Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

SanDisk Corporation (NASDAQ:SNDK)

Q1 2014 Earnings Conference Call

April 16, 2014 05:00 PM ET

Executives

Jay Iyer – IR

Sanjay Mehrotra - President and CEO

Judy Bruner - EVP, Administration and CFO

Analyst

Timothy Arcuri - Cowen and Company

John Pitzer - Credit Suisse

Mehdi Hosseini - SIG

Doug Friedman - RBC Capital Markets

Mark Newman - Sanford Bernstein

Steven Fox - Cross Research

Mark Delaney - Goldman Sachs

Joe Moore - Morgan Stanley

Craig Ellis - B. Riley

Kevin Cassidy - Stifel Nicolaus

Hans Mosesmann - Raymond James

Steven Chin - UBS

Operator

Good day and welcome to the SanDisk Corporation's First Quarter 2014 Financial Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Jay Iyer, Investor Relations. Please go ahead.

Jay Iyer

Thank you, Jessica, and good afternoon everyone. With me on the call are Sanjay Mehrotra, President and CEO of SanDisk; and Judy Bruner, Executive Vice President of Administration and CFO. In a moment, we will hear remarks from both of them followed by Q&A. Before we begin, please note that any non-GAAP financial measures discussed during this call, as defined by the SEC in Regulation G, will be reconciled to the most directly comparable GAAP financial measure.

That reconciliation is now available, along with supplemental schedules on our website at SanDisk.com/ir. Please note that non-GAAP to GAAP reconciliation tables for all applicable guidance will also be posted on our website. This guidance is exclusive of any one-time transactions and does not reflect the effect of any acquisitions, divestitures or similar transactions that may be completed after April 16, 2014.

In addition, during our call today, we will make forward-looking statements that refer to expectations, projections or other future events. Please refer to today’s press release and our SEC filing including the most recent 10-K for more information on the risk factors that could cause actual results to differ materially from those expressed in the forward-looking statements. SanDisk assumes no obligation to update these forward-looking statements, which speak as of today.

Before I turn the call over to Sanjay, I would like to inform you that our 2014 Investor Day meeting will be on May 7, and I look forward to seeing many of you then. Please mark your calendars.

With that, I will turn the call to Sanjay.

Sanjay Mehrotra

Thank you, Jay, and good afternoon, everyone. We are very pleased to report record first quarter results driven by strong execution of our strategy. The 13% year-over-year revenue increase along with record first-quarter gross margin and net income reflects the significant gains we have made in improving the mix of our portfolio. SSD sales drove our outstanding results as we continued to gain share across the client and enterprise markets. Our retail revenue posted a record first quarter with continued strong sales of high performance products.

Moving to details of our business results. Combined client and enterprise SSD sales accounted for 28% of our first quarter revenue with enterprise SSD revenue more than doubling on a year-over-year basis. Our expanded SaaS SSD portfolio has enabled us to further strengthen our market position and it has been the primary contributor to our enterprise SSD revenue growth. We’re focused on leveraging our deep system capabilities coupled with enduring benefits of our vertically integrated model to bring substantial value to enterprise customers.

We are helping customers accelerate applications, reduce total cost of ownership, and build a more resilient infrastructure with our enterprise solution. Last month, we announced our cloud speed line of SATA SSDs with a broad set of new offerings that have been designed to deliver business critical performance tailored to customer application workload. The varied use case scenario for enterprise SSDs are becoming increasingly prominent in data centers and in cloud computing environment.

By combining our guardian technology platform, which improved the endurance and reliability of SSDs with our leading edge NAND flash technology, SanDisk has gained the distinction of becoming the first SSD provider to ship 19 nanometer MLC-based enterprise SATA SSDs, capable of supporting 10 full drive writes per day. We expect our enterprise SATA SSDs to be a strong contributor to our enterprise revenue growth in 2014. In the hyperscale portion of the enterprise business, we are building substantial momentum in engaging customers, clinching design wins, and starting to build strategic relationships that will underpin the long-term growth of our enterprise business. We are already shipping product in volume to several customers and expect that these fast growing customers will play an important role in our growth ahead. Our client SSD revenue set another record in the first quarter, posting solid year-over-year growth in the process. In Q1, client SSD revenue benefited from a demand mix shift by a major customer from our mobile custom embedded solution to our client SSD solution. Our increased share at several key OEM customers and our growing momentum in channel sales also contributed to our strong Q1 client SSD results. We have started customer qualification of our 1Y nanometer based client SSDs at many OEMs, and we are making good progress on that front.

Overall, I am extremely pleased with our execution in SSDs. We have made significant strides in expanding our market presence and in growing our total SSD revenue. We anticipate that enterprise SSDs will be our fastest growing product category in 2014, and we are off to a great start towards exceeding our goal of delivering 25% of 2014 revenue from enterprise and client SSDs combined. Turning to mobile, our iNAND and iNAND MCP solutions posted strong revenue growth offset by lower sales of custom embedded solutions resulting in flat revenue from total embedded solutions versus the year ago results. We expect the mix of the custom embedded solution revenues to increase starting in the second quarter, and iNAND revenue should also grow throughout 2014.

