SanDisk Announces First Quarter 2014 Results

Delivers Record First Quarter Revenue, Gross Margin and Net Income

Business Wire

MILPITAS, Calif.--(BUSINESS WIRE)--

SanDisk Corporation (NASDAQ: SNDK), a global leader in flash storage solutions, today announced results for the first quarter ended March 30, 2014. First quarter revenue of $1.51 billion increased 13 percent on a year-over-year basis and decreased 12 percent sequentially.

On a GAAP(1) basis, first quarter net income was $269 million, or $1.14 per diluted share, compared to net income of $166 million, or $0.68 per diluted share, in the first quarter of fiscal 2013 and $338 million, or $1.45 per diluted share, in the fourth quarter of fiscal 2013.

On a non-GAAP(2)(3) basis, first quarter net income was $330 million, or $1.44 per diluted share, compared to net income of $207 million, or $0.84 per diluted share, in the first quarter of fiscal 2013 and net income of $390 million, or $1.71 per diluted share, in the fourth quarter of fiscal 2013. For reconciliation of non-GAAP to GAAP results, see accompanying financial tables and footnotes.

“We delivered record first quarter results, driven by 61 percent growth in our SSD revenue and strong retail performance,” said Sanjay Mehrotra, president and chief executive officer of SanDisk. “We are excited by the momentum we are building in our business as we continue to execute on our growth initiatives.”

KEY FINANCIAL METRICS

Metric   GAAP(1)   Non-GAAP(2)
in millions, except percentages and per share amounts   Q1’14   Q1’13   Q4’13 Q1’14   Q1’13   Q4’13
Revenue   $1,512   $1,341   $1,728 $1,512   $1,341   $1,728
Gross Profit   $751   $532   $857 $774   $543   $880
percent of revenue   49.7%   39.6%   49.6% 51.2%   40.5%   50.9%
Operating Income   $425   $254   $507 $476   $288   $556
percent of revenue   28.1%   18.9%   29.4% 31.5%   21.5%   32.2%
Diluted EPS(3)   $1.14   $0.68   $1.45 $1.44   $0.84   $1.71
       

OTHER HIGHLIGHTS

  • SanDisk announced today its second quarter 2014 dividend of $0.225 per share of common stock, payable on May 27, 2014 to shareholders of record as of the close of business on May 5, 2014.
  • SanDisk recently introduced innovative products in three categories:
    • CloudSpeed Extreme™, CloudSpeed Ultra™, CloudSpeed Ascend™ and CloudSpeed Eco™ enterprise SATA SSDs for data center and cloud computing storage solutions at unit capacities ranging from 100 gigabytes to 960 gigabytes
    • High performance iNAND Extreme™ embedded flash storage at capacities up to 64 gigabytes for flagship Android based mobile devices
    • 128 gigabyte SanDisk Ultra® microSDXC™ UHS-1 card, the world’s highest capacity mobile offering

CONFERENCE CALL

SanDisk’s first quarter of fiscal 2014 conference call is scheduled for 2:00 P.M., Pacific Daylight Time, Wednesday, April 16, 2014. The conference call will be webcast and can be accessed live, and throughout the quarter, at SanDisk’s website at www.sandisk.com/IR. To participate in the call via telephone, the dial-in number is 719-325-4942 and the dial-in password is 5310508. A copy of this press release will be furnished to the Securities and Exchange Commission on a current report on Form 8-K and will be posted to our website prior to the conference call.

ABOUT SANDISK

SanDisk Corporation (SNDK), a Fortune 500 and S&P 500 company, is a global leader in flash storage solutions. For more than 25 years, SanDisk has expanded the possibilities of storage, providing trusted and innovative products that have transformed the electronics industry. Today, SanDisk’s quality, state-of-the-art solutions are at the heart of many of the world's largest data centers, and embedded in advanced smart phones, tablets and PCs. SanDisk’s consumer products are available at hundreds of thousands of retail stores worldwide. For more information, visit www.sandisk.com.

© 2014 SanDisk Corporation. All rights reserved. SanDisk and the SanDisk logo are trademarks of SanDisk Corporation, registered in the United States and other countries. Other brand names mentioned herein are for identification purposes only and may be the trademarks of their respective holder(s).

This news release contains certain forward-looking statements, including our business prospects and our intended financial plans, including our anticipated momentum for continued gains in 2014, our continued focus on growth initiatives and our ability to execute on those initiatives, that are based on our current expectations and involve numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate. Risks that may cause these forward-looking statements to be inaccurate include among others: the market demand for our products may grow more slowly than our expectations or our products may not perform as expected or be available when demanded by customers, or the other risks detailed from time-to-time in our Securities and Exchange Commission filings and reports, including, but not limited to, our most recent annual report on Form 10-K. We do not intend to update the information contained in this press release.

