M-Systems Tops Estimates, But Margins Disappoint Again (FLSH)

Includes: FLSH, LEXR, WDC

Flash memory maker M-Systems (FLSH) easily topped analyst estimates for 4Q05 in its earnings report this morning, but the stock is down over 10% in trading today following the conference call, when the company acknowledged that lower gross margins this quarter will continue into the future -- an issue that has pressured this stock for years. The drop in FLSH dragged down SanDisk (SNDK) 5.5% and Lexar (LEXR) 5% as well. The key numbers for FLSH:

  • 4Q05 Revenue: $205.7 million -- up 55% q/q and 80% y/y (analysts expected $160.3m)
  • 4Q05 EPS: $0.59 (analysts expected $0.43)
  • 4Q05 Gross margins: 21.3% (3Q05: 24.8%, 4Q04: 21.7%)
  • In the conference call, M-Systems execs explained that gross margins were down due to product competition, the company's pursuit of greater market share, and NAND flash chip demand (among its competitors) increasing. For this reason, supply was tight, and M-System's NAND chip suppliers did not lower prices as expected. The company did not specify to what extent margins would continue to be squeezed in the future, but CEO Dov Moran noted that overall revenue growth in 2006 'could be greater than or similar to 2005'.

    We'll have the full M-Systems conference call up soon -- just check back here.