SanDisk Earnings: Enterprise SSD Sales Surprisingly Low

SanDisk Corporation (NASDAQ:SNDK) announced its fourth quarter earnings on January 27, reporting a sustained period of weakness in product revenues. In line with the company’s expectations, net revenues in Q4 were down by 11% year-over-year to $1.54 billion. ^[1] Revenues were low throughout the year, with full year revenues falling by 16% y-o-y to $5.6 billion. After a sustained period of weakness, SanDisk announced in late October that hard drive manufacturer Western Digital (NASDAQ:WDC) will acquire the company for $19 billion. Consequently, the company did not hold its earnings call for Q3 and Q4, with the deal likely to go through by the end of the June quarter. ^[2]

SanDisk’s stock price rose from $49 to about $78 in the weeks following the acquisition news. Subsequently, its stock price fell gradually to under $70 through the quarter. We have a $66 price estimate for SanDisk’s stock, which is in line with the current market price.

See our complete analysis of SanDisk here

Results By Division

SanDisk’s solid state drive (SSD) division has witnessed explosive growth over the past few years, with revenues growing from around $150 million in 2011 to $1.9 billion in 2014. However, SanDisk’s SSD revenues fell by 29% through 2015 to under $1.4 billion. Within the SSD division, client SSD sales fell by almost 50% on a y-o-y basis to $630 million. On the other hand, enterprise SSD sales were up by 10% annually to $723 million. SanDisk’s management mentioned that it registered a decline in client SSD revenues due to losing a major customer in the market. It was widely believed that the major customer was Apple (NASDAQ:AAPL), which switched to Samsung (PINK:SSNLF) for sourcing SSDs. ^{[3] [4]} Moreover, the company attributed the decline to a production issue related to the material used in a new embedded SSD component. The sustained weakness in client SSD sales in the coming quarters could continue to be an issue for the SanDisk-Western Digital combined entity.

On the other hand, enterprise SSD sales drove net revenues in the first half of the year with a 64% y-o-y rise in revenues to $362 million. This was the only division within SanDisk that reported year-over-year growth in revenues for both Q1 and Q2. Subsequently, enterprise SSD sales suffered in the latter half of the year with revenues falling by over 40% y-o-y to $330 million.

Revenues generated by SanDisk’s removable storage unit were down by 5% year-on-year to about $2.5 billion in 2014. This was roughly the same as the 6.5% annual decline faced by the company in this division in the previous four years. However, SanDisk reported an 18% decline in revenues to $1.6 billion through the first three quarters of the year. The declining average selling prices limited revenue growth despite growth in sale volumes for USB storage, memory cards for imaging devices and SD and micro SD cards over the years. SanDisk made efforts to revamp its product line over the last few months in order to boost revenues. As new technology gained traction in the retail segment, SanDisk’s removable storage revenues picked up in Q4. Resulting revenues in the December quarter stood at $633 million, which was a 10% annual gain.

SanDisk’s embedded storage division, which includes non-SSD storage products attached to a host board, has also witnessed a decline in revenues over the last couple of years due to an increasing mix of embedded SSDs used in tablets, smartphones and other portable devices. As a result, the contribution of embedded storage to SanDisk’s net revenues has dropped from 27% in 2013 to about 24% in 2015. Moreover, revenues generated by embedded storage through 2015 were down by about 12% y-o-y to $1.3 billion. Although the second half of the year is typically a strong period for SanDisk, the company faced a massive 25% annual fall in revenues to $340 million for embedded storage sales in Q4. The decline in revenues was primarily attributable to tough year-over-year comparisons in addition to weak global IT hardware sales.

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1. SanDisk Announces Fourth Quarter and Fiscal 2015 Results, SanDisk Press Release, January 2016 [↩]
2. Western Digital Q2 2016 Earnings Call Transcript, Seeking Alpha, January 2016 [↩]
3. SanDisk cuts revenue outlook, Market Watch, March 2015 [↩]
4. Samsung seals big SSD chip deal with Apple, Korea Times, March 2015 [↩]