SanDisk beats Street view after prices steady

SAN FRANCISCO (Reuters) - SanDisk Corp beat profit and margin expectations by reining in costs and keeping prices stable, and foresees a 2011 surge in demand as more consumers opt for smartphones and tablets.

Shares in the flash memory maker rose 5 percent despite a current-quarter outlook just below Wall Street’s targets. The company predicted surging demand for mobile devices like Apple’s iPad for the holidays and into next year.

“We see a lot of design activity in tablets that clearly has been influenced, to a large extent, by the introduction of the iPad,” said Chief Executive Eli Harari, who will retire at the end of 2010.

ISuppli expects the NAND market to grow 38 percent in 2010, and 18 percent next year on a revenue basis.

Although demand is unquestioned, profitability is trickier. Flash memory is a commodity and suppliers traditionally rise and fall based on pricing and supply-demand dynamics.

In the third quarter, average price per gigabyte sold declined 5 percent from the previous quarter, SanDisk said. But product cost per gigabyte improved 13 percent.

That helped boost gross margins to 52 percent, the highest ever, a level that Caris & Co analyst Craig Ellis called “stunning.”

“You can see all the strength in the gross margin,” he said. “They saw significantly better pricing than expected.”

The company forecast steeper price falls this quarter, and targeted revenue of $1.25 billion to $1.325 billion, slightly lower than Wall Street’s estimate. That helped curtail the rise of SanDisk’s stock after hours.

SanDisk shares are up roughly 25 percent this year. Analysts have noted that its stock is linked somewhat to Apple’s, because Apple is such a voracious consumer of flash, which is found in iPads, iPhones and iPods.


SanDisk cited strong demand in both its embedded and retail businesses. SanDisk is the world’s biggest supplier of flash memory cards that are sold to consumers at retail. But two-thirds of its sales now come from manufacturers, which embed flash in their devices.

Half of SanDisk’s sales came from the mobile market in the third quarter.

Since 2009, SanDisk and its rivals have benefited from tight supply and improving price stability, but major players are adding capacity to increase production next year. With more production coming online there are fears that it will upset favorable pricing dynamics.

SanDisk manufactures most of its supply through a joint venture with Toshiba Corp.

The company on Thursday reported net income of $322.1 million, or $1.34 cents a share, in the third quarter ended October 3, up from $231.3 million, or 99 cents a share, in the year-ago period.

Excluding items, SanDisk earned $1.30 a share, above the average analyst estimate of $1.05 a share, according to Thomson Reuters I/B/E/S.

Revenue rose 32 percent to $1.23 billion, in line with Wall Street’s target.

Thursday marked the final earnings conference call for Harari, SanDisk’s co-founder and the only CEO the company has ever had. COO Sanjay Mehrotra, who is well known to investors, will take over starting January 1.

Shares of Milpitas, California-based SanDisk closed at $37.12 and rose to $39.01 in extended trading.

Reporting by Gabriel Madway; Editing by Richard Chang, Gary Hill