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SanDisk (SNDK) Q1 Earnings & Revenues Surpass Estimates

SanDisk Corp. SNDK reported first-quarter 2016 adjusted earnings of 65 cents per share, which comfortably beat the Zacks Consensus Estimate of 43 cents. Earnings per share also increased from 50 cents reported in the year-ago quarter. Adjusted earnings per share (on a proportionate tax basis) exclude amortization of acquisition-related intangible assets, Western Digital acquisition-related expenses, convertible debt interest and other one-time items but include stock-based compensation expense.

Revenues

Total revenue increased 2.5% on a year-over-year basis to $1.366 billion and came ahead of management’s guided range of 1.175 billion–$1.250 billion. Also, reported revenues surpassed the Zacks Consensus Estimate of $1.218 billion. The year-over-year increase was primarily due to better-than-expected demand for enterprise solutions, client SSDs and removable products.

Revenues from Commercial channels (64% of first-quarter revenues) increased 1% year over year. Embedded revenues (part of commercial revenues) however were down 33% year over year, mainly due to lower-than-expected smartphone market and initial stages of X3 implementation for eMMC solutions.

SanDisk’s revenues from Retail channels (36% of first-quarter revenues) increased 5% year over year, primarily as a result of share gain in all product categories.

It is worth mentioning that on a year-over-year basis, client SSD revenues (excluding the impact of a loss of a large customer) grew a whopping 55%.

Operating Results

SanDisk’s adjusted gross profit (including stock-based compensation but excluding other one-time items) in the quarter came in at $571.6 million, up 0.3% from the year-ago quarter. Adjusted gross margin also decreased 92 basis points (bps) on a year-over-year basis to 41.9%, primarily due to unfavorable product mix.

SanDisk’s adjusted operating expenses decreased 19.7% year over year to $380.9 million. As a percentage of revenues, operating expenses were also down 770 bps from the year-ago quarter.

The company reported operating profit (including stock-based compensation but excluding other one-time items) of $190.7 million, up 99.5% from the year-ago quarter. Moreover, operating margin increased from 7.2% in the year-ago period to 13.9%.

Excluding the amortization of acquisition-related intangible assets, Western Digital acquisition-related expenses, convertible debt interest expense and related tax adjustments but including stock-based compensation expense, net income for the first quarter came in at approximately $135.1 million compared with $109.6 million in the year-ago quarter.

On a GAAP basis, net income during the quarter came in at $78.4 million compared with $39 million in the year-ago period.

Balance Sheet & Cash Flow

Cash and short-term investments were $4.52 billion compared with $4 billion in the previous quarter. Long-term marketable securities were $112.2 million. SanDisk had $2.18 billion of convertible long-term debt (including current portion) in its balance sheet.

SanDisk generated $355.1 million in cash from operating activities compared with $433.9 million in the prior quarter. Free cash flow for the quarter was negative $484 million.

Our Take

SanDisk posted better-than-expected first-quarter 2016 results, exceeding the Zacks Consensus Estimate on both counts. Retails channels and growth in client SSDs were positives in the quarter. Also, year-over-year comparisons on both counts were favorable.

Going further, the strategic acquisitions of Fusion-io Inc and SMART Storage Systems are expected to expand SanDisk’s offerings in the Enterprise SSD segment.

It is also worth mentioning that SanDisk is going to be acquired by Western Digital Corp. WDC. We believe that this acquisition offers a smart exit to SanDisk’s shareholders and will make Western Digital the world’s largest flash storage solution provider.

Currently, SanDisk has a Zacks Rank #3 (Hold).

Better-ranked stocks in the technology sector include Facebook, Inc. FB and Intuit Inc. INTU, both sporting a Zacks Rank #1 (Strong Buy).

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WESTERN DIGITAL (WDC): Free Stock Analysis Report
 
INTUIT INC (INTU): Free Stock Analysis Report
 
SANDISK CORP (SNDK): Free Stock Analysis Report
 
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