At Mobile World Congress in February, we launched our next-generation, high-performance iNAND Extreme embedded storage solution. This premium solution manufactured on our 1Y nanometer technology includes a unique dual core storage controller, innovative new hardware and software data management algorithms, and the latest eMMC 5.0 specification, all of which delivers significantly lower latency and higher bandwidth. These features enable smartphones and tablets to be more responsive and to smoothly run multiple applications simultaneously. We are pleased with our initial customer successes and expect iNAND Extreme to ship in several mobile devices this year. Our strategic position within the China mobile market is continuing to increase with several recent noteworthy design wins at top China OEMs.

Our iNAND and iNAND MCP solutions are now being sold to all major smartphone vendors in China. As many of these OEMs rapidly expand globally, we are pleased to be a strategic partner in their success. In retail, we generated record first quarter sales from strong year-over-year growth in both USB flash drive and mobile cards. We launched the world’s first and only 128 gigabyte micro SD card providing customers with immense portable storage capacity in a thumbnail sized package. Our ability to stack 16 memory chips along with the controller in such a constrained form factor speaks to our strong expertise in IC packaging and test. Our retail product innovation engine is in high gear as evidenced by the launch of the Extreme Pro USB 3.0 flash drive, a high performance, high capacity USB offering, and Extreme Pro SD card, the world’s fastest SD card capable of supporting 4k video recording.

Many of the new products contributed to our first quarter revenue. We are off to a good start and expect 2014 to be another solid year for our business in the retail channel. Turning to technology and Fab operations, our 1Y technology continues to ramp well and we expect to achieve more than half of our bit supply output on 1Y in the second quarter. In Q1, we also began shipments of embedded devices using our 1Y technology to OEM customers. Our 1Z technology continues to show promising early results, and we expect product ramp to begin towards the end of 2014. We continue to make good progress on our BiCS 3D NAND technology as well. From a wafer Fab perspective, the shell for phase 2 of Fab 5 is on track to be completed in mid-2014. As we have explained previously, the new clean room space and phase 2 of Fab 5 will be primarily used to support the 1Y and 1Z technology transitions of our current wafer capacity.

We expect related tool installations in phase 2 of Fab 5 to begin in the third quarter. Additionally, a portion of the new clean room space will be used for our bit 3D NAND pilot line to be established in the second half of 2015. Regarding Phase 1 of Fab 5, we except the clean room space to be fully utilized by the third quarter with equipment for the 1Y transition, BiCS development tools, and a small increase in our total wafer capacity of less than 5%, which includes both new capacity and productivity improvement. For 2014, SanDisk supply bit growth estimates remain unchanged between 25% and 35%, and our estimates for industry supply bit growth of approximately 40% for 2014 remains unchanged as well. For 2014, we continue to expect overall healthy industry fundamentals. To conclude, the first quarter marks an excellent start for the year. We continue to execute our business strategy with unwavering focus on profitable growth, cash flow, and shareholder returns. I look forward to seeing many of you at our upcoming investor day meeting. With that, I will turn the call over to Judy for her financial review and outlook.

