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Sandisk’s stock was at $97 on Jan-2-2015 and by May-15-2015 it had dropped to $67. Market has punished the company for its poor operating performance of Q1-2015. This blog post looks at factors that were responsible for the poor performance and assesses the company’s future prospects.Reference - Company's Q1-2015 Earning's call , Latest 10-Q / 10-K reports
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FOUR MAIN FACTORS THAT ARE CURRENTLY AFFECTING THE COMPANY 1. Product issues, including qualification delays impacting embedded and enterprise sales: The Company was working with a customer to qualify an embedded component for client SSD application. Qualification work for this new embedded component was going well early in the first quarter. However, during Q1, they encountered an issue related to a material used in their product assembly at the very last stage of the customer’s qualification process. They have a solution to this issue, but it requires the company’s internal validation and customer re-qualification before production shipments can begin. The delay in sales of this embedded component was the single largest contributor to their Q1 revenue shortfall and will also impact the company’s second quarter and 2015 results. Some of the 6-gig SAS and 12-gig SAS opportunities that they had included in their 2015 revenue outlook are reduced, primarily due to certain demand changes and delays in customer qualifications. As a result, they are reducing their estimates of 2015 sales of their SAS products. In spite of these challenges, they continue to believe that they will maintain a strong number two market share position within the SAS market. In addition, they are advancing their 12-gig SAS product roadmap with 15 nanometer NAND and a new higher performance controller and they expect to sample their product towards the end of this year. 2. Reduced 2015 opportunity in the enterprise market due to market shifts in PCIe and SATA. Q1 results as well as 2015 revenue estimates for their Fusion-io PCIe solutions are significantly below their original plan. The biggest contributor to their reduced 2015 enterprise PCIe outlook is that they are seeing a substantial portion of the PCIe TAM moving to lower cost solutions using enterprise SATA SSDs. This market shift has caused the near-term TAM to move from PCIes, where they are the market leader to enterprise SATA solutions, where their share is low given their relatively recent entry. They believe the broadening deployment of NVMe infrastructure and availability of NVMe PCIe solutions, along with lower cost PCIe solutions built on captive NAND, will contribute to the PCIe market expanding again, likely beginning in 2016. They plan to launch their new Fusion-io based PCIe solutions with captive 1Y technology-based NAND later this quarter and expect revenue contribution from the new PCIe solutions later in the year after customer qualifications are completed. In enterprise SATA SSDs, they have recently seen a demand shift to the 2 terabyte capacity point in the hyper-scale portion of the market, starting as early as the second quarter. They expect their 2 terabyte enterprise SATA product to be ready for production later this year. The current lack of this offering will also impact their enterprise SATA sales this year. The longer term impact of the hyper-scale market moving to these high capacity SATA SSDs is that it will expand the TAM. In enterprise SATA, they are working to improve their market position and broaden their portfolio with multiple new 15 nanometer product offerings launching later in the year. Given the overall impact of these market shifts and certain SAS product issues , the company no longer expects to reach its target of $1 billion of sales in enterprise this year . 3. Weaker than anticipated pricing. They experienced softer than expected pricing conditions in some parts of their business in Q1, including in global retail sales and in client SSDs. They also made the choice to pull back on sales of private label products late in the quarter because of the accelerated price decline in this channel. They now believe there is some industry oversupply in the first half of 2015. 4.Supply challenges : Due to their supply constraints, they were unable to meet the timing of delivery required to fulfill all of the demand for a large hyper-scale customer in enterprise SATA. This mismatch in supply availability resulted in a reduced share award for them with this customer. Separately, their overall petabyte supply for the year has been somewhat reduced as they are now planning for a higher mix of 1Y technology relative to 15 nanometer in the second half 2015 to support the mix of their business requirements. Q1-RESULTS: First quarter revenue of $1.33 billion was down 23% sequentially and down 12% year-over-year. Their Q1 revenue came 35% from retail and 65% from commercial channels. Retail revenue was down 15% sequentially and down 13% year-over-year. While there were lingering effects of the Q4 supply challenges on their retail sales, they were able to supply and sell a higher than forecasted number of units, albeit at lower prices than they had expected. In total, their retail revenue met their expectations for the quarter. By product category, the year-over-year retail revenue decline is being driven primarily by the imaging card market. Their Q1 forecast miss came from the commercial sales, where their revenue was down 27% sequentially and down 11% year-over-year. Within their commercial revenue, there were three key drivers of the sequential decline. The largest sequential decline within commercial revenue came from embedded products. While they expected a decline in this area due largely to seasonality and some supply limitations, they had expected some partial offset from a new embedded component for client SSD applications. They encountered qualification delays for this embedded component, which