SanDisk's (NASDAQ: SNDK) earnings may have just slightly beaten analysts expectations in Q4, but they likely didn't leave investors happy. In fact, SanDisk's management said itself that they were "disappointed" in the company's fourth-quarter earnings.
So, what happened, and where is SanDisk going for the rest of the year? Here's what the company's management had to say.
Why the quarter wasn't so great
SanDisk said back on its October conference call that inventory levels were "extremely lean," so problems with inventory in Q4 weren't exactly a surprise.
"We overestimated our ability to service our customers demand variability with our low levels of inventory, creating supply shortfalls in certain products," SanDisk's president and CEO, Sanjay Mehrotra, said on the earnings call.
He also mentioned that there was unplanned maintenance in Q4 on its Yokkaichi fab operations, which slowed down production.
"The combination of lean inventory and reduced memory output made our ability to meet our customer demand even more challenging during the seasonally strong period," he said.
How it's going to fix this
While inventory problems were the key driver of lackluster performance in Q4, the company appears confident it can fix the issues by mid-2015.
Mehrotra said, "We are taking corrective measures to mitigate the recurrence of these events in the future to ensure that we can consistently meet our customers' expectations. It is clear that one of our top operational priorities for 2015 is to rebuild our inventory levels, which we expect to be restored to normal levels by midyear."
This will be an important one for investors to watch over the next two quarterly earnings, as any problems with turning around inventory could lead to poor revenue growth again.
Better revenue diversification
Companies never want to rely too heavily on just one business segment for all of their revenue, and SanDisk is working to balance some of its revenue to correct just that. That's why the company's boosted its solid-state drive (SSD) revenue recently.
"We successfully drove our portfolio make shift toward high value solutions during the year, with total SSD revenue contributing 29% of 2014 revenue up from 19% of 2013 revenue," he said.
Stalled SSD growth through 2015
While Mehrotra said SSD is growing, he noted that one major customer will no longer use the company's client SSD products starting in the first quarter. This will keep SSD sales from contributing a larger percentage of revenue.
"Taking this into consideration, we estimate our 2015 total SSD sales enterprise and client solutions combined as a percentage of revenue to remain similar to the 29% revenue mix in 2014," Mehrotra said.
He said the company doesn't expect client SSD revenue to grow again until 2016.
The first half of the year may be a bit shaky
Investors should keep in mind that Mehrotra thinks revenue will be "challenged" in the first half of 2015 while inventory and production get back to where they need to be.
SanDisk's executive vice president of administration and CFO, Judy Bruner, said on the call:
In total we expect our revenue to experience a year-on-year decline in both the first and second quarters and return to year-on-year growth in the second half of 2015.
SanDisk forecasts full-year 2015 revenue of $6.5 billion to $6.8 billion. While gross margins will still be down at the beginning of the year, Bruner said the company should end the year with margins of 47% to 48%.
While Q4 2014 was unimpressive -- and the next two quarters will be a short time of inventory rebuilding -- investors shouldn't write off this memory maker quit yet. The company may be in the midst of a few setbacks, but looking at the big picture, SanDisk's fundamentals are still in tact.