Risks that may cause these forward-looking statements to be inaccurate include among others:

  • competitive pricing pressures, resulting in lower average selling prices, lower revenues and lower gross margins;
  • excess or mismatched captive memory output or capacity, resulting in lower average selling prices, financial charges and impairments, lower gross margin or other consequences, or insufficient or mismatched captive memory output or capacity, resulting in lost revenue and growth opportunities;
  • weakness in demand in one or more of our product categories, such as mobile embedded or SSDs, or adverse changes in our product or customer mix;
  • potential delays in product development or lack of customer acceptance and qualification of our solutions, including on new technology nodes, particularly in our OEM product category, including, among others, our embedded flash storage and SSD solutions;
  • the loss of, or reduction in orders from, one or more of our major customers;
  • inability to develop, or unexpected difficulties or delays in developing or ramping with acceptable yields, new technologies or the failure of new technologies to effectively compete with those of our competitors; and
  • the other risks detailed from time-to-time under the caption “Risk Factors” and elsewhere in our Securities and Exchange Commission filings and reports, including, but not limited to, our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.
(1)   GAAP represents U.S. Generally Accepted Accounting Principles.
(2) Non-GAAP represents GAAP excluding the impact of share-based compensation, amortization of acquisition-related intangible assets, non-cash economic interest expense associated with our convertible debt and related tax adjustments.
(3) Non-GAAP diluted shares include the impact of offsetting shares from the call option related to the 1.5% Sr. Convertible Notes due 2017 and the impact of share-based compensation.
 
SanDisk Corporation
Preliminary Condensed Consolidated Statements of Operations
(in thousands, except per share amounts, unaudited)
   
 
Three months ended
March 30, 2014 March 31, 2013
 
Revenue $ 1,511,945 $ 1,340,729
 
Cost of revenue 741,039 799,383
Amortization of acquisition-related intangible assets   19,616     9,830  
Total cost of revenue 760,655 809,213
   
Gross profit 751,290 531,516
 
Operating expenses:
Research and development 198,829 171,125
Sales and marketing 76,972 59,127
General and administrative 48,669 45,104
Amortization of acquisition-related intangible assets   1,646     2,369  
Total operating expenses   326,116     277,725  
 
Operating income 425,174 253,791
 
Other income (expense), net   (15,635 )   (19,897 )
Income before income taxes   409,539     233,894  
 
Provision for income taxes 140,591 67,665
Net income $ 268,948   $ 166,229  
 
Net income per share:
Basic $ 1.19 $ 0.69
Diluted $ 1.14 $ 0.68
 
Shares used in computing net income per share:
Basic 225,845 242,519
Diluted 234,914 245,577
 
SanDisk Corporation
Reconciliation of Preliminary GAAP to Non-GAAP Operating Results (1)
(in thousands, except per share data, unaudited)
   
Three months ended
March 30, 2014 March 31, 2013
 
SUMMARY RECONCILIATION OF NET INCOME
GAAP NET INCOME $ 268,948 $ 166,229
Share-based compensation (a) 30,030 21,734
Amortization of acquisition-related intangible assets (b) 21,262 12,199
Convertible debt interest (c) 20,964 23,577
Income tax adjustments (d)   (11,174 )   (16,842 )
NON-GAAP NET INCOME $ 330,030   $ 206,897  
 
 
GAAP COST OF REVENUE $ 760,655 $ 809,213
Share-based compensation (a) (2,610 ) (1,717 )
Amortization of acquisition-related intangible assets (b)   (19,616 )   (9,830 )
NON-GAAP COST OF REVENUE $ 738,429   $ 797,666  
 
GAAP GROSS PROFIT $ 751,290 $ 531,516
Share-based compensation (a) 2,610 1,717
Amortization of acquisition-related intangible assets (b)   19,616     9,830  
NON-GAAP GROSS PROFIT $ 773,516   $ 543,063  
 
GAAP RESEARCH AND DEVELOPMENT EXPENSES $ 198,829 $ 171,125
Share-based compensation (a)   (15,675 )   (11,640 )
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES $ 183,154   $ 159,485  
 
GAAP SALES AND MARKETING EXPENSES $ 76,972 $ 59,127
Share-based compensation (a)   (6,257 )   (3,871 )
NON-GAAP SALES AND MARKETING EXPENSES $ 70,715   $ 55,256  
 
GAAP GENERAL AND ADMINISTRATIVE EXPENSES $ 48,669 $ 45,104
Share-based compensation (a)   (5,488 )   (4,506 )
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES $ 43,181   $ 40,598  
 