Judy Bruner

Thank you, Sanjay. Our Q1 results demonstrate the value of our broad product portfolio, our leading edge memory and system level technology and our success in improving our portfolio mix towards higher value solution. This was our strongest first quarter to date with record Q1 revenue of $1.51 billion and record Q1 non-GAAP operating margin of 31.5%. Our first quarter year-over-year revenue growth of 13% was driven by our increasing share in the fast growing markets for both client and enterprise SSDs. Our overall SSD sales in Q1 grew by 61% year-over-year, reaching 28% of our total Q1 revenue. We also delivered outstanding results in retail worldwide. Our first quarter revenue mix by channel was 65% commercial and 35% retail, reflecting an increase in commercial mix of 3 percentage points both sequentially and year-over-year. Our commercial revenue was at a 18% year-over-year and retail revenue grew 4% from Q1 last year. Q1 revenue bits grew 20% year-over-year and declined 10% sequentially. Our year-over-year retail revenue increase was driven by strong growth in mobile cards and USBs partially offset by a decline in the imaging cards. Within commercial revenue, our embedded solutions revenue was flat year-over-year with a strong growth in iNAND solutions and a decline in custom embedded solution sales driven by a Q1 shift in demand from a major customer toward our client SSD solution. Our commercial sales strength was driven by year-over-year growth in both client and enterprise SSD revenue. Turning to gross margin, we are delighted to report a 51% non-GAAP gross margin our highest ever first quarter gross margin and 25 basis points above our strong Q4 ’13 non-GAAP gross margin. Our better than expected gross margin result stems from strong SSD product mix and lower than expected mix of custom embedded revenue and strong branded retail gross margin. Our blended cost per gigabyte improved 3% sequentially and 23% year-over-year. Our blended average selling price per gigabyte declined 3% sequentially and 7% year-over-year benefiting from our ongoing strong portfolio mix shift. The yen rate in our cost of sales was approximately 99 as expected compared to 97 in the fourth quarter. Our Q1 non-GAAP operating expenses of $297 million were slightly less than our forecast due to the timing of certain expenses which we expect will be incurred in Q2. Our Q1 non-GAAP operating margin was an outstanding 31.5% nearly the same as we achieved in our seasonally strong fourth quarter. Our non-GAAP tax rate of 31.5% increased as expected from 2013 due primarily to the expiration of the federal R&D tax credit. Our non-GAAP net income set a first quarter record of $330 million, up 60% year-over-year and our non-GAAP EPS grew an outstanding 71% year-over-year to a $1.44. Our Q1 cash flow from operations was $358 million and our cash used for capital investments was $35 million yielding free cash flow of $323 million. During Q1, our capital return to shareholders included $90 million for repurchase of $1.3 million shares and $52 million for dividends. Our share of the joint venture Fab investments during Q1 was $241 million. And these purchases were funded by joint venture working capital and $97 million of new operative leases. Our off balance sheet equipment lease guarantees now stand at $556 million. On the balance sheet, I want to point out that we have reclassified our 2017 convertible debt to short-term because the notice redeemable in Q2 as a result of our stock price trading above the trigger price. We believe it is unlikely that holders will choose to convert given the market value of the securities.

I will now turn to forward-looking commentary. Our second quarter revenue forecast is $1,550 million to $1,625 million and our full-year revenue forecast remains unchanged at $6.4 billion to $6.8 billion. In terms of product mix across the rest of 2014, we expect the strongest growth from both embedded solutions and enterprise SSD. We expect that our embedded sales mix will gain relative to SSD mix as our iNAND solutions continue to gain momentum, and with some expected shift in demand mix from the previously mentioned major customer towards custom embedded solutions.

In terms of gross margins, we are increasing our full year non-GAAP gross margin range to 47% to 49%, up from our previous forecast of 45% to 48%, reflecting continued strengthening of our product mix. We expect second quarter non-GAAP gross margins to also be in the range of 47% to 49%. This range for Q2 and the rest of the year is lower than our Q1 gross margin, due primarily to the expected increase in our mix of custom embedded solutions. We are pleased that our forecasted 2014 non-GAAP gross margin range of 47% to 49% is similar or higher than our record 2013 non-GAAP gross margin.

We expect Q2 non-GAAP operating expenses of $315 million to $325 million and our full year operating expense forecast has increased slightly to a range of $1,250 million to $1,275 million. This leads to forecast at non-GAAP operating margin range of 27% to 31% for the year, compared to 29% in 2013. We expect our Q2 other income and tax rate to be similar to Q1.

In terms of shares, in April we received final settlement on the $1 billion ASR that we enter into thousand 13. We received another 623,000 shares, which will be reflected in our Q2 share count. The total shares purchased under the ASR were 15.1 million at an average price of $66.07 per share. Now that the ASR is complete, we expect to increase our rate of share repurchases beginning in Q2 relative to the 90 million spent in Q1. And we expect that 2014 repurchases will likely offset the dilution from employee equity incentives and the in-the-money warrants related to our 2017 convertible.

As Sanjay described, we are adding a small amount of wafer capacity in Fab 5 phase one in 2014. And the cost of this was covered within the CapEx estimates we provided in January. As I normally do I will provide further CapEx granularity at our May investor day.

In summary, we’re off to a great start in 2014. We continue to expect a year of solid revenue growth and excellent profitability and plan to utilize the majority of our free cash flow to enhance shareholder return via share buyback and dividend.

We are now happy to answer your questions

Jay Iyer

Thank you, Judy, thank you, Sanjay. Jessica if you can open the floor for questions. And if I can ask the callers to ask one question and a brief follow-up, and we will try to adjust as many questions as time will permit and we will end this call about 3 O’clock or so. Jessica?

Question-and-Answer Session

Operator

(Operator Instructions) We will first go first to Timothy Arcuri with Cowen and Company

Timothy Arcuri - Cowen and Company

Great quarter, everybody. It was great. The first question I had was, Sanjay, if I look at the average capacity per unit that was down, yet your SSD mix went way up. Can you help us reconcile that?

Sanjay Mehrotra

In terms of the average mix, average capacity for our business, on a year-over-year basis, it increased nicely. On a sequential basis, it was somewhat down and it was really related to the mix of the business, particularly related to the embedded products and within embedded products the lower mix of customized embedded solutions, which tends to be high capacity, significantly higher than the averages. Since that customized embedded solution was best part of the revenue in Q1, that impacted the overall average capacity number but nothing unusual here. Overall, the average capacity trends continue to be solid.

