Mobile Memory Oversupply to Pressure Pricing Through Q2, SanDisk Says

Price declines from oversupply and lower-than-expected demand for mobile memory cards from OEM customers led to a $110 million drop in profit for SanDisk in Q1, COO Sanjay Mehrotra said in the company’s earnings call Thursday. Net income dropped to $114 million from $224 million for the 2011 quarter, and operating income sank to $192 million from $349 million in Q2 2011, SanDisk said. Revenue fell 7 percent to $1.21 billion from the prior year and plummeted 24 percent sequentially, the company said. Industry demand has been “weaker than expected,” leading to unexpected supply increases, and the supply-demand imbalance is likely to continue through Q2, Mehrotra said.

Competition in the mobile phone market resulted in a lower rate of OEM card bundling, along with a reduction in bundled card capacity, Mehrotra said. It’s “too early to tell” whether it’s a temporary or long-term trend, he said, but lower card bundling rates for smartphones could translate to more opportunity for the retail channel and potentially higher unit capacities, he said. Bundled cards in the first quarter contributed about 10 percent of total revenue, he said.

Mobile industry market share is becoming more concentrated and suppliers need to offer a broader portfolio of embedded offerings, including high-demand products and proprietary, customer-specific multi-chip packages, Mehrotra said, adding that SanDisk has been “late” in adapting its product roadmap to OEM customers’ needs.

To address supply-demand imbalance and weaker OEM card demand heading into Q2, SanDisk will trim sales to white-label channels, which is expected to have an adverse effect on its embedded business, Mehrotra said. SanDisk is in the process of developing and qualifying new embedded products, including next-generation iNAND embedded flash drive products for leading mobile OEMs, Mehrotra said, which should extend to a broader range of handsets, tablets, and other devices for established and emerging markets. The company recently completed qualification of its MCP (multi-chip package) embedded solution with leading OEMs and other customers, he said, and expects to begin ramping up production in second half 2012. That should enable SanDisk to gain embedded shares with leading mobile OEMs later this year, he said.

SanDisk’s SSD sales posted solid sequential growth in Q1, Mehrotra said, and the company plans to launch additional products in Q2. Ultrabooks are gaining momentum and boosting SSD attachment in mobile computing devices for both standalone and caching applications, he said. Growth in the company’s client and enterprise SSD revenues remains on track to account for more than 10 percent of total revenue for the year, he said.

In retail, the number of devices sold in emerging markets more than doubled from last year and now account for about half of total retail unit volume, Mehrotra said. Products sold to emerging markets tend to be at lower average capacities compared to products sold in the developed markets, he said. The company saw retail gains in “most markets,” he said.

SanDisk will engage in “modest” wafer capacity growth during the second half of 2012 in response to supply and demand, Mehrotra said. The company will maintain capacity at its Fab 5 plant “at least” through the rest of the year. The company had planned to expand capacity there in July, it said in January.

For Q2, SanDisk expects a “much improved” pricing environment -- “meaning a much lower level of price decline” -- than what it saw in the first quarter, said CFO Judy Bruner. While “disappointed with” first quarter results and “near-term prospects which we believe will lead to a sequential decline in revenue in the second quarter,” Bruner called first-half 2012 results “a temporary setback.” The company expects to “re-emerge stronger” in the second half on SSD and retail growth and by diversifying and strengthening its portfolio, she said.