehrotra had this to say:
"In terms of the strategic nature of the customer, the factors that we look at are the long-term stickiness of the business ... [and] our relationship with that customer in terms of us being able to deliver value to that customer. We certainly keep in mind the revenue opportunities when we look at the strategic nature of the customers, as well as the profitability consideration."
A customer like Apple, which sold nearly 250 million iDevices in fiscal 2013, is a huge revenue opportunity for SanDisk. The stickiness of Apple's business is historically better than other smartphone OEMs like Samsung, as Apple often commissions custom solutions. Because Apple is such a big customer, however, it's able to exert pricing power on SanDisk, driving down the supplier's profitability.
Vertical integration will help SanDisk win share of the market
SanDisk faces significant competition in the enterprise SSD market, which is much more profitable than the embedded solutions the company makes for Apple. To stay ahead of the competition in SSDs, Mehrotra sees vertical integration as a key to the business.
"Vertical integration is absolutely going to be key in enterprise SSDs. ... Having large volume production capability of flash, high-quality flash, leading-edge technology node, and applying ... aspects of that to the controller and the firmware aspects to manage high reliability, high-performance requirements of enterprise workloads, and doing it all, really, in a very seamless fashion across all aspects of product development and tests and understanding of customer applications is key to winning in the enterprise SSD space."
SanDisk offers everything needed for enterprise servers to use its SSDs. With soon-to-be-acquired Fusion-io, the company adds significant exposure to the enterprise PCIe market, as well as a major software upgrade.
Competing on cost when 3D NAND is still two years out
SanDisk's product roadmap doesn't include 3D NAND production until 2016. Meanwhile, Samsung released its 3D vNAND product last year. 3D NAND is the next way to scale for the industry, as node sizes get increasingly difficult to shrink. But, Mehrotra doesn't see 3D NAND as an immediate threat to the business.
"We have always talked about in the past that the first few generations of 3D NAND will not really be cost-competitive with the 2D NAND. So, I feel really very good about our technology roadmap, with our 1Y production this year ... 1Z production next year, giving us strong cost leadership with 2D or with any of the 3D NAND technology. And then in 2016 timeframe, to have our 3D NAND."
Samsung is already on its second generation of 3D NAND, and it has gotten good reviews in terms of endurance. The second generation uses 32 layers in the stack, compared to 24 layers in the first generation. As such, Samsung can reduce its costs by 33% over the first generation.
SanDisk sees its 2D technology as more than capable of beating Samsung's ability to reduce the cost of its 3D NAND in the near future. Considering 3D NAND requires processes that have never been implemented at scale, it should be awhile before Samsung's 3D NAND is cost competitive.
Management's long-term outlook
SanDisk's management appears focused on the long-term opportunities it has in NAND memory chips. Apple is key to the company's future, so it's willing to sacrifice margins to keep orders for its iDevices and Macbooks, and maintain Apple's relationship with Fusion-io. As it increases bit supply, the company will be able to focus on expanding its share of the enterprise SSD market, for which it is well set up with strong vertical integration and a competitive product roadmap through 2016.
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