Timothy Arcuri - Cowen and Company

Got it. Okay, thanks. And then just last thing for me, inventories were up a little bit on down revenue. Is there a particular reason that maybe that went up a little bit given that it went down the past couple of years on during Q1?

Judy Bruner

No, I would say there is nothing unusual in the inventory. We definitely feel that we need that inventory in order to service our customers and to deliver the plan that we have both for Q2 and for the rest of the year. And of course, we have a wide variety of different nodes of memory in there in order to service the growing diversity of our product portfolio.

Jay Iyer

Thank you, Tim. Next question please.

Operator

Yes. We will go next to John Pitzer with Credit Suisse.

John Pitzer - Credit Suisse

Congratulations on the good results. Judy, maybe my first question, you talked about in your prepared comments a mix shift back to embedded as you move into Q2 and beyond, mainly driven by one large principal customer. I'm kind fo curious if you could help quantify where you think embedded goes as a percent of the overall mix from where it was in Q1?

Judy Bruner

Sure. So, just to give a feel of those numbers, embedded in the first quarter was about 20% of our mix, and last year it was 27% for the full year, it was 26% in the fourth quarter. I do expect that it will trend upwards perhaps getting somewhat close to the exit rate of last year over the course of the year. And the growth is going to come not just from the custom embedded solution, but also strong growth from iNAND and MCP iNAND, and in particular a number of new products that we have in that area coming up during 2014.

John Pitzer - Credit Suisse

And then, Sanjay, clearly the enterprise SSD business is doing very well. Any way to help quantify what percent of the overall SSD solutions is enterprise today? How you expect that to trend through the balance of the year? And can you help us understand the cost curves there between now and year end, and how that might help drive penetration growth?

Sanjay Mehrotra

So, we don’t breakout the revenue for our SSDs between client and enterprise. As we have said, the enterprise SSD is the biggest growth opportunity for us, and enterprise SSD revenue will continue to increase throughout the course of the year. We are really doing very well with our broadened portfolio of Fab solutions as well as engaging with broad set of Fortune 1000, hyperscale storage OEM and server customers across the board where our solutions for SaaS and SATA SSD product, so really tremendous growth opportunity ahead. We are very excited. Our vertical integration model and our strong portfolio of products and broadening customer engagement is really working to our advantage in this area, and I expect continued solid growth in enterprise revenue through the year and in the future years for us as well.

In terms of the cost aspect, the SMART Storage related revenue was primarily on non-captive memory in the first quarter, and we will be converting toward captive memory and significantly increasing the use of captive memory during the course of the year, and that will continue to help improve the cost profile of the enterprise SSD business as well.

Jay Iyer

Thank you, John. Next question please.

Operator

We will go next to Mehdi Hosseini with SIG.

Mehdi Hosseini - SIG

Sanjay, could you please update us on qualification at some of the OEMs, especially with the DIMM-based product? You mentioned early in Q1 that IBM has started qualification. First the update there and how many other OEMs are evaluating? And I have a follow-up.

Sanjay Mehrotra

The ULLtraDIMM product is unique and differentiated product offering for us and exciting product offering. Given its features, primary one being ultra low latency, 10 times faster latency than typical PCIe product, this really helps to provide the strong value proposition for applications to accelerate their performance. We are very excited about the product, engaged in customer qualifications. As we have said before, we expect leading customer to qualify the product by midyear timeframe; and in second half, we expect to have some revenue from this product line. We are engaged with other customers as well. There continues to be strong interest in this product, but remember that a new product like this really takes lot evangelization in the marketplace. It really requires the ecosystem to be ready and we are continuing to invest our efforts and resources toward that.

For 2014, I expect in the second half, the revenue from ULLtraDIMM to be small. I look at it as a growing opportunity for us in 2015 timeframe. And again, ULLtraDIMM is really not a plug and play product. It requires certain modifications to the BIOS to address this, and we are investing time and effort in helping achieve that, but nonetheless remains an exciting opportunity for us and we expect to start revenue contribution in second half of this year from ULLtraDIMM.

Mehdi Hosseini - SIG

And one follow-up on the cost for migrating MLC 19 nanometer to TLC 3 bit per cell at 16 nanometer, how is that migration coming and how should we think about the impact to the overall cost per day.

Judy Bruner

In terms of our usage of 3 bit per cell, we use it of course on both 19 and on 1Y and 3 bit per cell usage is very similar this year overall to what it was last year. Last year and our expectations for this year is slightly above 40% of our overall revenue bits are coming from 3 bit per cell memory, so we only use it pretty broadly across our business.

Mehdi Hosseini - SIG

Did the impact to the cost is it similar to last year or should we think about any difference this year compared to last year.

