SanDisk Delays Capacity Expansion As It Burns Through Inventory

SanDisk cut projections for 2012 industry NAND flash memory supply growth from 70 percent to 60 percent, CEO Sanjay Mehrotra said on a Q3 earnings call Thursday. Citing “capacity and technology status,” Mehrotra said the company has also lowered 2013 estimates for industry supply growth rates to 30-40-percent from the July projection of 40-50-percent. Lower supply growth and expected strength in demand “bodes well for healthy flash industry fundamentals in 2013,” Mehrotra said.

SanDisk expects 2013 captive supply base growth to be “around the low end” of the industry range, Mehrotra said, citing “greater X2 mix, a continuing long tail of production of 24-nanometer to support our growing OEM customer requirements for embedded and SSD products” and uncertainty about restarting its 24-nanometer phase one Fab 5 expansion at its Yokkaichi, Japan, factory. The earliest a ramp would occur is Q2 2013, he said, but the company plans to “substantially complete phase one expansion” in 2013, he said.

SanDisk ended Q3 with inventory “somewhat in the higher range,” which the company will pare down in Q4, Mehrotra said. Since Q1 tends to be a slower quarter in certain segments of the business, “we don’t think that Q1 is the timeframe to be adding capacity,” he said. Given lead times, the company has time to assess adding capacity based on technology migration and transition plans for 2013, he said. “We are not after adding capacity for the sake of capacity,” he said, but want “prudent revenue growth.”

In response to a question about tablet makers charging $6 a gigabyte for upgrades for NAND to differentiate product, while flash memory makers get substantially less than that, Bruner said SanDisk believes industry bit growth rate of 30-40 percent, coupled with strong demand, will create a “very healthy supply/demand environment.” As a result, “that will help us gain more value for our products” in 2013, she said. Mehrotra said the company expects average capacities in tablets to increase next year.

For Q3 2012, SanDisk reported profit of $76.5 million, compared with $233 million in Q3 2011, on revenue of $1.27 billion, down from $1.4 billion in the prior quarter. Numbers exceeded analysts’ expectations, however, and Mehrotra attributed results to “high-volume production” of a custom solution for an unnamed mobile OEM customer. In addition, NAND MCP (multi-chip package) and discrete products revenue grew, and production has begun on next-generation NAND products qualified for use in 13 mobile OEM platforms, he said. Mobile platforms remain a focus for the company for Q4 and throughout 2013, he said.

SanDisk is shifting its product mix toward higher margin segments including enterprise SSDs and NAND, Bruner said, and will cut back in the area of lower priced white-label products with lower margins in an effort to achieve a more favorable “blended gross margin.” SSD revenue was less than 10 percent of total revenue in Q3, but it’s expected to be “quite a bit higher than 10 percent” in Q4 and more than 10 percent of total revenue for the year, said Chief Financial Office Judy Bruner. Mehrotra said the SSD segment will have the highest growth rate for SanDisk in 2013.

An improved flash memory industry supply-demand balance slowed the rate of price declines to 8 percent compared with 18 percent in Q2, according to Bruner. She called year-over-year average selling price per gigabyte declines “high” at 49 percent, reflecting “the steep price decline” in first half 2012. Product revenue mix in Q3 was 41 percent retail and 59 percent OEM, Brunner said. Retail sales for SanDisk grew 5 percent year over year and 15 percent sequentially in all major product categories, Bruner said, highlighted by strong USB sales in the back-to-school season. Imaging card sales showed strong growth and market share gains in the in high-performance segment, and mobile phone card sales were up sequentially and year-over-year, she said.

Geographically, retail revenue increased sequentially in all major regions, with year-over-year growth coming primarily from emerging markets, Bruner said. Revenue in the OEM channel grew 33 percent sequentially but fell 19 percent year-over-year due to mobile card de-bundling and the “steep” year-over-year price decline, she said. SanDisk shares closed up Friday 2.7 percent to $44.02.