SanDisk: Fiscal 3Q08 Financial Results

SanDisk Corporation announced results for the third quarter ended September 28, 2008, a non-binding MOU to restructure joint venture operations with Toshiba, a significant reduction in planned capital expenditures for 2009 and actions to reduce operating expenses. Total third-quarter revenue was $821 million, a decrease of 21% on a year-over-year basis. Net loss in accordance with U.S. Generally Accepted Accounting Principles (GAAP) was ($155) million, or ($0.69) per diluted share, compared to GAAP net income of $85 million, or $0.36 per diluted share, in the third quarter of 2007.

Excluding the impact of acquisition-related charges, share-based compensation expense and the related tax effect, the third quarter non-GAAP net loss was ($132) million, or ($0.59) per diluted share, compared to the third quarter 2007 non-GAAP net income of $130 million, or $0.54 per diluted share.

SanDisk also announced today the signing of a non-binding memorandum of understanding with Toshiba to restructure the current Fab 3 and Fab 4 joint ventures, which would substantially reduce SanDisk’s capital commitments in 2009, strengthen its balance sheet, and provide flexibility in managing supply.

"While third quarter revenue was down year-over-year, record megabyte sales demonstrate the resiliency and breadth of our channels and the elasticity of our end markets in the face of deteriorating global macroeconomic conditions. However, excess inventories resulted in severe pricing pressures and a disappointing loss for the quarter including $109 million of inventory related charges," said Eli Harari, Chairman and CEO. "To further strengthen our balance sheet we are taking decisive actions including: restructuring of our Fab joint ventures, deep cuts to our 2009 fab capacity investments, and substantial expense reduction measures for 2009. We believe the industry-wide moves to curtail flash capacity expansions are sowing the seeds for the next recovery. Times are tough, however, we believe we can maintain our strong market position with our intellectual property, our industry lead in manufacturing 3-bits per cell Flash, our strong execution of the 43-nanometer technology transition, our diversified OEM and retail global sales channels and our strong balance sheet."

Key Metrics for Third Quarter of 2008:

• Total megabytes sold in the third quarter increased 105% year-over-year and 44% from the second quarter of 2008.
• Average price per megabyte sold declined 63% on a year-over-year basis and 30% sequentially.
• License and royalty revenue was $132 million, up 11% year-over-year.
• Average retail card capacity of 2.9 gigabytes increased 84% on a year-over-year basis and 23% sequentially.
• GAAP product gross profit (loss) was ($138) million, or (20.0%) compared to $224 million, or 24.3% in the third quarter of 2007. Non-GAAP product gross profit (loss) was ($121) million, or (17.5%) compared to $242 million, or 26.4% in the third quarter of 2007.
• Operating loss, on a GAAP basis, was ($250) million, or (31%) of total revenue compared to GAAP operating income of $109 million, or 11% of total revenue in the third quarter of 2007. Non-GAAP operating loss was ($205) million, or (25%) of total revenue, compared to operating income of $162 million, or 16% of total revenue, in the third quarter of 2007.
• SanDisk introduced 16GB microSDHC and Memory Stick Micro (M2) mobile memory cards – the world’s largest removable storage capacity for mobile phones.
• SanDisk announced slotMusic. These microSD cards will be made available with pre-loaded high fidelity DRM free MP3 music from top artists at EMI Music, SONY BMG, Universal Music Group, and Warner Music Group. A selection of slotMusic cards will be available during the holidays at brick-and-mortar and online stores including Best Buy and Wal-Mart.
• SanDisk announced product upgrades including a 50 percent speed increase for the SDHC Extreme III card and a new high speed 45 megabytes per second 16-gigabyte CompactFlash Extreme IV card.
• SanDisk and Toshiba also announced a non-binding memo of understanding to sell approximately 30% of the manufacturing capacity of the parties’ joint ventures to Toshiba.

This news release contains certain forward-looking statements, including statements about our business prospects and outlook, anticipated recovery in our industry, our ability to maintain our market position, our ability to continue to execute on our 43-nanometer technology transition, our cost reduction activities, the availability of our slotMusic cards, and our long-term prospects, that are based on our current expectations and involve numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate and may significantly harm our business, financial condition and results of operations.

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

• slower than expected, or no, growth in market demand for our products including our solid state drives, or a slower adoption rate for our products in current and new markets that we are targeting including the mobile phone market,
• continued average selling price erosion that may be more severe than our expectations due to decreased demand or excess industry supply of flash memory from ourselves as well as from existing suppliers or from new competitors,
• continued excess industry-wide supply to meet demand,
• adverse global economic and geo-political conditions, including continued declines in the global economy, particularly in the U.S. and Europe, or continued adverse currency exchange rates particularly related to the Japanese yen,
• any interruption of or delay in supply from any of the semiconductor manufacturing or subcontracting facilities, including test and assembly facilities that supply products to us,
• slower than expected expansion of our global sales channels,
• fluctuations in operating results, unexpected yield variances and delays related to our conversion to 43-nanometer NAND flash technology or the ramp-up of the 300-millimeter flash fabrication facility,
• unexpected yield variances in, or delays related to the ramp-up of, 3-bits per cell manufacturing,
• lower than expected growth in the average megabyte capacity per card,
• fluctuations in license and royalty revenues,
• higher than anticipated operating expenses,
• unintended effects of our expense reduction measures,
• failure to develop commercially viable rewritable 3D memory technology in a timely and cost-effective manner,
• business interruption due to earthquakes, hurricanes or other natural disasters, particularly in areas in the Pacific Rim and Japan where we manufacture and assemble products,
• adverse results in litigation or regulatory actions affecting us,
• failure to execute definitive agreements on the terms set forth in the MOU or at all, our failure to implement the changes described in the MOU in a timely or cost-effective manner, and
• 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 30, 2007 and our Forms 10-Q.