SanDisk's CEO Discusses Q1 2012 Results - Earnings Call Transcript

SanDisk (SNDK)

Q1 2012 Earnings Call

April 19, 2012 5:00 pm ET

Executives

Jay Iyer -

Sanjay Mehrotra - Co-Founder, Chief Executive Officer, President, Director and Member of Special Option Committee

Judy Bruner - Chief Financial Officer, Executive Vice President of Administration and Member of Secondary Executive Committee

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

Craig A. Ellis - Caris & Company, Inc., Research Division

Daniel A. Berenbaum - MKM Partners LLC, Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Sidney Ho - Nomura Securities Co. Ltd., Research Division

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Ryan Goodman - CLSA Asia-Pacific Markets, Research Division

Bobby Gujavarty - Deutsche Bank AG, Research Division

Betsy Van Hees - Wedbush Securities Inc., Research Division

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Mark C. Newman - Sanford C. Bernstein & Co., LLC., Research Division

Presentation

Operator

Good day, everyone, and welcome to the SanDisk Corporation's First Quarter 2012 Financial Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Jay Iyer with Investor Relations. Please go ahead, sir.

Jay Iyer

Thank you, Jaimie, and good afternoon, everyone. Joining us on the call today are Sanjay Mehrotra, President and CEO of SanDisk; and Judy Bruner, Executive Vice President of Administration and CFO.

Before we begin, please note that any non-GAAP financial measures discussed during this call as defined by the SEC in Regulation G will be reconciled to the most directly comparable GAAP financial measure. That reconciliation is now available, along with supplemental schedules on our website at sandisk.com/ir. Please note that non-GAAP to GAAP reconciliation tables for all applicable guidance will be posted on our website. This guidance is exclusive of any onetime transactions and does not reflect the effect of any acquisitions, divestitures or similar transactions that may be completed after April 19, 2012.

In addition, during our call today, we will make forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in the documents we file from time to time with the SEC, including our Annual Report on Form 10-K for fiscal 2011 and our subsequent quarterly reports on Form 10-Q. SanDisk assumes no obligation to update these forward-looking statements that speak as of their respective dates.

With that, I will turn the call over to Sanjay.

Sanjay Mehrotra

Thank you, Jay. Good afternoon, everyone. I will focus most of my remarks today on describing the key developments we are seeing in the industry and factors in our business that are causing our results to be less than we had anticipated, as well as how we are addressing these developments. We now believe the industry experienced an imbalance between supply and demand in the first quarter, and we believe this imbalance is likely to continue through the second quarter of 2012. Industry demand has been weaker than we had expected, and we believe supplies have increased more than we had estimated at the beginning of the year. This led to greater-than-expected price decline, particularly in the second half of the first quarter, impacting our revenue and gross margin. As we look into the second half of the year, we believe the ramp of new smartphones, tablets, ultrabooks and Enterprise solid state drives, along with stronger seasonality, should lead to an improved demand environment. With this demand, coupled with a modest wafer capacity growth expected within the industry for the remainder of the year, we expect a better supply-demand environment in the second half of 2012.

For SanDisk, our first quarter results were impacted by 2 key factors: greater-than-expected price decline; and slower-than-expected demand for mobile cards from certain OEM customers with whom we have high shares. If you recall, steeper industry price declines for certain products began to be reported in the late part of the fourth quarter of 2011, indicating the existence of some excess supply, which continued in the seasonally weak quarter. We had expected pricing trends to moderate later in the first quarter, but instead, the rate of price decline accelerated even more. Despite the weaker demand for OEM mobile cards, the diversity of our customer base enabled us to allocate more products towards the demand from our white label customers. As such, we met our first quarter petabyte and unit sales objective. However, the different mix of sales than we had originally planned contributed to our weak first quarter results.

I would like to comment on aspects of card demand as we have observed at some of our mobile OEM customers. As a part of offerings and the competitive environment for mobile phones continues to evolve at a rapid pace, some handset OEMs recently began to adjust their bill of materials, resulting in the lower rate of OEM card bundling, as well as a reduction in bundled card capacity. It is too soon to determine whether this is temporary or a longer-term trend, and we are monitoring it carefully. While we are maintaining our market share of bundled mobile OEM cards, we believe that the overall industry demand for OEM bundled cards has been somewhat below previous expectations and has contributed to the supply-demand imbalance in the first half of this year. However, we also believe that lower card bundling rates for slotted phones could translate into expanded opportunities for the retail channel at potentially higher unit capacities.

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