Judy Bruner

I would say that it’s a similar in terms of impact and you know that our cost as we said earlier in January we still expect that our cost improvement this year will be in the 15% to 25% range.

Jay Iyer

Thank you, Mehdi. Next question please.

Operator

Let’s go to Doug Freidman with RBC Capital Markets.

Doug Friedman - RBC Capital Markets

Congratulations, again, on the strong results. Can you give us a little bit of color on how much of your SSD business, or just solutions in general, are being supported by your internal controllers versus those that may be supported by merchant suppliers?

Sanjay Mehrotra

Within SSDs our total SSDs client and enterprise combined, we use internal controllers as well as third part controllers, really not prepared to provide the specifics of the internal versus external, would like to remind you that our enterprise SSD business which primarily is based on the client that tends to use the internal controller, the part of the enterprise SSD business which is based on the smart storage tends to use external controller and within client SSD we have range of options of internal as well as external controllers. I would like to clarify here that when I say controller it means the ASIC of course the firmware, whether for enterprise SSDs or for client SSD solutions is SanDisk developed formula and you know as you well know lot of the secret sauce of managing the flash to deliver the ultimate performance reliability, quality and the specification, those really reside in the firmware aspects and those are all done internally for our SSD products. So again from a controller ASIC point of view it’s a mix.

Doug Friedman - RBC Capital Markets

Great, thanks for that color. And if could, for my follow-up, could you talk a little bit about -- you've been seeing and been pushing the bits that you produce into the higher-quality markets where you're getting paid more for them. But can you talk maybe a little bit about what you are seeing in individual markets and the ability to really get paid for maybe a higher-quality product? I'm talking SSD to SSD where your performance or mean lifetime to failure might be longer than your competitors'. Is the market starting to recognize and value that? And are you able to collect a premium?

Sanjay Mehrotra

I think market is definitely valuing the SanDisk power of vertical integration, our flash memory, high quality flash memory, our system expertise, our ability to really build the memory and the system expertise into how we test the products and assure high quality levels for the product and really our portfolio of products, diverse solutions across the board, whether it is for embedded solutions such as iNAND solutions, the recent high performance iNAND solutions that we announced or the client SSD solutions which have really broad portfolio of offering as well as enterprise SSD solutions so I think we’re really leveraging all of these very well to continue to deliver strong value propositions to our customers and our customers really are fully realizing the benefits we offer to them and we are becoming increasingly valued partners to them and ultimately it’s showing up in our financial results that we have.

Doug Friedman - RBC Capital Markets

Great, congratulations.

Jay Iyer

Thank you, Doug, next question please.

Operator

We’ll go next to Mark Newman with Sanford Bernstein

Mark Newman - Sanford Bernstein

Great results. Thanks for taking my question. The question is on trying to look at your performance on pricing and commentary about pricing in the industry. The price again this quarter is outperforming what looks to be what's going on in the rest of the industry. I wanted to see if I could get some commentary from you on how you are seeing pricing in the industry by different types of flash. And I'd like to see some qualitative comments on the -- with your price outperforming the industry, how much of that is due to mix changing versus outperformance in each category? If there is any way you can quantify like-for-like product ASP change or how you are seeing that. And so, then, the rest, obviously, being down to preferred mix change.

Judy Bruner

I will take that. Let me start by saying, I think Sanjay just commented in his last answer on, our believe that we are achieving higher than average value for our system level solutions in many of the markets that we serve based on the quality of products, based on our system, expertise, based on our vertical integration. And we are seeing that we believe in our SSD business and our embedded business and frankly we also see it in our retail business where we get paid for the high-performance and the value of our brand name of products. So, I do believe that we outperformed on average in price in the markets, really in all of the key markets that we served.

And there’s a very small percentage of our business that is older than what you might consider market pricing or slot level pricing, so a very small percentage of our business that is sold in that way. You also talked about mix and to what degree does mix impact our pricing results and it’s a good question because the mix of the products that we sell our increasingly impacting the pricing statistics meaning ASP per gigabytes and also the cost statistics, cost per gigabyte; and so when you look at our business, looking at percentage changes quarter-over-quarter or year-over-year in that ASP per gigabyte or that cost per gigabyte are becoming a little less meaningful in terms of understanding and measuring our business.

And so I would really encourage you and everyone to focus on the gross margin percentage that we are able to produce as well and maybe even more importantly the operating margin percentage that we are able to produce. And we’re working hard, we believe we are doing a good job, really managing the mix of the portfolio in order to balance and deliver strong revenue growth, at the same time very strong profit margins and very strong cash flow.

Mark Newman - Sanford Bernstein

Great, thanks. If I could just ask one quick follow-up on that. Could you qualify, again, the difference in gross margins between different types of products, looking at enterprise, SSD versus client, versus the other businesses? And then also within enterprise, since that's the big growth area, is there any way you could clarify the difference between the different types of enterprise? For example, hyperscale versus the rest, or however you want to break it out?

