SNDK: Merrill Report
ML:BUY, tgt $135, booking orders well into 1Q01.
Excerpts from Merrill Lynch Research 7/20/00
Investment Highlights:
• SanDisk reported 2Q00 EPS of $0.33, easily beating both our and the Consensus estimates by $0.11. Revenues of $143.9 million were up a whopping 31.6% QoQ, above our
$134.6 million estimate.
• Given that demand for SanDisk’s flash memory products continues to far outstrip the available supply, we are raising our F00 EPS estimates from $0.88 to $1.13 and our F01 EPS estimates from $1.17 to $1.35. We are reiterating our Buy/Buy ratings and our 12-18 month price objective of $135, a level we feel is reasonable given the peak multiple achieved by SNDK on its historical price-to-mean EPS
estimates when evaluated on a next-twelve-month
basis.
Fundamental Highlights:
• Sales of flash memory into consumer electronics were robust in all channels and geographies and supply remains tight.
• The company has excellent visibility and is booking orders well into 1Q01.
• A large increase in license and royalties revenues combined with lower operating expenses drove the upside.
2Q00 Highlights
SanDisk reported 2Q00 EPS of $0.33, easily beating both
our and the Consensus estimates by $0.11. Revenues of
$143.9 million were up a whopping 31.6% QoQ, above
our $134.6 million estimate, driven largely by a 78%
sequential increase in license and royalties revenues.
Gross margins were 41.3%, up a strong 330 basis points
QoQ, and well above our 39.4% estimate, due to the higher
percentage of license and royalties revenues. We look for
gross margins to trend to 38.4% by the end of F00 as the
product mix shifts to an increasing percentage of revenues
from flash products as the license and royalties revenues
remain flat going forward. We believe product gross
margins will continue to move higher as the product mix
shifts to higher-margin, higher-density flash chips, as
average selling price (ASP) declines are moderated, and as
further manufacturing efficiencies are recognized.
Unexpected increase in license and royalties revenue,
lower operating expenses drove upsides
SanDisk experienced an unexpected 77% sequential
increase in license and royalties revenue from $12.1
million in 1Q00 to $21.4 million last quarter. We had been
expecting $12.2 million and if the company had reported
that figure, EPS would have been $0.25.
Geographic breakout
Geographic breakout was as follows: North America,
47%, up 21% QoQ; Japan, 26% (up 20%); Europe, 18%
(up 67%); and Asia/Pac, 10% (up 36%). Demand was
strong across-the-board as all geographies reported at least
20% sequential increases in revenues. Europe was up
sharply due to strong increases in demand from telecom
and industrial customers for all products, particularly
FlashDisk products, in that region. Demand in Japan and
Asia is particularly strong for multimedia cards (MMCs)
used to store music in digital audio players.
Product revenue breakout
Estimated product revenue breakout was as follows:
CompactFlash, 43% of product revenues, up 12% QoQ;
FlashDisk, 18%, up 15% QoQ; MMC, 22%, up a strong
81% QoQ; Smart Media, 5%, up 40%; and flash chipset,
5%, flat QoQ. The sharp increase in MMC sales was due
to strong demand from the portable audio and digital
camcorder markets. We believe the company made a
conscious effort to ship a large amount of MMC products
in 2Q00 after starving MMC customers during the
previous three quarters.
An estimated 66% of sales were from the consumer
market, with 34% from telecom and industrial markets
versus 70% from consumer and 30% from telecom and
industrial markets during 1Q00.
Sales directly to customers were approximately 50% of
sales, retail sales, 25%, and industrial distributors, 25%.
The company continues to be supply constrained, with lead
times in the 16-18 week range on average. The company
currently is booking orders for shipment into 1Q01.
Explosive demand for MMC products
SanDisk experienced explosive demand for its products
during 2Q00, with demand for MMC products and
CompactFlash far outstripping the available supply. We
believe MMC product revenues will sharply increase going
forward, with robust demand emanating from MP3 player
and digital camcorder markets. In addition, the company
is beginning to experience strong demand for its MMC
products from several emerging end markets such as
internet appliances and digital cellular phones.
Transition to 256Mb products going smoothly..
SanDisk continues to benefit from a faster-than-expected
transition 256Mb from 128 Mb products. We believe
revenues were split 80/20 between 256Mb and 128Mb
products during the quarter, and we look for a 90% product
mix favoring 256Mb products in 3Q00, with the company
shipping 256 Mb products exclusively in 4Q00, a fact that
should act to push gross margins higher.
…as is the move to more advanced manufacturing processes
SanDisk is currently shrinking the linewidth on its 256 Mb
products from 0.28 micron to 0.24 micron, which should
provide badly-needed capacity for the company and
improve yields. We estimate the company should have its
products fully converted by the end of 3Q00. In addition,
SanDisk is scheduled to receive wafer shipments from an
additional fab at UMC beginning in late 3Q00, bringing
the total amount of fabs at UMC producing wafers for
SanDisk to three. We believe the combination of the
additional fab and die shrinking should provide the
company with a 50% increase in capacity over current
levels.
Balance Sheet Summary
Cash increased just over $23 million QoQ from $674.5
million to $697.8 million as a result of the increase in
sales. DSO shrank from 65.6 to 52.9 days QoQ as the
company demonstrated strong management of receivables.
Inventory days increased slightly from 47.3 to 50.3 days,
however are still within the company’s historic range.
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