SanDisk (SNDK) announced its Q3 earnings on Thursday. It reported revenues of $1.54 billion, a 2% decline on a year-over-year basis, but a 21% increase on a sequential basis.  Looking at these results, we think that the company did a good job to position itself for growth in 2013. Particularly, we are encouraged by the progress the firm made with its SSD segment, which again made up 10% of total revenues during the quarter. We think that the SSD division will be a big driver of growth going forward, and management expects revenues from this segment to hit 25% of total revenues by 2014.
SSD’s Estimated to Be 25% of Revenues by 2014
At present, SanDisk’s SSD sales make up approximately 10% of the company’s total revenues. We are encouraged to see that SanDisk was able to capitalize on a secular trend in this industry. The company now supplies SSD’s to 10 leading PC OEM’s which should drive SanDisk’s revenues even if PC sales decline. These new partnerships with OEM’s should help the company establish an even stronger foothold in a growing industry, which will ensure that SanDisk’s SSD revenues continue to grow rapidly.
Yen Weakness Will Help 2013 Gross Margins
SanDisk reported solid gross margin growth during the quarter. The metric improved t0 40% from 30% quarter-over-quarter. The increase was driven by the improvement in cost of sales and an improvement in average selling prices. However, it is worth noting that the company’s Yen exchange rate in its cost of sales was approximately 79 JPY per dollar and the Yen has fallen since to around 90 JPY per dollar.
SanDisk’s Yen based wafer purchases are reflected in cost of sales with approximately a 3-month lag. This means that its gross margins will be helped by continued Yen weakness for at least the next two to three quarters. If the Yen stays at these levels for the whole year, we can expect significant improvement in the firm’s gross margins year-over-year in 2013.
Quarter-on-Quarter improvement in ASP
In our pre-earnings article we stated that we would be closely watching SanDisk’s NAND flash prices during the earnings announcement. The company surprisingly reported a sequential ASP improvement during the third quarter, which shows stabilization and a possible improvement in the NAND flash industry pricing as a whole. The company reported a sequential price increase of 7% in Q4. While ASP’s for the whole year fell 35%, the figure was still lower than the 45% decline SanDisk experienced in 2011. SanDisk’s ASP’s have improved in the latter part of the year, and we think that it points to an improving demand/supply mix in the NAND flash industry.
Additionally, the fact that SanDisk’s ASP’s improved when compared with competitor Micron (NASDAQ:MU), signals that the company’s management has done a good job in positioning the company to take advantage of industry trends. This proactive management should help the company time volume increases and decreases a bit better than competitors, which could possibly lead SanDisk to outperform in a highly competitive industry.
We currently have a $50 price estimate for SanDisk, which is approximately 10% above the current market price.
- Press release, SEC
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