Sandisk Has Some Explaining to Do; Marvell's CFO Sets Up for Success

Will SanDisk come clean?

The most interesting news of the companies currently in my portfolio tracked by "Globes", will come from SanDisk Corporation (SNDK), whose CFO Judy Bruner will be talking to investors on at the conference on Thursday, an hour and a half before the end of trading. SanDisk's share is currently wallowing at a multi year low and NAND chip prices are in freefall. Those who have kept faith with the share, like me, believe the crisis is temporary and that the company will be thriving again from 2010 onward, but would nevertheless like to find out exactly how its finances stand at present. SanDisk has loans and liabilities on an investment in Japan it committed itself to in a joint venture with Toshiba (TOSBF.PK), but these are off-balance sheet because SanDisk's share in the venture is less than 50%.

Worried investors will want to hear from Bruner how the company intends to simultaneously shoulder both the massive investment in production lines in Japan, and the losses it recorded for the second quarter which analysts believe will continue into the next two quarters as well. I would not be surprised if SanDisk issues a formal announcement about its financial position before it faces investors at the Citigroup conference, and an update on its investment program for the years beyond the timeline it set out in its latest results. I found a clue to the clarifications that could be forthcoming from the SanDisk management later this week in a report published by independent research company Morningstar Inc. (MORN).

Until the disappointing second quarter, Morningstar's analysts had given SanDisk a fair value estimate of $60, four times the price today. After the grim second quarter results were unveiled, they noted the frustration they felt at the lack of transparency on the part of the SanDisk management, even after talking to the company's managers several times.

The Morningstar analysts wrote in their report at the end of August, that since they had been unable to obtain any financial details, specifically on the company's liabilities and its investment in production lines in Japan, they would be "revaluing" the share. They added that they would be meeting with management again in early September and would release an updated report immediately afterward. This leads me to conclude that SanDisk will be issuing a clear and up-to-date report on its finances either during its presentation at the Citigroup conference this Thursday, or in a formal notification to the capital market.

To be like Steve Jobs

I believe the results announced last Thursday from Marvell Technology Group (MRVL), and Sigma Designs Inc. (SIGM) will also give some indication of the atmosphere likely to prevail at the Citigroup conference this week. Current business remains strong, but the clouds of global recession that everyone is talking about will lead managers to ease back on their guidance. These two shares fell by up to 5% on Friday for the very same reason - guidance for the October quarter below that of preliminary market estimates - but in the quarter just ended both companies beat the earnings per share estimates hands down.

Of the two, Sigma got off to a shaky start on Friday, plummeting 11%, and ultimately ended the session just 3.7% lower on volume of 3.3 million shares, three times the average. The reason for this, I feel, was the large purchases by short traders, who apparently realized that the worst was already behind Sigma, especially after the company said during the announcement of its lowered guidance that half of its projected sales for the quarter were already backed by orders for delivery. One may assume, as a result, that it will have little trouble beating this guidance.

Sigma's management had a specific explanation for its reduced guidance, but in contrast, Marvell Technology Group didn't, something which came as a total surprise to Craig Berger, semiconductor industry analyst at Friedman Billings Ramsey. He said there was absolutely no logic at all to the guidance, given the success of the latest iPhone, the upcoming launch of the Blackberry Bold smartphone, and the thriving laptop market.

Others wrote that Marvell's new CFO Clyde Hosein, who has only been in the job for one quarter, apparently preferred to start off on the right foot and emulate Apple Inc. (AAPL) CEO Steve Jobs - be conservative in your guidance and beat the estimates in your results. Hosein will get another opportunity to explain the reduced guidance when he addresses investors at the Citigroup conference on Thursday.

As for Sigma, we were given yet another demonstration of just how tough a task analysts face when trying to gauge how its quarters will look. The IPTV market, in which it is the undisputed leader, is still in its infancy, and the number of networks in place worldwide is limited and spread across three continents - America, Europe and Asia. Each of these has a critical impact on Sigma's results in its own right, so building a forecast is hard. In the quarter just ended, for example, there were analysts who predicted that the build up of inventory at AT&T Inc. (T) that had harmed Sigma in the last two quarters would do so again since they believed that the issue had not yet been resolved.

It now appears that the rate of orders of processors for this project is back to what it was before the inventory began to pile up. Supplies of set-top box processors to AT&T's two producers on this project, Cisco Systems Inc. (CSCO) and Motorola Inc. (MOT) nearly doubled in the July quarter, compared with the previous quarter.

On the other hand, Sigma expects a temporary slowdown in two other markets, Korea and France. In Korea, the government has only recently given the green light for advanced IPTV services and it is known that the country's two big telephony companies, KT Corp. (KTC), and Hanaro Telecom Inc. (KSX: 03360), intend to make massive investments in infrastructure for IPTV services in the near future, but set-top boxes will not be supplied to subscribers until early 2009.

Disclosure: None

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on SeekingAlpha with full permission.

Comments

[papita:]

thank you shlomi for writing this article. I am a sandisk shareholder and am starving for information from the company. I will be anxiously waiting for your next report.

2008 Sep 03 08:55 PM

[paul:]

If the world of analysts only understood how difficult it is for CFOs to predict within a quarter what the results will be. A large portion of business in the semiconductor world is "turns" business. That is business booked and shipped within the quarter. This is why it is so difficult to manage a public semiconductor company.

2008 Sep 04 01:52 PM