SanDisk: Fiscal 2Q08 Financial Results

SanDisk Corporation announced results for the second quarter ended June 29, 2008, as well as steps to slow its supply growth. Total second-quarter revenue was $816 million, a decrease of 1% on a year-over-year basis. Net loss in accordance with U.S. Generally Accepted Accounting Principles (GAAP) was ($68) million, or ($0.30) per diluted share, compared to GAAP net income of $28 million, or $0.12 per diluted share, in the second quarter of 2007.

Excluding the impact of acquisition-related charges, share-based compensation expense and the related tax effect, the second quarter non-GAAP net loss was ($22) million, or ($0.10) per diluted share, compared to the second quarter 2007 non-GAAP net income of $72 million, or $0.30 per diluted share.

SanDisk is delaying the start of the next phase of production ramp in Fab 4 and now expects it to start no sooner than April 2009. The company is also pushing out its decision to invest in Fab 5 until market conditions improve. These actions are aimed at reducing future capital expenditures and inventory growth in order to maintain a strong balance sheet.

"Our second quarter sales were well below our expectations due to the rapid deterioration in consumer confidence which impacted our sales in U.S. retail and to handset OEMs. Product gross margin was negatively impacted by the lower sales volume and a substantial inventory write-down," said Eli Harari, Chairman and CEO. "Overall demand is expected to improve in the upcoming holiday season; however, industry-wide Flash inventories remain excessive and pricing and margins will therefore remain under pressure until supply and demand come into balance. We are taking significant actions to slow our captive supply growth, which will reduce our capital expenditure commitments, and allow us to better manage our inventory. We are also continuing to improve our cost structure through transitions to 43-nanometer MLC and the industry’s first commercialized 3-bits per cell NAND flash. While the industry downturn has been more pronounced and severe than expected, we are optimistic about our long-term renewed growth when the market rebounds."

Key Metrics for Second Quarter of 2008

• Product revenue was $688 million, down 5% year-over-year.
• License and royalty revenue was $129 million, up 20% year-over-year.
• Total megabytes sold in the second quarter were a record and increased 120% year-over-year and 14% from the first quarter of 2008.
• Average price per megabyte sold declined 55% on a year-over-year basis and 15% sequentially.
• Average retail card capacity of 2.36 gigabytes increased 64% on a year-over-year basis and 15% sequentially.
• GAAP product gross margin was 3.3% compared to 16.2% in the second quarter of 2007. Non-GAAP product gross margin was 5.7% compared to 19.0% in the second quarter of 2007.
• Operating loss, on a GAAP basis, was ($101) million, or (12%) of revenue compared to GAAP operating income of $14 million, or 2% in the second quarter of 2007. Non-GAAP operating loss was ($57) million, or (7%) of revenue, compared to operating income of $74 million, or 9% of revenue, in the second quarter of 2007.
• SanDisk introduced a line of flash memory-based solid state drives (SSDs) for an emerging new category of laptops – Ultra Low-Cost PCs (ULCPC).
• SanDisk launched the first premium memory cards for mobile phones to increase capacity and provide fast transfer speeds for music, maps, videos, photos, and games.
• SanDisk and Toshiba signed a strategic agreement to jointly develop and commercialize three dimensional (3D) rewritable memory.