Judy Bruner

Sure. Yes. So let me start at a high level and say, of course, for every -- looking at different categories, some will have to be below the corporate average and some will have to be above the corporate average. In terms of the categories that tend to be below the corporate average, those would be the embedded products and the client SSD products. And then the categories that tend to be about the corporate average all the enterprise SSDs and also our retail business. Now, of course, there is a mix of margins within each of those different categories.

And if you -- for example look at our embedded products, within embedded custom embedded solutions tend to be the lowest gross margin then followed by MCP iNAND products and then the highest gross margin within that category would be our discrete iNAND products. Then if you look at enterprise, your question was enterprise, there is absolutely a range of margins within enterprise and I would tell you that sort of the more traditional fortune 1000 enterprise gross margins came to be at the higher end and the hyper scale type of gross margins, which are typically more SATA products tend to have a somewhat lower gross margin in terms of the average within enterprise.

But the average enterprise gross margin is definitely higher than the corporate average, when of course; it’s using our captive memory. And as you know, I mean Sanjay commented on we are in the process now of moving the smart based business to captive memory. So that hopefully gives you a little bit of color and I just -- when I conclude by saying that I believe our overall gross margin for 2014 at 47% to 49% is quite good and quite high and delivering very strong operating margins.

Jay Iyer

Thank you Mark, next question please.

Operator

We will go next to Steven Fox with Cross Research.

Steven Fox - Cross Research

Just two quick questions from me. First, Sanjay, looking at some of your commentary around wins on the iNAND side and customer embedded, I'm just trying to understand the strength of the new wins going into later this year versus, say, a year ago. Is it about the same type of pace or do feel like you're having more success, etcetera? Any kind of qualification you could provide around that would be helpful.

Sanjay Mehrotra

I think our iNAND product portfolio has strengthened significantly. I am very excited about the new generation of iNAND that we launched at Mobile World Congress. And our new products, high performance product will give us greater opportunities in terms of design wins with our customers. And we are also really very much focus working with our customers and the ecosystem to drive a higher value proposition for NAND flash and really strengthen the customer application experience of flash. And all of this I believe is resulting in stronger engagement and stronger penetration of SanDisk products in the embedded marketplace and here I am particularly talking about iNAND family of solutions, discreet iNAND as well as MCP iNAND.

Steven Fox - Cross Research

Great, that's very helpful. And then just as a follow-up, in terms of the SSD market as a whole, obviously you guys had a very good quarter. How much would you attribute to just the market improving more than you would have thought during the quarter versus your own success within the market?

Sanjay Mehrotra

I think our presence in the market is increasing. We are gaining share both on the enterprise SSD side as well as client SSD side. You are right that the market itself is also growing, so we are in a good spot adjusting this market that market TAM is getting larger and our share position is increasing. We are focused on broadening our product portfolio and as I mentioned earlier our vertical integration, our ability to bring high technology, high quality solutions with a strong delivery performance. Our supply chain excellent execution really is becoming greater value to these customers. So, all of this combined is helping us gain share in the SSD market and this all aligned very well with our strategy of continuing to strengthen the mix of higher value solutions in our business. And the fact is that all PC OEMs actually use SanDisk SSDs and among the enterprise six of the top seven storage and server OEMs use SanDisk product as well. And SanDisk as I mentioned in my prepared remarks really broadening our engagement with the hyperscale customers as well.

Jay Iyer

Thank you, Steve. Next question please.

Operator

Yes. We will go next to Mark Delaney with Goldman Sachs.

Mark Delaney - Goldman Sachs

I'm hoping, first, you can help me think about your bit growth given your commentary around shrinks and the plan to add a little bit of new wafer capacity later this year. Can you help us think about what that implies for your potential bit growth on a year-over-year basis for 2015?

Sanjay Mehrotra

In terms of the supply bit growth for 2015, okay, I was just going to say that in terms of the 2014 supply bit growth, it’s in the range of 25% to 35% as we have said. And for 2015, of course it is too soon to say but I would not be expecting for the industry or for ourselves supply bit growth to be any higher than the kind of ranges that exist in 2014.

Mark Delaney - Goldman Sachs

Okay. That's helpful. And then for my follow-up question, I understand there is initiatives underway to improve the mix of your business. And maybe you can just help us understand what inning you think you are in, in terms of having the right mix of business that you'd hope to achieve longer term.

Sanjay Mehrotra

Our goal for this year is to see 25% in terms of total SSD client and enterprise combined and I would expect that this will continue to increase in the future years as we continue to grow our business particularly on the enterprise SSD side and as that market continues to grow well as well. If you look at the industry TAM itself the SSD TAM will become a bigger part of the industry and with our strengthening position in terms of share as well I would expect SSD to start become, to continue to become a larger mix of our business going forward. And many of these opportunities really are in very early innings particularly in SSD and with our capabilities in terms of hardware solutions as well as really combining it with software, we are really bringing strong value proposition, differentiated value proposition to the customers. So, I think we are well set for strong growth ahead.

