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Flash storage solutions provider, SanDisk Corp. (SNDK - Analyst Report), reported third-quarter 2013 adjusted earnings of $1.51 per share, which handily beat the Zacks Consensus Estimate of $1.22 per share. Moreover, earnings per share increased more than three fold from 42 cents reported in the year-ago quarter. The beat was mainly attributable to strong solid state drive (SSD) sales, strength in retail businesses and favorable supply/demand metrics.

Adjusted or non-GAAP earnings per share exclude amortization of acquisition-related intangible assets, convertible debt interest but include stock-based compensation expense.

Revenues

Total revenue for the third quarter increased 27.6% on a year-over-year basis to $1.63 billion, which not only beat management’s guided range of $1.525 billion–$1.575 billion but also came ahead of the Zacks Consensus Estimate of $1.56 billion. The strong revenue growth was primarily attributable to a 14.0% year-over-year increase in gigabyte sales and 12% rise in average selling price (ASP) per gigabyte.

Moreover, SanDisk’s prudent mix of high-margin embedded and SSD solutions and products (50% of third-quarter revenues) also positively impacted revenues for the quarter. The company reported strong adoption rate of the 19-nanometer (nm) client PCIe SSDs.

Additionally, SanDisk’s revenues from retail channels (35% of third-quarter revenues) increased 18% year over year driven by growth in mobile cards. Revenues from commercial channels recorded 33% year-over-year growth primarily driven by the embedded and SSD products.

Operating Results

SanDisk’s gross profit (including stock-based compensation but excluding other one-time items) for the quarter came in at $812.2 million or 50.0%, up from $392.7 million or 30.9% reported in the year-ago quarter. The year-over-year growth was primarily aided by lower cost-per-byte (down 19% from the year-ago quarter) coupled with favorable yen rates and prudent revenue mix.

Although SanDisk reported 22.8% year-over-year increase in operating costs, operating expenses were down 74 basis points (bps) as a percentage of revenues.  

The company reported operating profit (including stock-based compensation but excluding other one-time items) of $507.0 million or 31.2% compared with $144.2 million or 11.3% reported in the year-ago quarter.

Excluding the amortization of acquisition-related intangible assets, convertible debt interest expense and related tax adjustments but including stock-based compensation expense, adjusted net income for the third quarter came in at $352.6 million or $1.51 per share compared with $102.7 million or 42 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Cash and short-term investments were $2.04 billion versus $2.59 billion in the previous quarter. Long-term marketable securities were $2.24 billion. Convertible debt for the quarter was $819.7 million versus $809.6 million in the previous quarter.

SanDisk generated $382.4 million in cash from operating activities compared with $390.8 million in the prior quarter. Capital expenditure came in at $51.0 million. SanDisk repurchased stock worth $1.07 billion and paid dividends amounting to $51.0 million.

Outlook

Management is positive about SSD revenue growth, favorable product mix and better supply/demand metrics in 2013. This will boost pricing. SanDisk also expects a ramp up in the demand for its latest 19-nm technology.

Apart from this, SanDisk is planning to focus more on iNAND technology which will drive its mobile-embedded products. The company also expects its total SSD contribution to be roughly 25.0% of total revenue moving into 2014.

Based on these positive factors, SanDisk expects fourth-quarter revenues within $1.650 billion–$1.725 billion. The company expects non-GAAP gross margin of 48.0%–50.0%. Non-GAAP operating expenses will be in the range of $310.0 million–$320.0 million for the fourth quarter due to expenses related to the SMART Storage Systems acquisition, seasonal marketing expense and increased research and development expenses.

Our Take

SanDisk posted solid third-quarter results with both its top and bottom lines surpassing the Zacks Consensus Estimate. Revenues from commercial and retail channels were strong, aided by higher mobile embedded and SSD sales. The company’s 19-nm technology also saw a higher adoption rate. Moreover, the acquisition of SMART Storage Systems is expected to expand SanDisk’s offering in the Enterprise SSD segment.

Though lackluster PC sales, European issues, competition from Micron Technology Inc. (MU - Snapshot Report) and currency fluctuations could hurt fundamentals to some extent, we remain positive on management’s commentary of a turnaround story in the coming quarters and strong secular demand for NAND flash.

Currently, SanDisk holds a Zacks Rank #1 (Strong Buy). Other companies such as Cirrus Logic (CRUS - Snapshot Report) and Plexus Corp (PLXS - Analyst Report) are worth considering as both carry a Zacks Rank #1 (Strong Buy).

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