SanDisk Announces Third Quarter 2011 Financial Results

SanDisk Announces Third Quarter 2011 Financial Results

Reports Record Quarterly Revenue

SanDisk Corporation (NASDAQ:SNDK), a global leader in flash memory storage solutions, today announced results for the third fiscal quarter ending October 2, 2011. Total third quarter revenue of $1.416 billion increased 15% on a year-over-year basis and increased 3% on a sequential basis. Third quarter net income, in accordance with U.S. Generally Accepted Accounting Principles (GAAP), was $233 million, or $0.96 per diluted share, compared to net income of $322 million, or $1.34 per diluted share in the third quarter of fiscal 2010 and $248 million, or $1.02 per diluted share, in the second quarter of fiscal 2011.

On a non-GAAP basis, which excludes the impact of share-based compensation expense, amortization of acquisition-related intangible assets, non-cash economic interest expense associated with the convertible debts and related tax adjustments, third-quarter net income was $292 million, or $1.20 per diluted share, compared to net income of $311 million, or $1.30 per diluted share, in the third quarter of fiscal 2010 and net income of $278 million, or $1.14 per diluted share, in the second quarter of fiscal 2011. For reconciliation of non-GAAP to GAAP results, see accompanying financial tables and footnotes.

“We again delivered record revenue and strong profitability, driven by robust demand in our diversified end markets,” said Sanjay Mehrotra, president and chief executive officer. “Our broad portfolio of innovative storage solutions positions us exceedingly well to capitalize on our numerous growth opportunities in smart mobile devices and consumer and enterprise computing platforms.”

THIRD QUARTER 2011 KEY FINANCIAL METRICS

• Total third quarter gross profit, product gross profit and operating income compared on a year-over-year and sequential basis are shown in the table below:

					Metric in millions of US$, except %		GAAP						Non-GAAP
							Q311		Q310		Q211		Q311		Q310		Q211
					Total gross profit		$612		$639		$613		$627		$644		$623
					% of total revenue		43.2%		51.8%		44.6%		44.3%		52.2%		45.3%
					Product gross profit		$518		$543		$520		$533		$548		$530
					% of product revenue		39.2%		47.7%		40.6%		40.3%		48.1%		41.3%
					Operating income		$386		$432		$379		$379		$457		$402
					% of total revenue		27.3%		35.0%		27.6%		29.4%		37.0%		29.3%

• Cash flow from operations in the third quarter was $176 million and free cash flow⁽¹⁾ was $189 million.
• Total cash and cash equivalents and short and long-term marketable securities at the end of the third quarter of fiscal 2011 were $5.27 billion compared to $5.05 billion at the end of the third quarter of fiscal 2010 and $5.28 billion at the end of the second quarter of fiscal 2011.
• Third-quarter Other income (expense) includes a GAAP $12 million loss and a non-GAAP $9 million gain, resulting from the repurchase of $222 million par value of the company’s 2013 convertible debt for $211 million.

OTHER HIGHLIGHTS

• SanDisk refreshed its suite of retail products for the mobile, imaging and USB flash drive markets. SanDisk also introduced the SanDisk^® Memory Vault, the first product in a new category of devices that are designed for long-term data preservation.
• SanDisk began selling the SanDisk Ultra^® solid state drive (SSD) for the retail market in 60, 120 and 240 gigabyte capacities.
• SanDisk introduced the Sansa^® Clip Zip^™, a sub-$50 MP3 player packed with features, such as a large color screen, compatibility with all major music formats, a stopwatch, an FM radio, voice recording capability and a microSDHC^™ card slot for additional storage.
• SanDisk led a new initiative, called SATA DEVSLP, with support from Intel, Samsung and Microsoft to enable OEMs to offer solid-state drives with SATA performance at significantly lower power consumption than what is currently available. The implementation of the new technology is planned in future devices, chipsets and operating systems.

CONFERENCE CALL

SanDisk’s third quarter of fiscal 2011 conference call is scheduled for 2:00 P.M., Pacific Time, Thursday, October 20, 2011. The conference call will be webcast and can be accessed live, and throughout the quarter, at SanDisk’s website at http://www.sandisk.com/IR. To participate in the call via telephone, the dial-in number is 719-457-2713 and the dial-in password is 2858144. A copy of this press release will be furnished to the Securities and Exchange Commission on a current report on Form 8-K and will be posted to our website prior to the conference call.

FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking statements, including statements about our business prospects and growing demand for our products in the smart mobile device and consumer and enterprise computing markets and our expectations regarding our business and continued growth, that are based on our current expectations and are subject to 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:

• competitive pricing pressures, resulting in lower average selling prices and lower or negative product gross margins;
• unpredictable or changing demand for our products, particularly for certain form factors, such as embedded flash memory, or capacities, or the mix of X2 and X3;
• lower than anticipated demand, including due to general economic weakness in our markets;
• insufficient supply from captive flash memory sources, inability to obtain non-captive flash memory supply of the right product mix with adequate margins and quality in the time frame necessary to meet demand, or inability to realize a positive margin on non-captive purchases;
• expansion of industry supply, including low-grade supply useable in limited markets, creating excess market supply, causing our average selling prices to decline faster than our costs;
• excess captive memory output or capacity which could result in write-downs for excess inventory, lower of cost or market charges, fixed costs associated with under-utilized capacity, or other consequences;
• increased memory component and other costs as a result of currency exchange rate fluctuations to the U.S. dollar, particularly with respect to the Japanese yen; and
• the 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 Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2011.

⁽¹⁾ Free cash flow represents net cash provided by operating activities plus net cash used in investing activities less net purchases, sales and maturities of short and long-term marketable securities.

ABOUT SANDISK

SanDisk Corporation is a global leader in flash memory storage solutions, from research and development, product design and manufacturing to branding and distribution for OEM and retail channels. Since 1988, SanDisk’s innovations in flash memory and storage system technologies have provided customers with new and transformational digital experiences. SanDisk’s diverse product portfolio includes flash memory cards and embedded solutions used in smart phones, tablets, digital cameras, camcorders, digital media players and other consumer electronic devices, as well as USB flash drives and solid-state drives (SSD) for the computing market. SanDisk’s products are used by consumers and enterprise customers around the world.

SanDisk is a Silicon Valley-based S&P 500 and Fortune 500 company, with more than half its sales outside the United States. For more information, visit www.sandisk.com.

SanDisk, the SanDisk logo and SanDisk Ultra are trademarks of SanDisk Corporation, registered in the United States and other countries. Sansa Clip Zip is a trademark of SanDisk Corporation. microSDHC is a trademark of SD-3C, LLC. Other brand names mentioned herein are for identification purposes only and may be the trademarks of their respective holder(s).

SanDisk Corporation
Preliminary Condensed Consolidated Statements of Operations
(in thousands, except per share amounts, unaudited)
		Three months ended								Nine months ended
		October 2, 2011				October 3, 2010				October 2, 2011				October 3, 2010
Revenues:
Product		$	1,321,904			$	1,137,593			$	3,814,111			$	3,222,103
License and royalty			94,128				96,080				271,114				277,301
Total revenues			1,416,032				1,233,673				4,085,225				3,499,404
Cost of product revenues			790,465				591,296				2,281,264				1,804,203
Amortization of acquisition-related intangible assets			13,186				3,132				26,556				9,396
Total cost of product revenues			803,651				594,428				2,307,820				1,813,599
Gross profit			612,381				639,245				1,777,405				1,685,805
Operating expenses:
Research and development			135,271				111,518				400,145				309,970
Sales and marketing			48,538				50,390				144,195				150,985
General and administrative			40,567				44,524				116,020				118,647
Amortization of acquisition-related intangible assets			1,878				1,089				2,608				1,672
Total operating expenses			226,254				207,521				662,968				581,274
Operating income			386,127				431,724				1,114,437				1,104,531
Other income (expense)			(23,578	)			(3,168	)			(56,217	)			5,794
Income before income taxes			362,549				428,556				1,058,220				1,110,325
Provision for income taxes			129,296				106,464				352,453				295,648
Net income		$	233,253			$	322,092			$	705,767			$	814,677
Net income per share:
Basic		$	0.97			$	1.38			$	2.96			$	3.52
Diluted		$	0.96			$	1.34			$	2.90			$	3.41
Shares used in computing net income per share:
Basic			239,836				233,918				238,720				231,631
Diluted			243,680				240,717				243,782				239,249