Jay Iyer

Thank you, Mark. Next question please.

Operator

We will go next to Joe Moore with Morgan Stanley.

Joe Moore - Morgan Stanley

I wonder if you could talk about the Hynix litigation that you initiated in the quarter. Presumably you can't go into too much of the merits of the case but when might we see some milestones around that. And your partner Toshiba put a dollar amount on what they thought the damages were. Have you guys made any statement about that?

Sanjay Mehrotra

So, this is really too early to comment and of course the method is then litigation as well as criminal court so we really cannot comment much on it. What I would say is that, extremely disappointed that one of our ex-employees violated our intellectual property and trade secret aspects and we really-really take those things very-very seriously and we will definitely defend our intellectual property and trade secrets rigorously because it is simply unacceptable that any of that gets copied or you know used inappropriately by anybody out there. Beyond that, I really can’t comment much.

Joe Moore - Morgan Stanley

So nothing has been scheduled in terms of any hearings or any timing in terms of when we might get more clarity on what's happening there?

Sanjay Mehrotra

This is early, and these matters take a long time.

Joe Moore - Morgan Stanley

Great, okay. Thank you very much. And can I also ask, the content on high-end smart phones, it looks like we are starting to see some of the prices on these 32-gigabyte upgrades come down. How are you seeing the elasticity around that? What do you think might happen to the NAND content per phone over the course of the rest of this year?

Sanjay Mehrotra

In terms of the NAND content per phone through the course of this year, we expect the average capacity overall to continue to increase, particularly as the budget smartphones and the mid-range smartphones become bigger portion of the total smartphone mix. That will be happening through the course of this year, as well as in the future years. And at SanDisk, we are very well positioned with entire range of product offerings suitable for budget smartphones, mid-range smartphones as well as the high-end smartphones. And we are engaged with the global suppliers of these smartphones in all of these ranges, in China as well as the rest of the world. So I expect our average capacity is to continue to increase. Of course, as is well-known in the high-end phones, the premium smartphones, the average capacity growth is somewhat slower as the markets are somewhat maturing on the high end smartphones, but a lot of growth in the budget smartphone and mid-range phone. And as those low-end and mid-range phones really start adopting more and more features that used to be in the recent smartphones, they are using greater Flash content. And these are the trends that board well for continued increases in the average capacity of the total smartphone industry.

Jay Iyer

Thank you Joe, next question please.

Operator

We will go next to Craig Ellis with B. Riley.

Craig Ellis - B. Riley

Thanks for taking the question and congratulations on the very strong performance. My first question is really related to your concluding point there, Sanjay. You mentioned you are engaged with all the China handset OEMs. Can you identify what your market share is, both with those OEMs and in emerging country broadly? And what's your expectation relative to developed country removable and embedded share over time?

Sanjay Mehrotra

I can’t really give you the specifics of our share in China or break it out by different countries here, however, our penetration is continuing to increase and our engagement is solid. Our products can be found in the smartphones sold by the major players in these markets. But really can’t quantify the share and I believe that we have a lot of opportunity ahead here as well and giving new products to our customers. And certainly on the removable products, which I believe versus second part of your question; in the removable product, on the retail channel and certainly mobile cards attached to the smartphone is continuing growing opportunity.

And we have very strong share in mobile cards through our retail channel as well as share with OEMs in terms of bundling, although that’s a very small part of the total industry turn now, unlike years in the past. But our share there continues to be strong as well. So our share is certainly higher on the card side, but on the embedded solution side, iNAND and MCP doing quite well as well. And again our focus always remains that we continue to manage the mix of the business to ultimately achieve the best results in terms of revenue, profits and cash flow. So having the flexibility to really work with broad range of customers, with really a broad portfolio solution really gives us tremendous flexibly in managing the optimum mix. And this all enabled by our vertical integration.

Craig Ellis - B. Riley

Thank you. The follow question is regarding your technology transition with 1Y. You are in a strong position, 50% of output in the second quarter. Can you just give us an update on where you think you will be by the end of the year with 1Y output mix?

Sanjay Mehrotra

With 1Y output by end of the year we expect to be around two thirds of our total bit production to be in 1Y technology and keeping in mind that as that business really grows more and more in SSDs as well as embedded aspects, more and more OEM and enterprise business, it requires to maintain along tail of the previous generation nodes as well. So the 19 nanometer in lot of our businesses will still continue. And this happens because of the customers, some of the platforms is really take a while for product qualification and therefore we plan to continue to support them with 19 nanometer products through the course of the year as well. So that’s the nature of the OEM and enterprise business that there tends to be a longer tail of previous generation technology nodes, but we are doing very well, very happy with our 1Y technology ramp.

Jay Iyer

Thanks Greg, next question please.

