Reading SanDisk's Tea Leaves

SanDisk (SNDK) just blew out the top-line and bottomline numbers at $0.87 EPS and $1.16 Billion.  Estimates were $0.75 and $1.01 Billion.  Shares after-hours are basically flat (up/down, up/down) after closing up 1.4% at $42.83.  So why isn’t the stock up huge?  It’s the language and the items, so you might even see a drop depending on guidance.  $115 million of the revenue is from M-Systems, so its standalone revenues were $1.048 Billion.  The company also posted a GAAP loss after you factor in $247 million in one-time charges mostly related to merger costs and to options.

Here is the CEO comment: "In the first quarter of 2007 we expect continuing robust demand for our mobile OEM products, seasonally lower retail sales, and a decline in margins due to the prevailing challenging market pricing for flash memory. Internally we are focused on executing the integration of msystems and driving continued cost reductions by commencing the transition of our captive production from 70-nanometer to 56-nanometer NAND MLC in the first quarter…………"

The price per megabyte sold actually slid 62% in a year and 17% sequentially and non-GAAP margin on a standalone basis was 34.7%. So the problem is that you can’t compare these numbers to prior quarters because it close the M-Systems acquisition.  There is also no formal guidance.  The feel good comments are already preparing traders for lower numbers based on the quote and that’s what kept a lid on the otherwise solid numbers.

The real reaction will come from the conference call with some percentages and guidance figures, so until they give guidance the shares don’t know where to go.  SNDK is much more in the lower-end of its $37.34 to $67.99 52-week trading range. Maybe their consumer product unit will help eventually, but when component makers become consumer product makers it doesn’t usually come without a price.

Jon C. Ogg
January 30, 2007