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As it turns out, the memory market is not launching another brutal price war after all. SanDisk took the blame for its own issues rather than picking an easy scapegoat.
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Source: SanDisk.
SanDisk (NASDAQ: SNDK) likes to report its results in small batches. First, the data storage specialist posts preliminary sales and some earnings guidance. Then, a couple of weeks later, SanDisk fills in the blanks with a full report.
On Wednesday, it was time for that full report for the fourth quarter of 2014. SanDisk exceeded its pre-announced revenues by a slim margin and also beat the current Street view on earnings. But analysts had reduced their estimates drastically based on the preliminary sales report, so that was a very low bar to clear.
Fourth-quarter sales were flat year over year, landing at $1.7 billion. As a reminder, analysts were looking for $1.83 billion until SanDisk released its preliminary sales. Adjusted earnings fell 24% to $1.30 per share. That's better than the $1.27 per share expected by analysts, yet far below the $1.52 average estimate Wall Street proposed before that ghastly revenue pre-announcement.
The early sales update didn't come with much explanation of the weak results. "The lower revenue was primarily due to weaker than expected sales of retail and iNAND products," was all the company said at the time. No kidding. Analysts were left grasping at straws to explain why product sales came in below expectations. For the most part, they settled on Samsung (NASDAQOTH: SSNLF) flooding the NAND flash memory market with parts not needed for its own smartphone production operations.
SanDisk CEO Sanjay Mehrotra set the record straight last night and never had any reason to mention Samsung at all.
Instead, it turns out that SanDisk's sales issues stem from poor planning and execution.
"We are disappointed with our fourth quarter execution," Mehrotra said in prepared remarks. "Our inventory levels were extremely lean exiting the third quarter, and were anticipated to become even leaner throughout the fourth quarter. We over-estimated our ability to service our customers' demand variability, with our low levels of inventory creating supply shortfalls in certain products."
In other words, SanDisk thought it would be OK to maintain lean inventories in the fourth quarter. But then customers surprised it with large orders for certain products in short supply. Moreover, Mehrotra explained that disappointingly low production yields and emergency repairs of a production facility in Yokkaichi, Japan, amplified the supply problem. SanDisk simply couldn't readjust its product flow in time to satisfy actual demand.
The big takeaway for investors across the computer memory market is simple: SanDisk's weakness was never a sign of industry problems. Samsung isn't flooding the market with cheap flash memory chips, street prices are not plunging, and SanDisk can only blame its own planning and some bad luck for what happened here.
As a shareholder of memory products rival Micron Technology (MU +0.04%), I'm drawing a deep sigh of relief. If Samsung were actually pumping excess memory inventories into the market, it would undermine the hard-won pricing stability that Micron built with its Elpida acquisition, and perhaps spark yet another industrywide price war.
But that's not what happened at all. As if to underscore this fact, Mehrotra promised to keep more inventory reserves in 2015 to avoid supply side shortfalls amid healthy demand. This weak quarter was "really nothing but a temporary setback," he said.
If you take his words at face value, you might want to pick up some SanDisk shares at a 20% discount to prices seen just two weeks ago. And even if you don't, Mehrotra just explained why Micron remains a solid investment. Simply put, there's nothing wrong with the memory market nowadays.