Operator

We’ll go next to Kevin Cassidy with Stifel.

Kevin Cassidy - Stifel Nicolaus

Yes, thank you for taking my question and congratulations also. Are you working on a 3 bits per cell SSD or do you think there’s a market for that.

Sanjay Mehrotra

For this year, as we had mentioned before we plan to bring out certain products in our embedded category with 3 bit per cell, we do have 3 bit per cell on the roadmap for client SSDs but we look at more as a 2015 kind of opportunity. Keep in mind that you know bulk of the client SSD market is addressed by X2, X2 is the suitable technology to address those markets and we have done very well with our X2 in client SSD market, so focus this year more on starting to bring it out on the embedded side and for next year starting to bring out three products on the client SSD side. But both on the embedded side I think there will continue to be significant part of the market that will be served by X2 as well in the client SSD side.

Kevin Cassidy - Stifel Nicolaus

Okay. So SSD is in a more value segment?

Sanjay Mehrotra

Please repeat the question.

Kevin Cassidy - Stifel Nicolaus

If X2 SSDs are meeting the market demand right now, then where would the X3 SSD fit in?

Sanjay Mehrotra

That’s, you know it’s too soon to really comment on it, this is something that we’re looking at for 2015 kind of timeframe and it’s on the roadmap.

Jay Iyer

Thanks Kevin, next question please.

Operator

We’ll go next to Hans Mosesmann with Raymond James.

Hans Mosesmann - Raymond James

Congratulations, guys. Most of my questions have been answered. But just if you could provide some qualitative commentary regarding 3D NAND and your BiCS. There's a perception here, of late, that the industry is struggling in terms of the cost structure and in terms of the layers. Does that fall into your opinion that next year bit growth will not be as much as -- or cannot exceed the 40% for the current year?

Sanjay Mehrotra

You know certainly 3D NAND in the industry for in terms of percentage of bit production will be very-very small in 2014 and will be very small in 2015 timeframe as well. Our timeline for 3D NAND production for pilot line in second half of 2015 and then ramping production in 2016 timeframe, our timeline stays the same. We’ve always said that you know 3D NAND in terms of volume production capability will only make sense once it achieves the right cost structure and once it starts using it achieving stronger usage across industry segments as well so you know these are all the factors that will play a role. In terms of our industry bit growth estimates of course, you know the 2D NAND, any considerations of capacity you know require focus on ROI as well as 2D NAND capacities getting as we have said before more and more complex in terms of technology transitions, more capital intensive, so ROI, capital intensity, greater complexity, reduced productivity in terms of gigabyte gain from new technology nodes all of these factors as well as the future considerations regarding 3D play a role in the moderating supply bit growth for the future.

Hans Mosesmann - Raymond James

Great, very helpful.

Jay Iyer

Thank you Hans, Jessica I think we have time for one maybe two questions.

Operator

Okay, we’ll go next to Steven Chin with UBS.

Steven Chin - UBS

First one that I wanted to focus on is on the mobile side, just given some of your comments on your design win traction in the China smartphone space. I was wondering if you could provide a little more color in terms of the white label and also the multi-national OEM market, what your ASPs are there relative to your competition. And whether it's through your attachment to certain reference designs on the chipset space that's allowing you to win in those sockets, or is it an apples-to-apples product takeoff, and the customers there are actually going with your potentially premium solution over the competition.

Sanjay Mehrotra

We’re engaged with the leading handset suppliers in the China market and we are engaged with the broad set of those suppliers and you know we are not going to get into the specifics of ASP by customers or by markets here, but your question regarding the engagement with the chipset providers, of course that is key and engagement with the ecosystem in terms of chipset providers, in terms of operating system providers and of course the customers themselves I think this is definitely key, so it takes really all of the above that you mentioned in terms of designs by the customers, designs at the reference platform level with the chipset providers and then ongoing continuing support for getting the customers to qualify our products to support them through the qualifications and all the support that is needed in their postproduction phase as well. We are well positioned with our sales and customer support effort in our global markets to really continue to grow these opportunities on top of our engagement with the ecosystem as well as our strong product portfolio.

Steven Chin - UBS

Okay, that's helpful. And my follow-up is on your embedded product portfolio. I was interested in your comments earlier on the gross margin ranking in your overall portfolio. Can you remind us what the mix of TLC NAND is in your embedded portfolio, and opportunity to grow that further? Thanks.

Judy Bruner

So today there is a small usage of 3 bit per cell in our embedded portfolio but as Sanjay said we expect to be introducing products and increasing the usage of 3 bit per cell in our embedded products during 2014.

Jay Iyer

Thank you, Steve. And Jessica unfortunately that’s all the time we have for today and I want to thank everyone for joining us. And a webcast replay of today’s call should be available on our Investor Relations website shortly. Thank you and have a good evening.

Operator

This does conclude today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SanDisk's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts