SanDisk Surges as Investors
Hope for Big Profits in MP3
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
interactive.wsj.com
It was a good second quarter for SanDisk.
The maker of "flash" memory cards for storing information on digital cameras and other devices handily beat Wall Street profit estimates on Wednesday. But analysts believe that the excitement over MP3, a technology that's contributed little to current sales, sent the company's stock up 27% Thursday.
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The Sunnyvale, Calif., company saw its shares jump 14 5/8 to 69 on volume of 1.9 million shares on the Nasdaq Stock Market, up from average daily volume of 280,000.
Meanwhile, the Nasdaq Composite Index gained 21.24 to 2839.37 and Morgan Stanley's high-tech 35 index rose 8.10 to 1239.96. But the Dow Jones Internet Index slipped 0.21 to 253.74.
SanDisk said it earned $5.7 million, or 19 cents a diluted share, for the second period, up from $1.1 million, or four cents a diluted share a year earlier. The consensus analyst estimate was for profit of 15 cents a share, according to First Call. Total revenue for the quarter jumped to $52.5 million from $31.4 million a year ago.
But aside from the strong earnings, investors seem to believe the company will benefit from the projected explosion in demand for portable music players that use MP3 and other music formats. Market research-firm Semico Research estimates that three million devices will be sold world-wide next year, jumping to 7.8 million units in 2001.
MP3 is a software format that's quickly become the preferred method for listening to digital music downloaded from the Internet. Today it's primarily used for playing back songs on personal computers, but MP3 -- which stands for MPEG Layer 3 -- is beginning to make its way into a new generation of portable music players that use data storage rather than cassettes or compact discs to tote around music. Diamond Multimedia's Rio was the first MP3 player to garner significant attention, but others are following from Creative Labs, Samsung and others.
All of this is good news for companies like SanDisk, which sell removable data-storage cards and internal chips finding their way into the devices. Unlike like conventional hard-disk drives, which contain magnetic platters that are sensitive to movement, flash storage cards have no moving parts and are made out of silicon, making them better suited for portable devices that get jostled by users on the go.
SanDisk helped stoked investor enthusiasm. In a conference call with analysts late Wednesday, SanDisk executives said the Internet music-player market would become a significant part of its business in the future.
For now, Internet music players account for only a small percentage of SanDisk revenue. But analyst Joseph Osha of Merrill Lynch & Co. predicts the sales for the devices could be a $50 million-a-year business for the company by 2000. "They now appear to have a bona fide demand-driver" for their storage cards, said Mr. Osha, who raised his long-term investment rating on the company Thursday to "buy" from "accumulate." He added: "It was digital cameras, now it appears to be MP3."
SanDisk has announced agreements to ship its postage stamp-sized flash MultiMediaCard with a number of different Internet music players, including devices made by Information & Communication, LG Electronics and other Korean electronics manufacturers. The company will also supply CompactFlash Cards, a storage device the size of a matchbook, for the RCA Lycra, a music player due out from Thomson Consumer Electronics later this year.
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SanDisk faces a lot of competition from other flash-card makers who want music-device makers to standardize on their cards. Toshiba makes cards that work with the Rio, and Sony plans to push a flash format called Memory Stick for portable music players.
Bob Goligoski, a spokesman for SanDisk, said demand from music-device makers for its storage cards -- particularly its 32-megabyte cards -- caught the company by surprise. As a result, the company is "scrambling to bring up capacity" in its Taiwan manufacturing plant.
Another recent event has helped boost demand for SanDisk products: the release of final technical specifications for portable players by the Secure Digital Music Initiative, an industry effort to create guidelines for preventing unauthorized digital copies of songs. SDMI members from the consumer electronics, recording and technology industries were racing to finish the guidelines in time to build compliant products for the Christmas shopping season. |
