SanDisk’s (SNDK) second quarter 2010 earnings of $1.02 cents per share and revenue of $1.18 billion exceeded the Zacks Consensus EPS of 86 cents, and our revenue estimate of $1.16 billion.
Revenue
Total revenue for the second quarter was $1.18 billion, up 61.0% on a year-over-year basis, and up 9.0% on a sequential basis. Revenue for the quarter was in-line with the company’s guidance range of $1.1 billion to $1.2 billion.
This growth in revenue may be attributed to stellar OEM business performance, which grew by 181.0% compared to the year-ago quarter, with unit volume more than doubling in the same period. This apart, the company also witnessed robust growth in the embedded storage products business, wherein both units shipped and revenue grew at a substantial rate.
Total revenue for the quarter included $1.09 billion in Product revenue (an increase of 79.0% year over year and up 10.0% sequentially) and $88.0 million in License & Royalty revenue (down 27.0% year over year and down 6.0% sequentially).
The year-over-year increase in Product revenue may be attributed to substantial growth generated primarily from mobile handset products, coupled with growth witnessed in imaging products, as well as wafers and components.
License & Royalty revenue growth was inline with the company’s expectation, and fully incorporates the current license agreement with Samsung Electronics.
Operating Results
Product gross margin in the quarter was 42.4% on a non-GAAP basis versus product gross margin of 22.0% on a non-GAAP basis in the year-ago quarter. Product gross margin benefited as the company’s product costs per gigabyte improved 9.0% sequentially, slightly more than the price decline. Product gross margin on a GAAP basis for the second quarter was 42.0%, compared to a product gross margin of 21.1% in the year-ago quarter.
Consolidated gross margin of the company was 46.3% up from 34.1% reported in the year-ago quarter. Gross margin exceeded the company’s forecast, as SanDisk was able to reduce its promotional spending and increase the usage of three-bits-per-cell memory, or X3.
Operating profit margin on a GAAP basis was 30.4%, compared to 9.4% in the year-ago quarter, while non-GAAP operating profit margin of 32.0% in the second quarter compared to a margin of 12.9% in the year-ago quarter. The company’s operating expenses grew just $2.0 million on a sequential basis to 14.7% of revenue which is slightly below 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 $258.0 million or $1.08 per diluted share, compared to GAAP net income of $53.0 million or $0.23 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 $242.8 million or $1.02 per share versus $60.6 million or $0.26 per diluted share reported in the year-ago period.
Balance Sheet
SanDisk generated $358.0 million in cash from operating activities, compared to $328.3 million in the year-ago quarter. Cash and short-term investments were $2.42 billion compared to $1.94 billion in the previous quarter. Convertible long-term debt for the quarter was $963.4 million, an increase of $14.5 million from $948.9 million reported in the previous quarter. Long-term marketable securities during the second quarter stood at $1.29 billion.
Guidance
SanDisk is forecasting total revenue for the third quarter of between $1.175 billion and $1.25 billion, including License & Royalty revenue of between $90.0 million and $100.0 million. For the full year 2010, the company has raised its license and royalty revenue expectation to a range of $360.0 million to $375.0 million, with total revenue of $4.7 billion to $4.9 billion.
The company posted robust second quarter 2010 numbers, exceeding the Zacks consensus estimate. SanDisk witnessed major gains in the OEM business and reported higher product revenue. It also provided a decent guidance for the third quarter. The company witnessed stronger pricing, with a corresponding positive impact on the gross margin. This apart, SanDisk is cash-rich.
We are optimistic about the long-term growth story of SanDisk and maintain our Outperform rating on the shares. Our short-term recommendation is also positive, as represented by the Zacks #1 Rank (Strong Buy).
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