SanDisk’s (SNDK) third quarter 2010 earnings of $1.20 per share exceeded the Zacks Consensus EPS of $1.02.
Revenue
Total revenue for the third quarter was $1.23 billion, up 32.0% on a year-over-year basis, and up 5.0% on a sequential basis. Revenue for the quarter was in-line with the company’s guidance range of $1.175 billion to $1.25 billion. The revenue increase may be attributed to strength in both the OEM and retail businesses.
Total revenue for the quarter included $1.137 billion in Product revenue (an increase of 39.8% year over year and 4.0% sequentially) and $96.080 million in License & Royalty revenue (down 20.8% year over year and up 9.0% sequentially). The year-over-year increase in Product revenue for the third quarter was positively impacted by the shift to retail, which resulted in a mix of 62.0% OEM and 38.0% retail. License & Royalty revenue growth was inline with the company’s expectation
Operating Results
Product gross margin in the quarter was 48.1% on a non-GAAP basis versus product gross margin of 39.4% on a non-GAAP basis in the year-ago quarter. Product gross margin benefited from SanDisk’s products cost per gigabyte improving 13.0% sequentially compared to only a 5.0% price decline. The company’s cost decline was stronger than expected due primarily to higher 32-nanometer yields and rapid transition to 32-nanometer X3. Consolidated gross margin of the company was 52.2%, up from 47.2% reported in the year-ago quarter.
Operating profit margin on a GAAP basis was 35.0%, compared to 25.7% in the year-ago quarter, and non-GAAP operating profit margin was 37.0% in the third quarter compared to a margin of 28.1% in the year-ago quarter. The company’s operating expenses grew just 5.7% on a year-over-year basis to 16.8% of revenue which is within the long-term financial model range of 15.0% to 17.0%. SanDisk has prioritized its investment in technology and innovation and has increased hiring to fuel growth.
Net income on a GAAP basis for the quarter was $322.09 million or $1.34 per diluted share, compared to GAAP net income of $231.29 million or $0.99 per share in the year-ago quarter. Including the amortization of acquisition-related intangible assets, convertible debt interest expense, and related tax adjustments, non-GAAP net income for the quarter came in at $289.91 million or $1.20 per share versus $156.14 million or $0.67 per diluted share reported in the year-ago period.
Balance Sheet
SanDisk generated $379.1 million in cash from operating activities, compared to $238.4 million in the year-ago quarter. Cash and short-term investments were $5.10 billion compared to $2.42 billion in the previous quarter. Convertible long-term debt for the quarter was $1.68 billion, up from $963.4 million reported in the previous quarter. Long term marketable securities during the third quarter stood at $2.14 billion.
Guidance
SanDisk is forecasting total revenue for the fourth quarter of between $1.25 billion and $1.32 billion, including License & Royalty revenue of between $85.0 million and $90.0 million. For the full year 2010, the company has provided total revenue of $4.75 billion to $4.825 billion.
SanDisk posted robust third quarter 2010 numbers, exceeding the Zacks consensus estimate. Both the OEM and retail sides of the business progressed, enabling solid product revenue. It also provided a decent guidance for the fourth quarter. The company witnessed stronger pricing, with a corresponding positive impact on the gross margin. This apart, SanDisk is sitting on a pile of cash, which lends operational flexibility in our view.
On the other hand, the company has a high debt balance, suffers from customer concentration risk and is exposed to the current weakness in Europe. The company has a Zacks #5 Rank, which represents a short term ngative recommendation.
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