SanDisk’s (SNDK) third quarter 2009 earnings exceeded the Zacks Consensus EPS by 61 cents and revenue by 19.4%.
Revenue
Total revenue for the quarter was $935.0 million, up 14.0% on a year-over-year basis and up 28.0% on a sequential basis. Revenue exceeded the company’s expectation of $725.0 million to $775.0 million, due to a sequential increase in both Product revenue and License & Royalty revenue. This apart, the company’s results were positively impacted by order strength at its OEM customers, which is expected to continue in the fourth quarter.
Total revenue for the quarter included $814.0 million in Product revenue (an increase of 18.0% year over year and 33.0% sequentially) and $121.3 million in License & Royalty revenue (down 8.0% year over year and up 1.0% sequentially). The increase in Product revenue can be attributed to the increase in gigabytes sold. Gigabytes increased 107.0% year-over-year and 37.0% sequentially. This apart, Average retail card capacity was up 46.0% year-over-year and down 1.0% sequentially. License & Royalty revenue increased primarily due to higher-than-anticipated prices of License sales. Within Product revenue, OEM channel sales were the highlight of the quarter, contributing 56.0% of total Product revenue.
Operating Results
Product gross margin in the quarter was 39.0% on a non-GAAP basis versus product loss margin of 17.0% on a non-GAAP basis in the year-ago quarter. The quarter’s product gross profit included $139 million benefit primarily from the sale of previously reserved inventory, and was positively impacted by lower cost of sales, as there was a cost reduction per gigabyte, which was in the high teens in the third quarter. GAAP product gross profit for the quarter was a negative $315.0 million, compared to a product gross loss of $138.0 million in the year-ago quarter. GAAP operating profit was $240 million compared to GAAP operating loss of $250.0 million in the third quarter of 2008 and GAAP operating profit of $68 million in the second quarter of 2009.
Net income on GAAP basis for the quarter was $231.3 million or 99 cents per share, compared to GAAP net loss in the year-ago quarter of $165.9 million or 74 cents per diluted share. Excluding amortization of acquisition-related intangible assets, stock-based compensation expenses, convertible debt interest and income tax adjustments, non-GAAP net income for the quarter came in at $175.5 million or 75 cents per diluted share versus a net loss of $132.1 million or 74 cents per diluted share reported in the year-ago period. The quarter’s results were favorably impacted by higher OEM volumes, substantial reduction in cost of sales, modest pricing and improved industry fundamentals.
Balance Sheet
SanDisk generated $238.4 million in cash from operating activities, compared to $24.3 million cash utilized in the second quarter. Cash and short-term investments were $1452.1 million compared to $1362.1 million at the end of the second quarter. On a sequential basis, convertible long-term debt increased by $13.7 million to $919.5 million. Long term investments during the second quarter stood at $1132.4 million.
Guidance
For the fourth quarter, SanDisk is forecasting total revenue of between $1.1 billion and $1.2 billion, including License & Royalty revenue of between $100.0 million and $110.0 million. This License & Royalty revenue forecast includes Samsung royalties, of which half is based on the old license agreement and half on the new license agreement. Non-GAAP product gross margin exclusive of inventory reserve fluctuations are expected to more than offset price reduction. Fourth quarter non-GAAP product gross margin are expected to be between 25.0% and 30.0%. The company forecasts fourth quarter non-GAAP operating expenses of $190.0 million to $200.0 million. SanDisk expects to make a total capital investment of less than $475.0 million for 2009, compared to its earlier estimate of $500.0 million.
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