resulted in a larger than expected sequential decline in embedded revenue. The second key driver of sequential decline in commercial revenue was the phasing out of their client SSD program with a large customer. This decline was as expected for Q1. Enterprise SSD was the third key area contributing to the sequential commercial revenue decline and this was also a miss from their Q1 forecast. The key drivers of the sequential enterprise decline included a lost opportunity in enterprise SATA due to a supply timing mismatch with a hyper-scale customer and lower PCIe sales due largely to the rapidly shifting enterprise market. On a year-over-year basis, the Q1 decline in commercial revenue was driven by the client SSD program loss with one customer and by lower private label sales, partially offset by growth in enterprise embedded and also client SSD revenue from other OEM customers. Their sales to private label accounts were down year-over-year due to both supply constraints and their conscious pull back from this channel due to aggressive pricing late in Q1. The overall ASP per gigabyte declined 10% sequentially and 29% year-over-year. The price decline was more pronounced in retail and private label markets. While prices were soft in most retail geographies, one contributing factor in Europe was the impact of the weak euro on their U.S. dollar sales. Their gigabytes sold declined 15% sequentially and increased 24% year-over-year. OUTLOOK OF THE BUSINESS: In Q2 the company expects a sequential decline in revenue, influenced by three primary drivers. First, their Q2 client SSD revenue will be down sequentially due to the end of life in Q1 of the SSD program with a major customer, which they previously expected would end in Q2. Second, they expect enterprise revenue to decline sequentially in Q2 in SATA and SAS for the reasons described above. Finally, the lower price points they saw in the latter part of Q1 will also impact several parts of their business in Q2. They expect their total Q2 revenue to be in the range of $1.150 billion to $1.225 billion. In the second half of the year, they expect sequential revenue growth in both Q3 and Q4, but they no longer expect year-over-year revenue growth in the second half. The primary drivers of sequential quarterly revenue growth in the second half will be their embedded products, continued gains with key client SSD customers and stronger seasonality. Within enterprise, they expect their business to stabilize in the second half of 2015 and regain growth momentum in 2016. Their full year 2015 revenue forecast is now $5.4 billion to $5.7 billion. This represents a substantial year-over-year revenue decline and a significant reduction from their previous 2015 outlook. The largest driver of their forecasted year-over-year revenue decline is the loss of the client SSD program with a large customer. The other key contributors are expected higher price decline than in 2014 coupled with limited supply due to rebuilding inventory levels as they have previously discussed. PREVIOUS PROJECTION FOR 2015 : When they provided their 2015 forecast in January, they had expected that their enterprise sales would generate significantly more growth in 2015 and provide a significant offset to the loss of the client SSD program. Since January, the biggest changes in their outlook for the year are reduced enterprise growth, higher price decline and a delay in the qualification of an embedded component for a client SSD application. 3D NAND – THE NEXT BIG THING!!! : Company has begun gearing up for the pilot production of 48-layer 3D NAND technology, which is an industry first. This breakthrough memory architecture utilizes numerous process and device innovations and demonstrates their strength in introducing industry leading memory technologies. 48-layer 3D NAND technology provides an exciting combination of increased density, higher performance and lower power, which will be used in a broad range of solutions from removable products to enterprise SSDs. 3D NAND pilot production will commence in the second half of the year and will be introduced for commercial use in 2016. EVEN THOUGH PICIe IS THE FUTURE, WHY NEAR TERM CUSTOMERS ARE EMBRACING SATA? In the near-term in 2015, it is seen that PCIe opportunity is really shifting towards SATA solutions. And this is because PCIe solutions have commanded higher pricing in the market and have addressed a certain portion of the workload requirements. On the other hand, enterprise SATA solutions are able to address the market to meet its performance requirements in an adequate fashion while using multiple SATA drive in a rate configuration and basically being good enough in terms of meeting the application requirement and doing so in a more cost effective fashion versus the PCIe solutions that are there in the marketplace today. However, in the future this market TAM will return to growth that will be enabled by solutions with captive NAND. The captive NAND will help bring down the cost. It will enable the company to offer PCIe solutions at lower price points and still strong margins – heavy margins and this will then enable them to grow the PCIe TAM as they go forward. CONCLUSION: From the above points it’s clear that the short term outlook of the company is bleak and hence the stock would languish in sixties for next couple of months. The company has lowered its guidance for 2015 and thus now its mandatory for them to meet the numbers at any cost to sustain the current stock price. If by any chance they miss this lower guidance the stock could be dumped further. A lot is dependent on the company’s 3D NAND implementation. If that goes as per plan, then in Q1-2016 the market will give a fresh look at the company. It will give management a chance to prove that the factors responsible for Q1-2015 were short term pitfalls and they have recovered from them and thus the stock would have a chance to reach back its fair value of $95 by the end of 2016. |