SanDisk Corporation
Reconciliation of Preliminary GAAP to Non-GAAP Operating Results (1)
(in thousands, except per share data, unaudited)
		Three months ended								Nine months ended
		October 2, 2011				October 3, 2010				October 2, 2011				October 3, 2010
SUMMARY RECONCILIATION OF NET INCOME
GAAP NET INCOME		$	233,253			$	322,092			$	705,767			$	814,677
Share-based compensation (a)			15,729				20,944				44,678				52,791
Amortization of acquisition-related intangible assets (b)			15,064				4,221				29,164				11,068
Convertible debt interest (c)			42,840				17,983				90,038				46,112
Income tax adjustments (d)			(14,644	)			(54,387	)			(48,780	)			(130,953	)
NON-GAAP NET INCOME		$	292,242			$	310,853			$	820,867			$	793,695
GAAP COST OF PRODUCT REVENUES		$	803,651			$	594,428			$	2,307,820			$	1,813,599
Share-based compensation (a)			(1,284	)			(1,205	)			(3,316	)			(4,972	)
Amortization of acquisition-related intangible assets (b)			(13,186	)			(3,132	)			(26,556	)			(9,396	)
NON-GAAP COST OF PRODUCT REVENUES		$	789,181			$	590,091			$	2,277,948			$	1,799,231
GAAP GROSS PROFIT		$	612,381			$	639,245			$	1,777,405			$	1,685,805
Share-based compensation (a)			1,284				1,205				3,316				4,972
Amortization of acquisition-related intangible assets (b)			13,186				3,132				26,556				9,396
NON-GAAP GROSS PROFIT		$	626,851			$	643,582			$	1,807,277			$	1,700,173
GAAP RESEARCH AND DEVELOPMENT EXPENSES		$	135,271			$	111,518			$	400,145			$	309,970
Share-based compensation (a)			(8,320	)			(6,629	)			(23,248	)			(19,975	)
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES		$	126,951			$	104,889			$	376,897			$	289,995
GAAP SALES AND MARKETING EXPENSES		$	48,538			$	50,390			$	144,195			$	150,985
Share-based compensation (a)			(2,704	)			(2,959	)			(7,746	)			(8,300	)
NON-GAAP SALES AND MARKETING EXPENSES		$	45,834			$	47,431			$	136,449			$	142,685
GAAP GENERAL AND ADMINISTRATIVE EXPENSES		$	40,567			$	44,524			$	116,020			$	118,647
Share-based compensation (a)			(3,421	)			(10,151	)			(10,368	)			(19,544	)
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES		$	37,146			$	34,373			$	105,652			$	99,103
GAAP TOTAL OPERATING EXPENSES		$	226,254			$	207,521			$	662,968			$	581,274
Share-based compensation (a)			(14,445	)			(19,739	)			(41,362	)			(47,819	)
Amortization of acquisition-related intangible assets (b)			(1,878	)			(1,089	)			(2,608	)			(1,672	)
NON-GAAP TOTAL OPERATING EXPENSES		$	209,931			$	186,693			$	618,998			$	531,783
GAAP OPERATING INCOME		$	386,127			$	431,724			$	1,114,437			$	1,104,531
Cost of product revenues adjustments (a) (b)			14,470				4,337				29,872				14,368
Operating expense adjustments (a) (b)			16,323				20,828				43,970				49,491
NON-GAAP OPERATING INCOME		$	416,920			$	456,889			$	1,188,279			$	1,168,390
GAAP OTHER INCOME (EXPENSE)		$	(23,578	)		$	(3,168	)		$	(56,217	)		$	5,794
Convertible debt interest (c)			42,840				17,983				90,038				46,112
NON-GAAP OTHER INCOME (EXPENSE)		$	19,262			$	14,815			$	33,821			$	51,906
GAAP NET INCOME		$	233,253			$	322,092			$	705,767			$	814,677
Cost of product revenues adjustments (a) (b)			14,470				4,337				29,872				14,368
Operating expense adjustments (a) (b)			16,323				20,828				43,970				49,491
Convertible debt interest (c)			42,840				17,983				90,038				46,112
Income tax adjustments (d)			(14,644	)			(54,387	)			(48,780	)			(130,953	)
NON-GAAP NET INCOME		$	292,242			$	310,853			$	820,867			$	793,695
Diluted net income per share:
GAAP		$	0.96			$	1.34			$	2.90			$	3.41
Non-GAAP		$	1.20			$	1.30			$	3.37			$	3.33
Shares used in computing diluted net income per share:
GAAP			243,680				240,717				243,782				239,249
Non-GAAP			243,947				239,798				243,828				238,302

