Is SanDisk Corporation (NASDAQ:SNDK) Losing Its Memory?
It is a bad thing to suffer memory loss, but SanDisk Corporation (NASDAQ:SNDK) seems to be a memory loss victim, quite literally. The company isn’t able to replicate strategies that drove its success in the yesteryears.
To begin with, SanDisk expects its current quarter (2Q2015) revenue to miss Wall Street expectation. That will add to a series of quarters that the company has failed to live up to revenue expectations. The company has also cut its own revenue outlook two consecutive times with the latest happening in 1Q2015.
SanDisk isn’t in a nice shape. That is the short story, but that requires a closer look to see why the memory maker is in trouble.
SanDisk is in the business of designing, manufacturing and marketing of data storage solutions. Its products come in a variety of form factors including solid state drives (SSD), removable cards, UBS drives, embedded products among others.
SanDisk is largely in problem because of its own missteps, and it remains uncertain how and when it would recover. These are some of the issues why SanDisk is no longer enjoying its time as a memory maker:
There was a time when NAND Flash memory market belonged to SanDisk Corporation (NASDAQ:SNDK) and Samsung Electronics. The two companies enjoyed a comfortable duopoly run in the NAND Flash category up until 2004.
Looking at where Samsung stands right now in the flash memory technology, it seems one major mistake that SanDisk made was failure to discern market intelligence correctly or quickly. What has happened today is that Samsung has been able to take its memory architecture nearly one year ahead of rivals including SanDisk, allowing it to steal some key customers from SanDisk.
Flash chips are used in a variety of electronics and computing devices from smartphones to hard-drives in PCs and data centers. SanDisk competes primarily with Samsung and Micron Technology, Inc. (NASDAQ:MU) flash chips market.
Competition births pricing pressure
The issue of heightened competition has brought more than one adverse impact on the side of SanDisk. In addition to pressure on sales because of a large number of providers, there is also the challenge of pricing. Oversupply in the market poses the risk of pricing pressure as suppliers seek to woo buyers with lower prices and in the process trigger downward pricing adjustments. In the end, margins and profits are eroded.
Still on the issue of pricing, companies that used fabbed model seem to enjoy better pricing advantage over SanDisk because they are able to sell their memory products at lower prices and still make profits.
SanDisk has significant exposure to Yen, especially because a large portion of its inventory and cost of goods sold are in Yen given its dealings with TOSHIBA CORP (OTCMKTS:TOSBF). The risk here is that an appreciation on Yen, especially amid the ongoing massive currency fluctuations, could lead to adverse impact on the company’s financials.
As competition intensifies in the memory market in respect to technology and pricing, focus is on how SanDisk Corporation (NASDAQ:SNDK)’s large customers (OEMs) might behave in the long run.
The story goes that SanDisk could face material adverse impact on its revenue and profit figures in the event that one of its few OEM customers lower its purchase or completely parts ways with the company.
In 1Q2015, revenue from SanDisk’s 10 largest customers accounted for just 46% of total revenue in the quarter. That represented a decline from 49% in the same quarter a year earlier. That means that the company is losing grip on its most important customers, which could lead to prolonged path to recovery.
SanDisk generates significant amount of its revenue and profits from license fees and royalty payments on its IP. While licensing technology is a lucrative strategy, the problem is that licensing fees are subject to renegotiations, which essentially involve licensee seeking lower fees after they have used the technology for some time. Renegotiations that lead to lower technology licensing fees imply adverse impact on SanDisk’s EPS.
SanDisk Corporation (NASDAQ:SNDK) has been hit with supply issues, making it hard for the company to meet demand, thereby allowing competitors to evade its markets. The company has also admitted that part of the challenges it faces currently stem from its inability to bring products to market on time.
Costs and expenses
SanDisk is battling bloated costs and expenses, especially as indicated by the latest quarterly results. The company reported 32% YoY increase in sales and marketing expenses, most of which was driven by labor costs that reached $21 million. External services costs and costs related to IT and facilities also weighed in on the company’s finances in 1Q.
Woes of Misreading of market intelligence
It seems SanDisk Corporation (NASDAQ:SNDK) didn’t anticipate changes to enterprise SSD market. The company has also been hit with product qualification challenges as it struggles to shift its memory production architecture.
SanDisk is underway with the transition of its memory production to 15nm architecture from 19nm. The transition started in the early part of 2014 and is still in progress. However, product qualification delays have hit the process, leading to SanDisk losing some market share to rivals.
It is reported that SanDisk’s OEM customers like Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOGL) have abandoned SanDisk’s SSD for Samsung’s 3D-NAND SSD, which is the latest technology.
Samsung’s memory technology is one year ahead of SanDisk and other rivals, and that is allowing the company to eat SanDisk’s lunch in some markets.
Things could continue to worsen for SanDisk as the relationship between Apple and Samsung appears to improve. While Apple has shifted the contract to supply SSD for Macbook Air to Samsung from SanDisk, there is also concern that Apple might move iPhone 6S memory business to Samsung. The iPhone 6S is expected to launch in September 2015.
Revenue from Apple
SanDisk generates significant amount of its overall revenue from Apple. Last year, the company generated 19% of its revenue or about $1.3 billion from Apple. In 2013, 20% of total revenue or $1.23 billion came from Apple. The revenue generated through relationship with Apple has been improving considering that it was 13% or just about $657 million in 2012. For the SanDisk memory supplies to Apple, SSD has often accounted for a significant portion of the revenue.
SanDisk Corporation (NASDAQ:SNDK)’s net revenue fell 12% YoY to $1.33 billion in 1Q2015. SSD division is disastrous, especially with client SDD falling by a massive 48% in 1Q.
The decline in revenue was occasioned by delays in product qualification, unprecedented shifts in the enterprise market, supply constraints and weaker pricing environment.
SanDisk Corporation (NASDAQ:SNDK) expects 1Q revenue to come in the range of $1.15-$1.22 billion, representing potential decline of 14% to 8%. Analysts on the average are looking for revenue of $1.45 billion for the quarter.
While there are industry-wide issues such secular slowdown in the demand for removable memory and memory chips for smartphones and tablets, most of the challenges facing SanDisk are self-inflicted.
The combination of poor execution and inability to discern shifts in the market have led to all the distress SanDisk Corporation (NASDAQ:SNDK) is dealing with in its system currently. The unfortunate thing is that the company is trying to right the ship at a time when pressure has increased that there is no longer room for delay or error. Looking at the myriad of challenges facings SanDisk, 2015 seems like a lost year for the company and it is difficult to guess when a real turnaround might happen.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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