SanDisk's (NASDAQ:SNDK) soft Q2 gross margin and muted Q3 margin outlook stems from a "strategic decision" to supply Apple with a huge volume of embedded NAND flash and SSDs at lower margins, says Susquehanna. Susquehanna, RBC, and others are defending SanDisk's move, arguing the near-term pain is worth the long-term benefit of a strong relationship with Apple.
The company's below-consensus Q3 sales guidance is chalked up to supply constraints for 19nm NAND flash parts amid healthy demand from OEMs (likely including Apple) and enterprise SSD clients.
SanDisk stated on its CC (transcript) it now expects its 2014 bit supply growth to be at the low end of a prior 25%-35% guidance range due to the constraints. Industry supply growth is still expected to total 40%.
Needham (Buy) thinks SanDisk will ramp 19nm capacity in Q4, and expects a mix shift towards embedded NAND and SSDs to boost margins long-term. Morgan Stanley (Equal-Weight) isn't as enthusiastic. "We expected 14% Q/Q bit growth, 6% ASP declines, and 3% cost declines; instead they did 31% bit growth, 16% ASP declines, and 12% cost declines."