SanDisk Dn 12% As 1Q Gross Pdt Margins Disappoint Wall St
DOW JONES NEWSWIRES
April 15, 2004 12:06 p.m.
By Jen Ryan
Of DOW JONES NEWSWIRES
NEW YORK -- Shares of SanDisk Corp. (SNDK) fell 13% Thursday as Wall Street expressed concern over the company's outlook for product gross margins, and its decision to cut product prices sooner than expected.
Late Wednesday, the maker of flash data storage products said it expects product gross margins to be 30% for the rest of the year, below its original expectations of 32% to 36% in the first half of 2004 and in line with the expected 28% to 32% in the second half.
For the first quarter the company's product gross margins were 32%, at the low end of its 32% to 36% guidance range.
The company also announced plans to slash prices of its higher capacity flash memory, effective immediately, which is expected to cut overall prices by 40% year-over-year.
According to Thomson Weisel Partners analyst Eric Gomberg, the company's product gross margins have historically come in at the high end of guidance, so the first-quarter results sparked disappointment on Wall Street.
Additionally, he added that the price cuts, which are expected to stimulate demand for these higher capacity products, may have a negative impact on margins going forwards if the company cuts prices faster then they're cutting costs.
Shares of the Sunnyvale, Calif., company recently fell $4.26, or 13.1%, to $28.24, on volume of 20.1 million compared with average daily volume of 10.6 million.
SanDisk's President and Chief Executive Eli Harari believes the market is reacting primarily to the "preemptive" timing of the price cuts.
Right now the market is in a good balance between demand and supply, so Wall Street thinks that cutting prices "is leaving money on the table," Harari said.
However, he added that "we are planning for new capacity in the second half and want to preempt a situation of excess supply...We would rather suffer less supply so that when new supply comes on board it is well balanced with demand."
Thomson Weisel's Gomberg said SanDisk employed a similar price cutting strategy in 2003, which "resulted in a very significant uptick in consumer demand and in Sandisk sales."
However, "prior success does not insure similar outcome this time around," so some investors are still concerned, Gomberg said.
He added that "we remain optimistic about the industry outlook for the year and think that the company's strategy will ensure that there isn't oversupply in the market in 2004."
Gomberg does not own shares of Sandisk. Thomson Weisel has an investment banking relationship with the company.
Following the news, SanDisk competitors Lexar Media Inc. (LEXR) lost $1.50, or 8.8%, to $15.55, while M-Systems Flash Disk Pioneers Ltd. (FLSH) declined $1.37, or 5.9%, to $21.79.
-By Jen Ryan, Dow Jones Newswires; 201-938-5294
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