Flash storage solutions provider, SanDisk Corp. , reported fourth-quarter 2013 adjusted earnings of $1.61 per share, which handily beat the Zacks Consensus Estimate of $1.47. Moreover, earnings per share increased 62.4% from the year-ago quarter. The beat was mainly attributable to strong client and enterprise solid state drive (SSD) sales, strength in retail businesses and favorable supply/demand metrics.
Adjusted earnings per share exclude amortization of acquisition-related intangible assets, convertible debt interest but include stock-based compensation expense.
Total revenue for the fourth quarter increased 12.1% on a year-over-year basis to $1.73 billion. It was not only at the higher end of management’s guided range of $1.650 billion–$1.725 billion but also ahead of the Zacks Consensus Estimate of $1.71 billion. The strong revenue growth was primarily attributed to a 13.0% year-over-year increase in gigabyte sales, partially offset by 2.0% decline in average selling price per gigabyte.
Moreover, SanDisk’s prudent mix of high-margin embedded and client and enterprise class SSD solutions and products comprised of the Commercial revenues (62% of fourth-quarter revenues) grew 8% year over year. However, mobile embedded revenues declined on a year-over-year basis primarily due to lower sales of custom embedded solutions. Nonetheless, revenues from iNAND and MCP iNAND increased year over year driven by rapid adoption in the entry-level and mid-tier mobile devices.
Additionally, SanDisk’s revenues from retail channels (38% of fourth-quarter revenues) increased 18% year over year driven by growth in USBs, SSDs and mobile cards.
SanDisk’s gross profit (including stock-based compensation but excluding other one-time items) for the quarter came in at $876.8 million or 50.7% of revenues, up from $612.8 million or 39.8% reported in the year-ago quarter. The year-over-year growth was primarily aided by higher mix of X3 memory sales, certain settlement amount receipt and an increase in royalty and license revenues.
SanDisk reported 31.8% year-over-year increase in operating expenses (including stock-based compensation but excluding other one-time items). As a percentage of revenues, operating expenses were up 302 basis points (bps). The increase was primarily due to expenses related to the SMART Storage acquisition, and higher number of headcounts.
The company reported operating profit (including stock-based compensation but excluding other one-time items) of $528.9 million or 30.6% of revenues compared with $349.0 million or 22.6% 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, net income for the fourth quarter came in at $368.6 million or $1.61 per share compared with $242.1 million or 99 cents in the year-ago quarter.
Balance Sheet & Cash Flow
Cash and short-term investments were $2.91 billion versus $2.04 billion in the previous quarter. Long-term marketable securities were $3.18 billion. SanDisk had $1.99 billion of convertible long-term debt in its balance sheet.
The company generated $616.8 million in cash from operating activities compared with $382.4 million in the prior quarter. SanDisk repurchased stock worth $150 million and paid dividends amounting to $50.6 million.
Management is positive about SSD revenue growth, favorable product mix and better supply/demand metrics in 2014 but expects modest price decline. The company expects bit supply to increase in the range of 25% to 35%.
Based on these factors, SanDisk expects a sequential decline in its first-quarter revenues. The company expects revenues to be between $1.450 billion–$1.525 billion while the Zacks Consensus Estimate for the same period is pegged at $1.522 billion.
Moreover, SanDisk expects its fiscal 2014 revenues to range between $6.4 billion to $6.8 billion. The Zacks Consensus Estimate for the period is pegged at $6.7 billion.
The company expects non-GAAP gross margin of 47.0%–49.0%, while the fiscal 2014 gross margin is expected in the range of 45% to 48%. The company expects to continue investing to increase the SSD product portfolio and strengthen enterprise go-to-market strategies.
Thus, SanDisk expects operating expenses in the range of $300 million to $310 million for the first quarter and $1.225 billion to $1.25 billion for fiscal 2014. The company expects to increase its wafer capacity by approximately 5%. Moreover, the company expects to return 70% of the free cash flow generated through share repurchases as part of its capital return strategy.
SanDisk posted solid fourth-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. Moreover, the acquisition of SMART Storage Systems is expected to expand SanDisk’s offering in the Enterprise SSD segment.
Lackluster PC sales, European issues, competition from Micron Technology Inc. (MU - Analyst Report) and currency fluctuations could hurt fundamentals to some extent. However, we remain positive on management’s commentary of a turnaround story in the coming quarters and strong secular demand for its storage products.
Currently, SanDisk has a Zacks Rank #3 (Hold). Other companies such as CA Inc. (CA) and Cirrus Logic (CRUS - Snapshot Report) are also worth considering as both carry a Zacks Rank #1 (Strong Buy).