Storage solutions provider SanDisk Corp (SNDK) made a fantastic start to its fiscal 2014. The company posted stellar first-quarter results riding on the solid state drive (SSD) powertrain. Numbers were decently above Street’s expectations and the year-ago period. Second quarter revenue as well as gross margin outlook was also better-than-expected. All these positives took SanDisk shares 5.79% higher in the after-hours on the day of earnings release and currently they are hovering around 52-week high price. So, what were the key drivers for the quarter and what more can SanDisk offer? Scroll down to unleash.
Numbers at a Glance
SanDisk’s adjusted earnings of $1.44 per share grew 71.4% year over year mainly due to higher revenue, continuous cost containment efforts and lower share count. Revenue grew 12.8% aided by strong demand for its SSDs products and strength in retail sales channel.
Adjusted gross margin grew more than 1000 basis points from the year-ago quarter on higher SSD sales. Cost of revenue dropped roughly 7%. Expecting the momentum to continue, the company raised its annual gross margin forecast range to 47%-49% (previously 45%-48%).
SanDisk amassed cash and short-term marketable securities balance of $2.8 billion and a free cash flow of $323.1 million.
SSDs --The Big Push
SanDisk has expanded its exposure into the SSD market through the acquisitions of SMART Storage Systems (July 2013), FlashSoft (February 2012) and Pliant Technology (May 2011) and now it is time for reaping the benefit.
Revenue from the sale of SSDs grew 61% year over year and helped SanDisk to gain share in the consumer and enterprise sectors. The improvement was driven by increasing popularity of SSDs in the data centers and client computing.
Not only revenue, SSDs have strengthened the company’s margins as well. Higher mix of high-margin SSDs helped SanDisk to offset the price volatility in NAND chips. SanDisk also sells NAND chips, the selling price of which are declining due to supply/demand imbalance in the industry.
Given the quarter’s outperformance, SanDisk believes that the goal to have 25% contribution from SSDs in 2014 will be achieved soon. Higher SSD revenue will also mean higher margins for SanDisk, which will boost overall profitability.
Retail Sales Channel Showing Momentum
SanDisk sells its products through commercial channel (largest one) and retail channel. Although it is not as big as commercial channel, SanDisk considers this channel to be of utmost importance. It sells removable USB drives and flash cards through this channel and the demand for these products is going up significantly. This past quarter, revenue from the retail channel grew 3% year over year because of improved demand for mobile cards and USBs. What’s interesting is that this is the eighth consecutive quarter of growth and indicates a rebound in consumer spending, which is even more positive for SanDisk.
Management says that the growth in retail channel was a record in the first quarter, which could be due to SanDisk’s relentless effort to expand retail customer base and geographic reach as well as continuous new product launches.
NAND Story is Promising
Declining NAND prices has been a challenge to manufacturers like Micron (MU), SK Hynix, Samsung (SSNLF) and to some extent SanDisk. But the tough pricing environment is a big positive for SanDisk. It uses NAND chips in its SSDs, mobile devices and other electronic goods for storage purpose and most of its NAND consumption is fulfilled mainly by Japanese semiconductor giant Toshiba.
Here, SanDisk is getting benefited in two ways. First, cheaper NAND prices are making its component cost lower. That is why selling more SSDs (consisting NAND chips) will mean improved margins. Secondly, Japanese yen is depreciating compared to USD, which is giving rise to a currency tailwind and hence an operating cost benefit is achieved.
Returning Shareholder Value
SanDisk has been consistently returning cash to its shareholders by buying back shares. It has also initiated quarterly cash dividend of $0.225 per share starting second-quarter 2013. In the recently concluded quarter, it paid $51.6 million as dividend and $90 million in share repurchase.
Management predicts continued growth in its revenue and profitability throughout this fiscal and expects to utilize most of its free cash flow toward returning value to the shareholders. This indeed is good news for investors.
SanDisk is firing on all cylinders and there are enough reasons for its investors to be happy. It has revised its annual gross margin outlook upward, which looks pretty achievable given its strength in SSDs, retail channel and growing demand for its products. Overall, its growing profitability, huge cash pile and positive free cash flow will keep SanDisk competitively ahead.