SanDisk Corporation
Reconciliation of Preliminary GAAP to Non-GAAP Operating Results (1)
(1)			To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), we use non-GAAP measures of operating results, net income and net income per share, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses.  These non-GAAP financial measures are provided to enhance the user's overall understanding of our current financial performance and our prospects for the future.  Specifically, we believe the non-GAAP results provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that we believe are not indicative of our core operating results and because it is consistent with the financial models and estimates published by many analysts who follow the Company.  For example, because the non-GAAP results exclude the expenses we recorded for share-based compensation, the amortization of acquisition-related intangible assets related to acquisitions of Matrix Semiconductor, Inc. in January 2006, MusicGremlin, Inc. in June 2008 and Pliant Technology, Inc. in May 2011, non-cash economic interest expense associated with our convertible debt and tax valuation allowances, we believe the inclusion of non-GAAP financial measures provide consistency in our financial reporting.  These non-GAAP results are some of the primary indicators management uses for assessing our performance, allocating resources and planning and forecasting future periods.  Further, management uses non-GAAP information that excludes certain non-cash charges, such as amortization of purchased intangible assets, share-based compensation, non-cash economic interest expense associated with our convertible debt and tax valuation allowances, as these non-GAAP charges do not reflect the cash operating results of the business or the ongoing results.  These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.  These non-GAAP measures may be different than the non-GAAP measures used by other companies.
(a)			Share-based compensation expense.
(b)			Amortization of acquisition-related intangible assets, primarily core technology, developed technology, customer relationships and trademarks related to the acquisitions of Matrix Semiconductor, Inc. (January 2006), MusicGremlin, Inc. (June 2008) and Pliant Technology, Inc. (May 2011).
(c)			Incremental interest expense relating to the non-cash economic interest expense associated with the Company's 1% Sr. Convertible Note due 2013 and 1.5% Sr. Convertible Note due 2017, and the acceleration of non-cash economic interest expense due to the repurchase of a portion of the 1% Sr. Convertible Note due 2013.
(d)			Income taxes associated with certain non-GAAP to GAAP adjustments and valuation allowances on deferred taxes.

SanDisk Corporation
Preliminary Condensed Consolidated Balance Sheets
(in thousands, unaudited)
		October 2, 2011				January 2, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	1,074,850			$	829,149
Short-term marketable securities			1,478,702				2,018,565
Accounts receivable from product revenues, net			464,647				367,784
Inventory			684,628				509,585
Deferred taxes			131,811				104,582
Other current assets			138,161				203,027
Total current assets			3,972,799				4,032,692
Long-term marketable securities			2,714,663				2,494,972
Property and equipment, net			297,216				266,721
Notes receivable and investments in flash ventures with Toshiba			2,116,262				1,733,491
Deferred taxes			162,083				149,486
Goodwill			154,899			-
Intangible assets, net			308,909				37,404
Other non-current assets			134,064				61,944
Total assets		$	9,860,895			$	8,776,710
LIABILITIES
Current liabilities:
Accounts payable trade		$	223,241			$	173,259
Accounts payable to related parties			258,821				241,744
Other current accrued liabilities			417,902				284,709
Deferred income on shipments to distributors and retailers and deferred revenue			242,416				260,395
Total current liabilities			1,142,380				960,107
Convertible long-term debt			1,583,158				1,711,032
Non-current liabilities			419,848				326,176
Total liabilities			3,145,386				2,997,315
EQUITY
Stockholders' equity:
Common stock			4,849,777				4,709,743
Retained earnings			1,518,420				812,653
Accumulated other comprehensive income			350,837				260,228
Total stockholders' equity			6,719,034				5,782,624
Non-controlling interests			(3,525	)			(3,229	)
Total equity			6,715,509				5,779,395
Total liabilities and equity		$	9,860,895			$	8,776,710

