Bear issued an update 2 days ago. Here are some highlights:
SanDisk is scheduled to report 4Q04 results on Thursday 1/27. We are forecasting revenues of $504M (up 23.5%
QoQ), below the mid-point but within the guidance range of $500-530M (up 26.2% at the mid point), product
gross margin of 21.1%, significantly below guidance of 27%-30%, and EPS of $0.19. Our earlier EPS estimate was
$0.23. Consensus is at $503M for revenues and $0.28 for earnings.
We expect SanDisk to report a shortfall in margins as compared to its October guidance, and believe this is where we
differ significantly from the Street. The street in our view is too focused on the top line. Our product gross margin
estimate of 21.1% represents a decline of 750 basis points from the prior quarter’s 28.6%, versus guidance of flat
gross margins (27%-30%), reflecting our view that cost reductions did not compensate for the ASP decline. We
believe margins likely fell short on both the captive and non-captive business, and that there was an increased mix
toward the lower margin non-captive business due to yield issues at FlashVision, its joint venture with Toshiba.
We have raised our 4Q revenue estimate from our prior estimate of $469M (up 15.0% QoQ), based on an increase in
our bit growth forecast from 70% QoQ to 100% QoQ growth, which is above guidance of 89% QoQ bit growth.
However, our ASP estimate for the quarter stands at 36% QoQ decline on a per megabyte basis, which is below
guidance of a 30% QoQ decline in ASP. We have assumed license and royalty revenues of $35M (down 18% QoQ),
at the high end of the $30-$35M guidance range.
Our checks indicate that sales of USB flash drives and memory cards were strong during the holiday season, with
memory card sales driven by strength in digital still camera (DSC) shipments. We estimate DSC shipments increased
32% QoQ in 4Q04, slightly stronger than last year’s 29% QoQ growth in 4Q. While a doubling in bit shipments may
appear aggressive in light of historical patterns, we believe demand was positively impacted by elasticity, as we went
through two consecutive quarters of significant ASP declines – down 22% in 3Q and an estimated 36% in 4Q. The
sequential comparison is also helped by the weak 3Q. However, on the pricing side, our checks indicate that retail
pricing was more aggressive than expected, and we believe SanDisk offered significant rebates and discounts during
4Q in order to stimulate demand.
We estimate SanDisk increased the non-captive portion of its sales from 35% in 3Q to approximately 40% in 4Q,
versus guidance of maintaining the non-captive portion at 35%. We believe SanDisk’s non-captive product gross
margins came under significant pressure in the quarter. On the captive side as well, we think margins were below the
company’s expectation, given the greater than expected price decline and the yield issues with 90nm production.
For 1Q05, we are lowering our revenue estimate from $456M to $420M, down 17% QoQ, based on an ASP decline
of 10% QoQ and bit shipment decline of 11% QoQ. While our checks and recent spot market pricing trends indicate
that supply has tightened in recent weeks for high density chips, we believe this is a short-term phenomenon being
driven by inventory replenishment following the holiday season sales, and we expect supply to loosen as we advance
further into the seasonally weak first quarter. For full year 2005, we are lowering our EPS estimate from $1.21 to
$1.07, primarily due to lower gross margin estimates. Our 2006 EPS goes from $1.38 to $1.30.
We are maintaining our Underperform rating on the stock. We believe the street’s estimates for 4Q04 and 2005 are
optimistic and have room to decline, and a decline in consensus estimates should lead to the stock’s
underperformance. We expect continued pricing pressure in flash cards in 1Q05. We believe the increasing number
of competitors in the flash card market, particularly from Asia, will contribute to pricing and margin pressure for
SanDisk. We also expect NAND chip supply to loosen up as new entrants ramp up production, which should make it
easier for competing card manufacturers to obtain increased supply. |
