SanDisk Corporation (NASDAQ:SNDK) is scheduled to announce its Q1 2014 earnings on April 16. In the last quarter, the company met its guided revenue midpoint of $1.73 billion, and we expect the company to stay within its expected revenue range of $1.425-$1.5 billion in Q1. The company posted healthier margins and a higher net income in 2013 compared to 2012, primarily due to a better mix of high-margin enterprise-class solid-state drives (SSDs) over embedded and client SSDs. Looking ahead, the company expects gross margins to be around 48% for the quarter while it expects gross margins for the full year to be similar to last year’s at around 45%. A weak Yen during the previous quarter resulted in a 6% reduction in production costs, since the company sources many products from Japan. The company could witness further benefits in Q1, as exchange rates have been lower than the company’s anticipated figures.
Enterprise-Class Solid State Drives To Continue To Drive Performance
SanDisk generated more than 20% of its revenues from enterprise SSDs in Q4. Comparatively, the contribution of these high-margin SSDs was less than 10% in Q4 2012. With user data increasingly moving to the cloud, storage demand from data centers is increasing. Since SSDs provide efficient storage through higher Input/Output per Second (IOPS) and low latency, they are increasingly becoming the preferred option for enterprises.
Over the next few quarters, the company expects the contribution of SSDs to go up to around a quarter of its net revenues due to the expected growth in enterprise storage demand and its new products. If the company meets its expected target, it would provide a substantial boost to earnings, which we have incorporated in our current model. Although the company could face stiff competition from major storage providers such as Western Digital (NASDAQ:WDC) and Seagate (NASDAQ:STX) entering the enterprise SSD market, we expect the company to continue its strong growth in the enterprise-SSD arena.
Virtualization Of Flash And The Future Of Software-Defined Storage
SanDisk upgraded its Flashsoft software in the last quarter with the intention of targeting the growing demand for software-defined storage. The software for enterprise storage solutions uses host-based caching for VMware’s (NYSE:VMW) vSphere environments. This means that Flashsoft software enables a standard SSD to be used as a high-speed caching memory for enterprise-level storage devices. The memory drive acting as cache increases its IOPS, which improves performance and reduces latency. With such flexibility, SanDisk aims to capture the attention of IT departments that are contemplating the switch to flash arrays. Although flash arrays are gaining traction in the industry, switching to arrays is still costly. However, this is a new market for SanDisk and we expect long-term growth to come from software-defined storage.
The Yen Factor
According to SanDisk’s management, the low cost of sales in 2013 was primarily driven by the declining yen as the company sources many products from Japan. Moreover, management expects the yen devaluation to give a slight boost to bottom line figures in the next quarter as well. However, due to the unpredictable nature of the conversion rate, the company has hedged approximately one-third of its Yen exposure.
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