(SNDK) SanDisk Fourth Quarter 2011 Earnings Preview

SanDisk Corp. (SNDK) is scheduled to announce its fourth quarter fiscal 2011 results on January 25, 2012 after market close, and we do not see any variation in the analysts’ estimates at this point.

Looking Back

SanDisk posted impressive third quarter 2011 earnings of $1.10 per share, handily beating the Zacks Consensus Estimate by 13 cents. The improved earnings were attributable to strong revenue growth. Increasing demand for SanDisk’s flash memory products in the emerging markets, as well as solid performance by its retail and OEM (original equipment manufacturer) channels globally helped the company post a 14.8% year-over-year revenue growth.

Despite the higher revenue growth rate, margins came in below the year-ago level, mostly due to the negative impact of the yen exchange rate, start-up cost for a new fab as well as price declines. All these factors tempered the positive effect of cost control measures.

Fourth Quarter & Fiscal 2011 Outlook

Management expects the current capacity expansion commitment within Phase I of Fab 5 to be completed by the end of January 2012 and future Phase I expansion to begin approximately three months later. With this capacity plan, management expects 2012 captive bit growth rate to be a tad higher than  the 2011 level, and the key drivers of the 2012 bit growth are expected to be the 19-nanometer technology transition, and the wafer capacity expansion in Fab 5.

SanDisk also expects the growing demand for its products to continue and supply to remain unhindered. Hence, the company forecasts fourth quarter revenue of between $1.5 billion and $1.6 billion.

SanDisk expects the fourth quarter gross margin to remain depressed due to Fab 5 start-up costs and currency exchange. The company expects non-GAAP product gross margin of 38% to 40%, and total non-GAAP gross margin, including license and royalty, of 42% to 44%. Non-GAAP operating expenses are forecasted at $225 million to $235 million, with the expected increase coming primarily from growth in the R&D investment level, and a seasonal increase in sales and marketing spending.

Agreement of Analysts

Analysts believe that the NAND flash market remains highly elastic with solid industry consumption growth due to new applications such as solid state drives in notebooks, PCs, Web tablets, smartphones, etc., soaking up any significant increments in NAND flash capacity. While Samsung, Toshiba/SanDisk, and Micron/Intel have innovated new 20-25nm fabs, the analysts believe that the fabs may not start high-volume production in the near term.

According to some analysts, industry capacity additions of 30% to 40% from all the major players (Samsung, Toshiba/SanDisk, Micron/Intel, and Hynix) will put more pressure on ASPs and margins during 2011. Moreover, they believe that higher fab-5 start-up costs and slightly more aggressive pricing trends will pressure margins in 2011.

Out of the five and seven analysts providing estimates for the fourth quarter and fiscal 2011, none revised the estimates over the last thirty days. However, one out of the seven analysts providing estimates for fiscal 2012 made an upward revision in the past 30 days.

The unchanged estimates point to the fact that there were no major catalysts during the quarter that could drive results. Consequently, analysts are more or less sticking to the estimates projected post-third quarter earnings and are of the opinion that SanDisk will deliver fourth quarter results in line with their expectations.

Magnitude of Estimate Revisions

Over the past 30 days, the Zacks Consensus Estimates for the fourth quarter and fiscal 2011 have moved down a penny and 2 cents to $1.23 and $4.47, respectively. Estimates have also been lowered by 4 cents for the fiscal 2012 to $4.94.

Our Take

The current pricing scenario in the memory market seems to be unruly. The ongoing oversupply in the market is bringing about a continuous decline in memory pricing. Though NAND Flash memory is in a somewhat better position than DRAM (Dynamic Random Access Memory), it is also seeing pricing decline.

Despite management’s decent fourth quarter guidance, we believe that the oversupply situation coupled with the muted cost reduction effort could put SanDisk’s margins under pressure.

But we are positive about the growing demand for flash memory backed by the popularity of smartphones and tablets such as Apple Inc.‘s (AAPL) iPad. Moreover, with the acquisition of Pliant Technology, SanDisk has made its foray into the booming enterprise flash memory market.

Currently, SanDisk has a short-term Buy recommendation, as indicated by the Zacks #2 Rank.

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