SNDK Lays Another Egg

Updated from 4:51 p.m. EDT on April 16.

SanDisk (SNDK - commentary - Cramer's Take) reported first-quarter 2008 results Thursday after the close that were lukewarm at best, and guidance for the June quarter was a mixed bag.

Total revenue in the quarter was $850 million (up 8% year over year but down 32% quarter over quarter), with pro forma EPS of 21 cents (GAAP = 8 cents). Product revenue (around 85% of total) increased 5% year over year and declined 35% quarter over quarter. Revenue from royalties was $126 million, up 30% from last year and down 2% sequentially. The pro forma gross margin on products in the period was 30.4%, up 540 basis points year over year but down 510 basis points versus the fourth quarter. The operating margin was 0.6% vs. a loss last year but down more than 1,300 basis points sequentially.

Cash from operations was about $220 million vs. last year's $255 million. The cash and equivalents increased about $20 million and stands at about $1.85 billion. Accounts receivable declined a very strong $280 million, with days sales outstanding down 14 days, to 19 days. Conversely, inventory exploded by about $140 million, with days of inventory up to 106 days vs. 62 days last quarter and 90 days last year. Channel inventory was said to be about seven weeks, which was characterized as "healthy" despite the fact that it is up one week sequentially.

Within its two principle business segments, retail (just over half of product revenue) was $418 million, up 22% year over year but down 42% quarter over quarter. OEM revenue was $306 million, down 14% from last year and 22% sequentially. Megabytes shipped were up 189% from a year ago but down 9% from fourth-quarter levels. Unfortunately, ASPs were down 61% year over year and 29% sequentially.

The "explosion" of inventory was due to the ramp up of Fab 4 ahead of its original schedule. While this actually added to the gross margin during the period, it will also lead to expanding inventory in second quarter as well.

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At the time of publication, Faulkner had no position in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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