SanDisk Corporation
Preliminary Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
		Three months ended								Nine months ended
		October 2, 2011				October 3, 2010				October 2, 2011 (1)				October 3, 2010
Cash flows from operating activities:
Net income		$	233,253			$	322,092			$	705,767			$	814,677
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes			(70,618	)			(16,940	)			(77,842	)			(95,849	)
Depreciation			27,322				32,970				84,959				102,075
Amortization			44,685				24,761				118,035				65,349
Provision for doubtful accounts			1,025				(205	)			(1,929	)			(2,804	)
Share-based compensation expense			15,729				20,944				44,678				52,791
Excess tax benefit from share-based compensation			(4,009	)			(6,232	)			(15,820	)			(19,960	)
Impairments, restructuring and other			(5,673	)			(11,349	)			(25,118	)			(27,587	)
Other non-operating			22,088				6,769				63,771				25,708
Changes in operating assets and liabilities:
Accounts receivable from product revenues			(88,570	)			5,663				(89,157	)			(104,272	)
Inventory			(130,797	)			(33,256	)			(164,798	)			66,974
Other assets			1,926				(21,928	)			(69,443	)			1,649
Accounts payable trade			41,825				36,431				38,368				17,359
Accounts payable to related parties			(16,790	)			(33,137	)			17,077				(18,184	)
Other liabilities			104,939				52,567				215,672				214,569
Total adjustments			(56,918	)			57,058				138,453				277,818
Net cash provided by operating activities			176,335				379,150				844,220				1,092,495
Cash flows from investing activities:
Purchases of short and long-term marketable securities			(891,345	)			(2,788,994	)			(2,500,913	)			(4,231,953	)
Proceeds from sale of short and long-term marketable securities			804,576				944,838				2,276,356				1,636,549
Proceeds from maturities of short and long-term marketable securities			182,110				148,790				505,920				317,805
Acquisition of property and equipment			(52,914	)			(22,314	)			(114,267	)			(59,728	)
Investment in Flash Ventures			(64,983	)			-				(83,316	)			-
Distribution from FlashVision Ltd.			-				-				-				122
Notes receivable issuance to Flash Ventures			(32,519	)			-				(399,281	)			-
Notes receivable proceeds from Flash Ventures			163,420				59,664				248,516				59,664
Proceeds from sale of assets			-				-				-				17,767
Purchased technology and other assets			-				-				(100,000	)			(1,982	)
Acquisition of Pliant Technology, Inc., net of cash acquired			-				-				(317,649	)			-
Net cash provided by (used in) investing activities			108,345				(1,658,016	)			(484,634	)			(2,261,756	)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs			-				982,500				-				982,500
Proceeds from sale (purchase) of convertible bond hedge			1,494				(292,900	)			1,494				(292,900	)
Proceeds from sale (purchase) of warrants			(1,158	)			188,100				(1,158	)			188,100
Repayment of debt financing			(211,441	)			-				(211,441	)			(75,000	)
Proceeds from employee stock programs			23,185				23,615				81,791				107,971
Excess tax benefit from share-based compensation			4,009				6,232				15,820				19,960
Net cash provided by (used in) financing activities			(183,911	)			907,547				(113,494	)			930,631
Effect of changes in foreign currency exchange rates on cash			(773	)			(304	)			(391	)			3,654
Net increase (decrease) in cash and cash equivalents			99,996				(371,623	)			245,701				(234,976	)
Cash and cash equivalents at beginning of period			974,854				1,237,011				829,149				1,100,364
Cash and cash equivalents at end of period		$	1,074,850			$	865,388			$	1,074,850			$	865,388
(1)Consideration provided to Pliant Technology, Inc. of $15 million during the first quarter of fiscal year 2011 has been reclassified from 'Purchased technology and other assets' to 'Acquisition of Pliant Technology, Inc., net of cash acquired'.

SanDisk Corporation
Jay Iyer, 408-801-2067 (Investors)
Lee Flanagin, 408-801-2463 (Media)