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| SNDK > SEC Filings for SNDK > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Statements in this report, which are not historical facts, are forward-looking statements within the meaning of the federal securities laws. These statements may contain words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or other wording indicating future results or expectations. Forward-looking statements are subject to significant risks and uncertainties. Our actual results may differ materially from the results discussed in these forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under "Risk Factors" and elsewhere in this report. Our business, financial condition or results of operations could be materially adversely affected by any of these factors. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report, except as required by law. References in this report to "SanDiskŪ," "we," "our," and "us" refer collectively to SanDisk Corporation, a Delaware corporation, and its subsidiaries.
Overview
We are the inventor of and worldwide leader in NAND-based flash storage cards. Our mission is to provide simple, reliable and affordable storage for consumer use in portable devices. We sell SanDisk branded products for consumer electronics through broad global retail and original equipment manufacturer, or OEM, distribution channels.
We design, develop and manufacture products and solutions in a variety of form factors using our flash memory, controller and firmware technologies. We source the vast majority of our flash memory supply through our significant venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading edge low-cost memory wafers. Our cards are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. We also produce Universal Serial Bus, or USB, drives, MP3 players and other flash storage products that are embedded in a variety of systems for the enterprise, industrial, military and other markets.
Our results are primarily driven by worldwide demand for flash storage devices, which in turn depends on end-user demand for electronic products. We believe the market for flash storage is generally price elastic. Accordingly, we expect that as we reduce the price of our flash devices, consumers will demand an increasing number of gigabytes and/or units of memory and that over time, new markets will emerge. In order to profitably capitalize on price elasticity of demand in the market for flash storage products, we must reduce our cost per gigabyte at a rate similar to the change in selling price per gigabyte to the consumer and the average capacity of our products must grow enough to offset price declines. We seek to achieve these cost reductions through technology improvements primarily by increasing the amount of memory stored in a given area of silicon.
We adopted Statement of Financial Accounting Standards No. 157, or SFAS 157, Fair Value Measurements, as of the beginning of fiscal year 2008. In February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have only adopted the provisions of SFAS 157 with respect to our financial assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition. See Note 2, "Fair Value Measurements," in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q.
We adopted Statement of Financial Accounting Standards No. 159, or SFAS 159, Establishing the Fair Value Option for Financial Assets and Liabilities, which permits entities to elect, at specified election dates, to measure eligible financial instruments at fair value. As of September 28, 2008, we did not elect the fair value option for any financial assets and liabilities that were not previously measured at fair value. See Note 2, "Fair Value Measurements," in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q.
Results of Operations.
Three months ended Nine months ended
September 28, % of September 30, % of September 28, % of September 30, % of
2008 Revenues 2007 Revenues 2008 Revenues 2007 Revenues
(In millions, except percentages)
Product revenues $ 689.6 83.9 % $ 918.8 88.6 % $ 2,101.1 84.5 % $ 2,328.1 87.8 %
License and royalty revenues 131.9 16.1 % 118.6 11.4 % 386.4 15.5 % 322.4 12.2 %
Total revenues 821.5 100.0 % 1,037.4 100.0 % 2,487.5 100.0 % 2,650.5 100.0 %
Cost of product revenues 812.8 98.9 % 680.5 65.6 % 2,040.0 82.0 % 1,839.3 69.4 %
Amortization of acquisition-related intangible assets 14.6 1.8 % 14.6 1.4 % 43.8 1.8 % 50.2 1.9 %
Total cost of product revenues 827.4 100.7 % 695.1 67.0 % 2,083.8 83.8 % 1,889.5 71.3 %
Gross profit (loss) (5.9 ) (0.7 %) 342.3 33.0 % 403.7 16.2 % 761.0 28.7 %
Operating expenses
Research and development 104.6 12.7 % 110.5 10.7 % 328.1 13.2 % 307.4 11.6 %
Sales and marketing 87.8 10.7 % 72.5 7.0 % 245.6 9.9 % 189.2 7.1 %
General and administrative 47.1 5.7 % 45.6 4.4 % 158.6 6.4 % 133.8 5.1 %
Amortization of acquisition-related intangible assets 4.8 0.6 % 4.6 0.4 % 13.8 0.5 % 20.7 0.8 %
Restructuring - - - - 4.1 0.1 % 6.7 0.2 %
Total operating expenses 244.3 29.7 % 233.2 22.5 % 750.2 30.1 % 657.8 24.8 %
Operating income (loss) (250.2 ) (30.4 %) 109.1 10.5 % (346.5 ) (13.9 %) 103.2 3.9 %
Other income (expense) (0.4 ) (0.1 %) 29.2 2.8 % 46.0 1.8 % 104.0 3.9 %
Income (loss) before taxes (250.6 ) (30.5 %) 138.3 13.3 % (300.5 ) (12.1 %) 207.2 7.8 %
Provision for (benefit from) income taxes (95.4 ) (11.6 %) 53.7 5.1 % (95.3 ) (3.8 %) 89.5 3.4 %
Minority interest - - - - - - 5.2 0.1 %
Net income (loss) $ (155.2 ) (18.9 %) $ 84.6 8.2 % $ (205.2 ) (8.3 %) $ 112.5 4.3 %
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Product Revenues.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
Retail $ 433.1 $ 607.7 (28.7 )% $ 1,272.8 $ 1,436.0 (11.4 %)
OEM 256.5 311.1 (17.6 %) 828.3 892.1 (7.2 %)
Product revenues $ 689.6 $ 918.8 (25.0 %) $ 2,101.1 $ 2,328.1 (9.8 %)
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The decrease in our product revenues for the three months ended September 28, 2008 as compared to the three months ended September 30, 2007 resulted from a 63% reduction in average selling price per gigabyte, partially offset by a 105% increase in the number of gigabytes sold. The decrease in our product revenues for the nine months ended September 28, 2008 as compared to the nine months ended September 30, 2007 resulted from a 59% reduction in average selling price per gigabyte, partially offset by a 127% increase in the number of gigabytes sold. Price declines in fiscal year 2008 have been steep due to industry-wide supply and demand imbalance.
