SanDisk Earnings Preview: Weakness In SSD Channel, Removable Storage Likely To Continue Through Q2

SanDisk (NASDAQ:SNDK) is scheduled to announce its second quarter earnings on Wednesday, July 22. ^[1] The company reported a 12% year-over-year decline in net revenues to $1.33 billion in the March quarter. The company anticipated weakness, in its solid state drive (SSD) channel before its earnings release last quarter, following which revenues were roughly in line with the company’s revised guidance. Moreover, SanDisk’s gross margin (non-GAAP) for the quarter was over 8 percentage points lower than the comparable prior year quarter at 43% due to a lower mix of high-margin SSD products.

The company had a solid 2014 for solid state drive (SSD) sales, with 60% annual growth in SSD segment revenues to $1.9 billion. Comparatively, SanDisk’s SSD product sales (including both client and enterprise SSDs) fell by 15% year over year to $360 million in the first quarter of 2015. Additionally, removable storage product sales were also down by over 17% year over year to $506 million. The only area of growth for SanDisk was embedded storage product sales, which rose by 10% over the prior year quarter to $333 million during the March quarter. ^[2]

SanDisk expects its Q2 and full year revenues to take a hit owing to recent shortcomings. The company expects Q2 revenues to be around $1.2 billion, which is over 25% lower than the prior year quarter, primarily due to low client SSD sales through the quarter. Furthermore, the company expects full year revenues to be around $5.4-$5.7 billion, which is a 14-18% annual decline. As a result of low SSD sales, gross margins are also likely to be adversely impacted. The company expects expected Q2 gross margins to be as low as 37-40%. However, margins could pick up slightly in the latter half of the year due to expected increase in high-margin product sales of both SSDs and X3 memory. ^[3]

 See our complete analysis of SanDisk here

How Key Divisions Performed

SanDisk’s SSD division grew at an explosive rate over the past few years, with revenues jumping from around $150 million in 2011 to almost $2 billion in 2014. SSDs contributed to about 29% of SanDisk’s net revenues in 2014. This fell to under 27% in Q1’15, with revenues declining by about 15% over the comparable prior year period to $360 million. Within the SSD division, the client SSD revenues were down by a massive 48% on a year-over-year basis to $173 million for the quarter. The company attributed the decline to a production issue related to the material used in a new embedded SSD component, which was in the process of being qualified for use for one of its largest customers. SanDisk’s management mentioned that this decline was the largest contributor to the company-wide revenue shortfall, and it could continue to impact both Q2 and full year revenues. Comparatively, SanDisk had posted solid results in this domain last year, with revenues growing by 36% year over year to almost $1.3 billion.

Weakness in the client SSD space did not impact the company’s enterprise SSD product sales. SanDisk’s enterprise SSD sales grew by about 100% y-o-y to $186 million in the March quarter. Although the rise in revenues was slightly lower than the 140% annual growth observed in 2014, it partially offset the revenue decline in client SSD product sales. In its earnings call, the company remained cautious about its outlook in the enterprise SSD domain, citing lower expected demand for its PCIe SSD solutions. SanDisk expects the total addressable market for its enterprise SSD offerings to be lower than previously anticipated since it expects many of its customers to switch to low-end SATA enterprise-grade SSDs. However, management mentioned that it could only be a short-term trend lasting through 2015, with PCIe SSD shipments likely to pick up from 2016 onwards.

SanDisk’s embedded storage division, which includes non-SSD storage products attached to a host board, has witnessed a decline in revenues 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 22% in through 2014. The trend reversed in Q1 this year as revenues picked up by about 10% y-o-y to $333 million. As a result, the contribution of embedded storage to net revenues rose to about 25% through the March quarter. SanDisk expects embedded storage products to continue to post healthy numbers through the latter half of the year with sequential improvement in revenues. However, the company is not very optimistic about a sustained year-over-year growth in the same period.

SanDisk’s removable storage division has witnessed mixed results for storage products in the last few years, with sales volumes rising across various product categories including USB storage, memory cards for imaging devices and SD and micro SD cards. However, the declining average selling prices have limited revenue growth. As a result, revenues generated by SanDisk’s removable storage division fell by about 6% year over year to $2.5 billion in 2014. Correspondingly, the contribution of removable storage to net revenues declined from 43% of overall revenues in 2013 to about 38% in 2014. The company made efforts to revamp its product line in late 2014 and early 2015 in order to boost revenues. The company introduced the world’s highest-capacity micro SD card in March, with a capacity of 200 gigabytes, the iXpand flash drives for Apple devices and USB flash drives for Android-based devices earlier this year. However, the combined revenues generated by removable storage products through the March quarter declined by 17% year over year to $506 million. Despite unimpressive Q1 figures, the company remains optimistic about future revenues due to the upcoming 48-layer 3D NAND technology which it plans to include in removable storage products. ^[3]

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1. SanDisk Sets July 22 to Discuss FQ2-2015 Financial Results, SanDisk Press Release, July 2015 [↩]
2. Q115 Earnings Press Release, SanDisk Press Release, April 2015 [↩]
3. SanDisk Earnings Call Transcript Q1 2015, Seeking Alpha, April 2015 [↩] [↩]