GAAP TOTAL OPERATING EXPENSES $ 326,116 $ 277,725
Share-based compensation (a) (27,420 ) (20,017 )
Amortization of acquisition-related intangible assets (b)   (1,646 )   (2,369 )
NON-GAAP TOTAL OPERATING EXPENSES $ 297,050   $ 255,339  
 
GAAP OPERATING INCOME $ 425,174 $ 253,791
Cost of revenue adjustments (a) (b) 22,226 11,547
Operating expense adjustments (a) (b)   29,066     22,386  
NON-GAAP OPERATING INCOME $ 476,466   $ 287,724  
 
GAAP OTHER INCOME (EXPENSE), NET $ (15,635 ) $ (19,897 )
Convertible debt interest (c)   20,964     23,577  
NON-GAAP OTHER INCOME (EXPENSE), NET $ 5,329   $ 3,680  
 
GAAP NET INCOME $ 268,948 $ 166,229
Cost of revenue adjustments (a) (b) 22,226 11,547
Operating expense adjustments (a) (b) 29,066 22,386
Other income (expense) adjustments (c) 20,964 23,577
Income tax adjustments (d)   (11,174 )   (16,842 )
NON-GAAP NET INCOME $ 330,030   $ 206,897  
 
Diluted net income per share:
GAAP $ 1.14 $ 0.68
Non-GAAP $ 1.44 $ 0.84
 
Shares used in computing diluted net income per share:
GAAP 234,914 245,577
Non-GAAP (e) 229,508 245,596
 
SanDisk Corporation
Reconciliation of Preliminary GAAP to Non-GAAP Operating Results (1)
(in thousands, unaudited)
   
Three months ended
March 30, 2014 March 31, 2013
SUMMARY RECONCILIATION OF DILUTED SHARES
 
GAAP 234,914 245,577
Adjustments for share-based compensation 296 19
Offsetting shares from call option (5,702 )
Non-GAAP (e) 229,508   245,596
(1)   To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), we use non-GAAP measures of operating results, net income and net income per share, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user's overall understanding of our current financial performance and our prospects for the future. Specifically, we believe the non-GAAP results provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that we believe are not indicative of our core operating results and because they are consistent with the financial models and estimates published by many analysts who follow us. For example, because the non-GAAP results exclude the expenses we recorded for share-based compensation, amortization of acquisition-related intangible assets related to acquisitions of Pliant Technology, Inc. in May 2011, FlashSoft Corporation in February 2012, Schooner Information Technology, Inc. in June 2012 and SMART Storage Systems in August 2013, non-cash economic interest expense associated with the convertible debt and related tax adjustments, we believe the inclusion of non-GAAP financial measures provides consistency in our financial reporting. In addition, our non-GAAP diluted shares include the impact of the call option which, when exercised, will offset the issuance of dilutive shares from the 1.5% Sr. Convertible Notes due 2017, while the GAAP diluted shares exclude the anti-dilutive impact of this call option. These non-GAAP results are some of the primary indicators management uses for assessing our performance, allocating resources and planning and forecasting future periods. Further, management uses non-GAAP information that excludes certain non-cash charges, such as amortization of acquisition-related intangible assets, share-based compensation, non-cash economic interest expense associated with the convertible debt and related tax adjustments, as these non-GAAP charges do not reflect the cash operating results of the business or the ongoing results. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP measures may be different than the non-GAAP measures used by other companies.
 
(a) Share-based compensation expense.
 
(b) Amortization of acquisition-related intangible assets, primarily core technology, developed technology, customer relationships and trademarks related to the acquisitions of Pliant Technology, Inc. (May 2011), FlashSoft Corporation (February 2012), Schooner Information Technology, Inc. (June 2012) and SMART Storage Systems (August 2013).
 
(c) Incremental interest expense relating to the non-cash economic interest expense associated with the 1% Sr. Convertible Notes due 2013, 1.5% Sr. Convertible Notes due 2017, and 0.5% Sr. Convertible Notes due 2020.
 
(d) Income taxes associated with certain non-GAAP to GAAP adjustments, and the effects of one-time income tax adjustments recorded in a specific quarter for GAAP purposes are reflected on a forecast basis in our non-GAAP tax rate.
 
(e) Non-GAAP diluted shares include the impact of offsetting shares from the call option related to the 1.5% Sr. Convertible Notes due 2017 and the impact of share-based compensation.
 