The decline in retail product revenues for the three and nine months ended September 28, 2008 versus the comparable periods in fiscal year 2007 was due to minimal growth in unit demand more than offset by aggressive price declines.
Original equipment manufacturer, or OEM, product revenues for the three months ended September 28, 2008 decreased versus the comparable period in fiscal year 2007 primarily due to price declines more than offsetting unit growth. OEM product revenues for the nine months ended September 28, 2008 were lower than the comparable period in fiscal year 2007 due to price declines more than offsetting unit growth and the discontinuation of our TwinSys LLC operations on March 31, 2007, which contributed $53.0 million of product revenues in the first quarter of fiscal year 2007 prior to ceasing operations.
Our ten largest customers represented approximately 49% and 47% of our total revenues in the three and nine months ended September 28, 2008, respectively, compared to 44% and 47% in the three and nine months ended September 30, 2007. In the three and nine months ended September 28, 2008, revenue from Samsung Electronics Co. Ltd., or Samsung, which included both license and royalty revenues and product revenues, accounted for 13% of our total revenues in each period, respectively. No other customer exceeded 10% of our total revenues during those periods. No customer exceeded 10% of our total revenues in the three months ended September 30, 2007. Customers who exceeded 10% of our total revenues in the nine months ended September 30, 2007 were Sony Ericsson Mobile Communications AB, or Sony Ericsson, and Samsung, each of which were 10% of our total revenues.
Geographical Product Revenues.
Three months ended Nine months ended
September 28, % of Product September 30, % of Product Percent September 28, % of Product September 30, % of Product Percent
2008 Revenues 2007 Revenues Change 2008 Revenues 2007 Revenues Change
(In millions, except percentages)
United States $ 235.5 34.1 % $ 278.2 30.3 % (15.4 %) $ 706.4 33.6 % $ 745.0 32.0 % (5.2 %)
Japan 44.8 6.5 % 62.3 6.8 % (28.2 %) 146.4 7.0 % 215.7 9.3 % (32.1 %)
Europe and Middle East 170.1 24.7 % 281.0 30.6 % (39.5 %) 539.7 25.7 % 610.1 26.2 % (11.5 %)
Asia-Pacific 220.0 31.9 % 273.3 29.7 % (19.5 %) 658.7 31.3 % 654.7 28.1 % 0.6 %
Other foreign countries 19.2 2.8 % 24.0 2.6 % (19.8 %) 49.9 2.4 % 102.6 4.4 % (51.4 %)
Product revenues $ 689.6 100.0 % $ 918.8 100.0 % (25.0 %) $ 2,101.1 100.0 % $ 2,328.1 100.0 % (9.8 %)
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Product revenues declined in all regions for the three months ended September 28, 2008 versus the comparable period in fiscal year 2007 due to aggressive industry price declines as well as unit sales declines in Europe and Japan. Regional declines in product revenues for the nine months ended September 28, 2008 were due primarily to aggressive industry price declines partially offset by unit sales growth in all regions except Japan. The decline in Japan was primarily due to the termination of the TwinSys LLC venture on March 31, 2007, which contributed $53.0 million of product revenues in the nine months ended September 30, 2007.
License and Royalty Revenues.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
License and royalty revenues $ 131.9 $ 118.6 11.2 % $ 386.4 $ 322.4 19.9 %
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The increase in our license and royalty revenues for the three and nine months ended September 28, 2008 over the comparable periods of fiscal year 2007 was due to higher NAND-based royalties and the addition of new licensees.
