Thursday, April 17, 2014

Sandisk Corporation crushes consensus estimates trading up 10%

                SanDisk Corporation came in well ahead of consensus estimates on both the top and bottom lines. The company posted Revenues of $1.512 BB above the street and UASBIG estimate of $1.49 BB. On the bottom line the company posted a non-GAAP EPS value of 1.44 dollars per share, 18 cents above what Wall Street was expecting and 16 cents above the UASBIG estimate of 1.28 dollars per share. The company reiterated the strength of their growing enterprise storage and SSD businesses and managed to improve gross margins in the face a strong declines in NAND spot and contract prices. Solid state drive revenues (which include enterprise storage solutions) accounted for 28% of revenue this quarter up from 21% in Q4 2013. It is apparent that this has had a great impact on revenue and margin growth alike, perfectly aligning with our investment thesis. The company boasted 61% growth YoY in SSD revenues. NAND prices are estimated to have fallen 14% in February alone and warnings from the likes of Morgan Stanley cast shadows over the NAND space as a whole. SanDisk only witnessed a 7% decrease in its ASPs YoY and this could not be a better indication that the company has successfully made a shift into higher margin businesses. We expect that NAND pricing declines will be far less severe for the remainder of 2014 and we also can appreciate the fact that falling NAND prices can provide offsetting increases in demand for solid state drives and flash memory as a whole. Although some investors may be disappointed over the decrease in embedded NAND revenues that only accounted for 20% of revenue this quarter (down from 27% in FY 2013), The SSD business more than makes up for the very slight decline in this area YoY (less than 2%). Management also provided guidance that described an increase in the revenue mix of embedded solutions going forward. We also believe that this may open up the possibility for another earnings surprise if we can see a jump in sales for this area.
                The company achieved revenue growth of 12.9% YoY and EPS growth of 71% YoY. The 22.5 cent per share dividend program will extend into Q2 2014. The company is currently trading at a trailing P/E ratio right around 17 and the five year P/E average runs at around 15.5x trailing twelve month’s earnings. We believe that current earnings growth prospects justify a PE multiple of up to 19x between now and their next earnings release.
Gross margins came in very strong at 51.2% on a non-GAAP basis (49.6% GAAP). We cannot stress enough how impressive these margins are, again, in a quarter where the company sold off last week primarily due to crashing NAND prices and increased competition. Commercial sales were up 18% YoY and Retail sales were up 4%.
SanDisk was up 5.79% in the after hours after the conference call after a .68% gain during normal trading hours. The company has held onto these impressive gains and some into today’s trading day and is currently up over 10% on the day. We currently have a $90.40 price target on the company. There was very positive sentiment from CEO Sanjay Mehrotra during the call. He can be quoted saying, “We expect our enterprise SATA SSD to be a strong contributor to our enterprise revenue growth in 2014”. The Cloudspeed SATA SSD family was introduced this quarter and has clearly been met with success very quickly. The CEO also commented on the record breaking client SSD revenues and the benefit from a demand shift by a “major customer from our mobile custom embedded solutions to our client SSD solutions”. This sounds to me like the relationship with Apple could continue into solid state drives and that SanDisk SSDs could be making appearances in Apple’s future laptops. Other comments included positivity in retail innovation as well as on schedule fab upgrades. Half of bit production will be on the 1Y node in 2H 2014 and 1Z technology node production will begin in this same time period. Pilot 3D NAND lines are still scheduled to begin 2H 2015. All these production improvements are set to reduce costs and help the company hold industry leading margins. Blended cost per gigabyte improved 3% sequentially and 23% YoY. Blended selling prices decreased 3% sequentially and 7% YoY. Cash flows from operations were 358 million and 35 million was utilized for capital expenditures resulting in free cash flows around 323 milliion. 90 million dollars were used for share repurchases this quarter.
Forecasts Q2
                Convertible bonds due 2017 are being reclassified into short term debt due to the share price rising above the trigger price. These bonds are convertible in Q2 but it is unlikely debt-holders will convert due to the high price of the security. Revenue is projected at $1.55-$1.625BB for Q2 and $6.4-$6.8BB for FY 2014. Embedded mix should see gains compared to SSDs. Gross margin estimates are being revised upward to 47-49%. Operating expenses are projected at $315-$325 million non-GAAP for Q2 and $1.25-1.275 million for FY 2014. EBIT margins are projected at 27-31%. Similar taxes and non-operating income are expected. 2014 share repurchases should offset share count increases due to employee compensation and convertible debt.

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