SanDisk Corporation
Preliminary Condensed Consolidated Balance Sheets
(in thousands, unaudited)
   
 
March 30, 2014 December 29, 2013
 
ASSETS
Current assets:
Cash and cash equivalents $ 1,116,938 $ 986,246
Short-term marketable securities 1,692,801 1,919,611
Accounts receivable, net 596,669 682,809
Inventory 799,883 756,975
Deferred taxes 124,200 138,192
Other current assets   177,532     166,885  
Total current assets 4,508,023 4,650,718
 
Long-term marketable securities 3,508,081 3,179,471
Property and equipment, net 639,653 655,794
Notes receivable and investments in Flash Ventures 1,159,264 1,134,620
Deferred taxes 136,991 134,669
Goodwill 317,930 318,111
Intangible assets, net 221,099 247,904
Other non-current assets   95,330     167,430  
Total assets $ 10,586,371   $ 10,488,717  
 
LIABILITIES, CONVERTIBLE SHORT-TERM DEBT CONVERSION OBLIGATION AND EQUITY
Current liabilities:
Accounts payable trade $ 259,204 $ 282,582
Accounts payable to related parties 160,536 146,964
Convertible short-term debt (1) 840,180
Other current accrued liabilities 349,126 509,732
Deferred income on shipments to distributors and retailers and deferred revenue   269,349     291,302  
Total current liabilities 1,878,395 1,230,580
 
Convertible long-term debt 1,166,497 1,985,363
Non-current liabilities   311,334     307,083  
Total liabilities   3,356,226     3,523,026  
 
Convertible short-term debt conversion obligation (1) 159,820
 
Stockholders' equity:
Common stock 4,961,893 5,040,242
Retained earnings 2,150,583 2,004,089
Accumulated other comprehensive loss   (40,038 )   (76,459 )
Total stockholders' equity 7,072,438 6,967,872
Non-controlling interests   (2,113 )   (2,181 )
Total equity   7,070,325     6,965,691  

Total liabilities, convertible short-term debt conversion obligation and equity

$ 10,586,371   $ 10,488,717  
 
(1)   The 1.5% Convertible Senior Notes due 2017 became convertible on April 1, 2014, and will remain convertible through June 30, 2014, as a result of the Company’s common stock price exceeding the trigger price set forth in the indenture for at least 20 trading days during the 30 consecutive trading-day period ended March 31, 2014. Accordingly, the carrying value of the notes was reclassified from long-term to short-term debt as of March 30, 2014, and will remain so while the notes are convertible. The convertible short-term debt conversion obligation represents the difference between the carrying value of the convertible debt and the principal amount due in cash upon conversion.
 
SanDisk Corporation
Preliminary Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
   
 
Three months ended
March 30, 2014 March 31, 2013
Cash flows from operating activities:
Net income $ 268,948 $ 166,229
 
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes 6,951 53,151
Depreciation 60,089 53,017
Amortization 72,598 65,151
Provision for doubtful accounts (547 ) (197 )
Share-based compensation expense 30,030 21,734
Excess tax benefit from share-based plans (17,460 ) (8,450 )
Impairment and other (3,173 )
Other non-operating 1,020 136
Changes in operating assets and liabilities:
Accounts receivable, net 86,689 186,726
Inventory (42,117 ) 16,776
Other assets 54,547 (20,156 )
Accounts payable trade (36,546 ) 2,898
Accounts payable to related parties 13,572 (37,901 )
Other liabilities   (140,128 )   (22,290 )
Total adjustments   88,698     307,422  
 
Net cash provided by operating activities   357,646     473,651  
 
Cash flows from investing activities:
Purchases of short and long-term marketable securities (1,266,899 ) (1,150,347 )
Proceeds from sales of short and long-term marketable securities 1,015,605 513,354
Proceeds from maturities of short and long-term marketable securities 129,620 293,205
Acquisition of property and equipment, net (34,517 ) (48,352 )
Notes receivable issuances to Flash Ventures (24,352 )
Notes receivable proceeds from Flash Ventures 24,352 53,586
Purchased technology and other assets (869 ) (237 )
Acquisitions, net of cash acquired   2,368     (142 )
Net cash used in investing activities   (154,692 )   (338,933 )
 
Cash flows from financing activities:
Distribution to non-controlling interests (87 )
Proceeds from employee stock programs 51,882 93,075
Excess tax benefit from share-based plans 17,460 8,450
Dividends paid (51,560 )
Share repurchase program   (90,019 )   (89,621 )
Net cash provided by (used in) financing activities   (72,237 )   11,817  
 
Effect of changes in foreign currency exchange rates on cash   (25 )   6,105  
 
Net increase in cash and cash equivalents 130,692 152,640
 
Cash and cash equivalents at beginning of period 986,246 995,470
   
Cash and cash equivalents at end of period $ 1,116,938   $ 1,148,110  

Contact:
SanDisk Corporation
Investor Contacts:
Jay Iyer, 408-801-2067
jay.iyer@sandisk.com
Brendan Lahiff, 408-801-1732
brendan.lahiff@sandisk.com
Media Contact:
Michael Diamond, 408-801-1108
michael.diamond@sandisk.com
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