Gross Profit (Loss) and Margin.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
Product gross profit (loss) $ (137.9 ) $ 223.7 (161.6 %) $ 17.4 $ 438.6 (96.0 %)
Product gross margin (as a percent of product
revenues) (20.0 %) 24.4 % 0.8 % 18.8 %
Total gross margin (as a percent of total
revenues) (0.7 %) 33.0 % 16.2 % 28.7 %
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Product gross margin for the three months ended September 28, 2008 was negative and lower than the comparable period of fiscal year 2007 due primarily to aggressive industry price declines resulting in the sale of products below cost and related lower-of-cost or market and excess inventory charges of $109.0 million for both inventory on-hand and in the channel.
Product gross margin for the nine months ended September 28, 2008 was lower than the comparable period of fiscal year 2007 due primarily to aggressive price declines resulting in the sale of products below cost in the third quarter of fiscal year 2008, lower-of-cost or market and excess inventory charges for both inventory on-hand and in the channel, and decline of the U.S. dollar to Japanese yen exchange rate.
In the three and nine months ended September 28, 2008 and September 30, 2007, we sold approximately $16.3 million, $27.1 million, $9.3 million and $10.2 million, respectively, of inventory that had been fully written-off or reserved.
Research and Development.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
Research and development $ 104.6 $ 110.5 (5.4 %) $ 328.1 $ 307.4 6.8 %
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Our reduction in research and development expense for the three months ended September 28, 2008 versus the comparable period in fiscal year 2007 was due primarily to lower Flash Alliance start-up costs of $7.9 million.
Our research and development expense growth for the nine months ended September 28, 2008 versus the comparable period in fiscal year 2007 included increased employee-related costs of $8.9 million and increased engineering consulting, material and equipment costs of $14.5 million and $9.3 million of increases in other engineering costs, partially offset by lower Flash Alliance start-up costs of $11.9 million.
Sales and Marketing.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
Sales and marketing $ 87.8 $ 72.5 21.3 % $ 245.6 $ 189.2 29.9 %
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Our sales and marketing expense growth for the three months ended September 28, 2008 over the comparable period in fiscal year 2007 was primarily due to increased branding and merchandising costs of $15.9 million.
Our sales and marketing expense growth for the nine months ended September 28, 2008 over the comparable period in fiscal year 2007 was primarily due to increased branding and merchandising costs of $48.1 million and increased employee-related costs of $5.2 million.
General and Administrative.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
General and administrative $ 47.1 $ 45.6 3.3 % $ 158.6 $ 133.8 18.6 %
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Our general and administrative expense growth for the three months ended September 28, 2008 over the comparable period in fiscal year 2007 was primarily related to increased legal and outside advisor costs of $6.4 million, partially offset by lower employee-related costs of $2.2 million and lower bad debt expense of $2.2 million.
Our general and administrative expense growth for the nine months ended September 28, 2008 over the comparable period in fiscal year 2007 was primarily related to increased legal and outside advisor costs of $23.7 million and bad debt expense of $3.2 million, offset by lower employee-related costs of $2.1 million.
Amortization of Acquisition-Related Intangible Assets.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
Amortization of acquisition-related intangible assets $ 4.8 $ 4.6 3.6 % $ 13.8 $ 20.7 (33.5 %)
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Amortization of acquisition-related intangible assets was lower in the three and nine months ended September 28, 2008 compared to the three and nine months ended September 30, 2007, due to intangibles that were fully amortized in fiscal year 2007. Our expense from the amortization of acquisition-related intangible assets was primarily related to our acquisitions of Matrix Semiconductor, Inc. in January 2006 and msystems Ltd. in November 2006.
Net acquisition-related intangible assets at September 28, 2008 were $243.3 million. If we are required to evaluate our goodwill under a Step 2 analysis as defined by Statement of Financial Accounting Standard No. 142, or SFAS 142, Goodwill and Other Intangible Assets, we will also be required to evaluate our intangible assets for impairment under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Any potential impairment of intangible assets would increase expenses in a current period and decrease expenses in subsequent periods. See Note 4, "Goodwill and Other Intangible Assets," in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q.
Restructuring.
Three months ended Nine months ended
September 28, September 30, Percent September 28, September 30, Percent
2008 2007 Change 2008 2007 Change
(In millions, except percentages)
Restructuring $ - $ - - $ 4.1 $ 6.7 (39.2 %)
Percent of revenue - 0.1 % 0.2 %
During the second quarter of fiscal year 2008, we implemented a restructuring
plan in order to reduce our cost structure, which included reductions of our
workforce in all functions of the organization worldwide.
As a result of our second quarter of fiscal year 2008 restructuring plan, we
expect to reduce our annual spending by approximately $15.2 million, of which
approximately 26%, 17%, 41% and 16% will be reflected as a reduction in
operations, research and development expense, sales and marketing expense, and
general and administrative expense, respectively.
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