SanDisk: Fiscal 3Q10 Financial Results

in US$ millions)	3Q09	3Q10	9 mo. 09	9 mo. 10
Revenues	935	1,234	2,325	3,499
*Growth*		32%		*50%*
Net income (loss)	232	322	76	815

SanDisk Corporation announced results for the third quarter ended October 3, 2010.

Total third quarter revenue of $1.23 billion increased 32% on a year-over-year basis and increased 5% on a sequential basis. Net income, in accordance with U.S. Generally Accepted Accounting Principles (GAAP), was $322 million, or $1.34 per diluted share, compared to GAAP net income of $231 million, or $0.99 per diluted share, in the third quarter of 2009 and GAAP net income of $258 million, or $1.08 per diluted share, in the second quarter of 2010.

On a non-GAAP basis, which excludes the impact of share-based compensation expense, amortization of acquisition-related intangible assets, non-cash economic interest expense associated with the cash-settled convertible notes, and related tax adjustments and valuation allowance, third-quarter net income was $311 million, or $1.30 per diluted share, compared to net income of $176 million, or $0.75 per diluted share, in the third quarter of 2009 and net income of $258 million, or $1.08 per diluted share, in the second quarter of 2010. For reconciliation of non-GAAP to GAAP results, see accompanying financial tables and footnotes.

“SanDisk delivered outstanding results for the third quarter, driven by continued strength in our OEM and retail businesses. Solid execution, stable pricing and substantial cost reductions led to record high operating and net income and our highest ever total gross margin of 52%. For 2011, we are bullish about continuing growth in our diversified channels, including further substantial inroads for our embedded storage products in smartphones, tablet PC’s and other mobile devices,” said Eli Harari, Chairman and CEO of SanDisk.

3Q10 Metrics and Highlights

Total revenue was $1.23 billion, up 32% year-over-year and up 5% sequentially.
Product revenue was $1.14 billion, up 40% year-over-year and up 4% sequentially.
License and royalty revenue was $96 million, down 21% year-over-year and up 9% sequentially.
Cash flow from operations was $379 million and free cash flow was $416 million.
Total cash and equivalents, short and long-term marketable securities at the end of the third quarter were $5.1 billion compared to $2.6 billion at the end of the third quarter of 2009 and $3.7 billion at the end of the second quarter of 2010.
SanDisk completed a $1.0 billion senior unsecured convertible notes offering due 2017. The notes will pay interest semi-annually at a rate of 1.5% per annum.
Average price per gigabyte sold declined 20% on a year-over-year basis and declined 5% sequentially.

Other Recent Key Announcements

SanDisk introduced an embedded solid state drive (SSD), the SanDisk integrated SSD (iSSD), a high-capacity storage solution for use in fast-growing mobile computing platforms such as tablet PCs and ultra-thin notebooks, in capacities ranging from 4 gigabytes to 64 gigabytes.
SanDisk launched a new sub-$100 media player, Sansa Fuze+, with a microSDHC card slot that is compatible with the SanDisk slotRadio pre-loaded music card or with any other microSD card containing music, videos and photos.

Comments

Abstracts of the earnings call transcript:

Eli Harari, chairman and CEO:
"The announcement this week MacBook Air having SSD as standard is I believe very, very important, not so much because of MacBook Air itself but because it’s really an industry signal I believe. Apple has done so in the past."

Sanjay Mehrotra, president and COO:
"Our top five customers in the third quarter were all in the mobile phone end market.
"Our embedded products including iNANDs made up nearly 30% of our OEM revenues, up from just under 20% in Q2.
"Retail delivered a solid quarter as total unit sales grew at a healthy double digit rate on a year-over-year basis and sequential basis with the average capacity of retail units sold approaching 5 gigabytes.
"The final phase of Fab 4 expansion is underway and we expect the facility to attain its full capacity in mid 2011. Regarding Fab 5, we continue to proceed with caution and have not made the final decision regarding ramp start date or the base of expansions."

Judy Bruner, CFO:
"Our product revenue for the third quarter shifted a bit toward retail, with a mix of 62% OEM and 38% retail. Our ASP per gigabyte declined a modest 5% with our prices mostly firm through August and some price reductions in September.
"Our Q3 gigabytes sold grew 8% sequentially and 71% year-over-year and on a year-to-date basis, our gigabytes sold have grown 84%. In Q3, we experienced solid retail growth both sequentially and year-over-year in the Americas, Europe, and Asia with overall retail revenue of 13% sequentially and 20% year-over-year.
"Our OEM revenue was flat sequentially and up 55% year-over-year.
"Across all channels, our third quarter revenue by end market came 50% from the mobile market, 22% from imaging, 10% from USBs, 10% from other product markets, and 8% from license and royalty revenue.
"We expect fourth quarter total revenue to be between $1.25 billion and $1.325 billion, and within this total Q4 revenue, we forecast license and royalty revenue between $85 million and $90 million. This fourth quarter forecast was lead to full year revenue between $4.75 billion and $4.825 billion in the middle of our July forecast of $4.7 billion to $4.9 billion."