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| SNDK > SEC Filings for SNDK > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
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" in Part II, Item 1A of this report, and elsewhere in this report. Our business, financial condition or results of operations could be materially adversely affected by any of these or other 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. 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. Flash storage technology allows data to be stored in a durable, compact format that retains the digital information even after the power has been switched off. Our mission is to provide simple, reliable and affordable storage at different capacities for consumer use in a wide variety of formats and devices. We sell flash memory 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 flash venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading-edge, low-cost memory wafers. Our card products are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. We produce Universal Serial Bus, or USB, drives, and MP3 players as well as embedded flash storage products that are used in a variety of systems for the enterprise, industrial, military and other markets. We also provide high-speed and high-capacity storage solutions, known as solid-state drives, or SSDs, that can be used in lieu of hard disk drives in a variety of computing devices, including personal computers and enterprise servers.
Our strategy is to be an industry-leading supplier of flash storage solutions and to develop large scale markets for flash-based storage products. We maintain our technology leadership by investing in advanced technologies and flash memory fabrication capacity in order to produce leading-edge, low-cost flash memory for use in end-products that we design and market. We are a one-stop-shop for our retail and OEM customers, selling all major flash storage card formats for our target markets in high volumes.
Our revenues are driven by the sale of our products and the licensing of our intellectual property. We believe the market for flash storage is price elastic, meaning that a decrease in the price per megabyte results in demand for higher capacity products and the emergence of new applications for flash storage. We continuously reduce the cost of NAND flash memory, which we believe over time will enable new markets and expand existing markets and allow us to achieve higher overall revenue. We seek to achieve these cost reductions through technology improvements, primarily by increasing the amount of memory stored in a given area of silicon.
Effective December 29, 2008, we implemented a change in accounting and have separately accounted for the liability and equity components of our 1% Senior Convertible Note due 2013 that may be settled in cash upon conversion (including partial cash settlement) in a manner that reflects our economic interest cost. Accordingly, we bifurcated the debt into debt and equity components and will amortize the debt discount that will result in the "economic interest cost" being reflected in our Condensed Consolidated Statements of Operations. We have retrospectively applied the change in accounting to all periods presented, and have recast the Condensed Consolidated Financial Statements presented in this report.
Results of Operations.
Three months ended Nine months ended
September 27, % of September 28, % of September 27, % of September 28, % of
2009 Revenues 2008 Revenues 2009 Revenues 2008 Revenues
(In millions, except percentages)
Product revenues $ 813.8 87.0 % $ 689.6 83.9 % $ 2,012.3 86.5 % $ 2,101.1 84.5 %
License and royalty
revenues 121.4 13.0 % 131.9 16.1 % 312.9 13.5 % 386.4 15.5 %
Total revenues 935.2 100.0 % 821.5 100.0 % 2,325.2 100.0 % 2,487.5 100.0 %
Cost of product revenues 495.8 53.0 % 812.8 98.9 % 1,631.7 70.2 % 2,040.0 82.0 %
Amortization of
acquisition-related
intangible assets 3.1 0.3 % 14.6 1.8 % 9.4 0.4 % 43.8 1.8 %
Total cost of product
revenues 498.9 53.3 % 827.4 100.7 % 1,641.1 70.6 % 2,083.8 83.8 %
Gross profit (loss) 436.3 46.7 % (5.9 ) (0.7 %) 684.1 29.4 % 403.7 16.2 %
Operating expenses
Research and development 94.9 10.2 % 104.6 12.7 % 273.0 11.7 % 328.1 13.2 %
Sales and marketing 55.8 6.0 % 87.8 10.7 % 144.0 6.2 % 245.6 9.9 %
General and administrative 45.3 4.8 % 47.1 5.7 % 122.3 5.3 % 158.6 6.4 %
Amortization of
acquisition-related
intangible assets 0.3 0.0 % 4.8 0.6 % 0.9 0.0 % 13.8 0.5 %
Restructuring and other ? 0.0 % ? 0.0 % 0.8 0.0 % 4.1 0.1 %
Total operating expenses 196.3 21.0 % 244.3 29.7 % 541.0 23.2 % 750.2 30.1 %
Operating income (loss) 240.0 25.7 % (250.2 ) (30.4 %) 143.1 6.2 % (346.5 ) (13.9 %)
Other income (expense) (2.6 ) (0.3 %) (12.9 ) (1.6 %) (16.6 ) (0.7 %) 9.3 0.3 %
Income (loss) before
income taxes 237.4 25.4 % (263.1 ) (32.0 %) 126.5 5.5 % (337.2 ) (13.6 %)
Provision for (benefit
from) income taxes 6.1 0.7 % (97.2 ) (11.8 %) 50.7 2.2 % (108.5 ) (4.4 %)
Net income (loss) $ 231.3 24.7 % $ (165.9 ) (20.2 %) $ 75.8 3.3 % $ (228.7 ) (9.2 %)
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Product Revenues.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Retail $ 357.6 $ 433.1 (17.4 %) $ 1,062.0 $ 1,272.8 (16.6 %)
OEM 456.2 256.5 77.9 % 950.3 828.3 14.7 %
Product revenues $ 813.8 $ 689.6 18.0 % $ 2,012.3 $ 2,101.1 (4.2 %)
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The increase in our product revenues for the three months ended September 27, 2009, as compared to the three months ended September 28, 2008, resulted from a 107% increase in the number of gigabytes sold, partially offset by a 43% reduction in average selling price per gigabyte. The decrease in our product revenues for the nine months ended September 27, 2009, as compared to the nine months ended September 28, 2008, resulted from a 126% increase in the number of gigabytes sold, more than offset by a 57% reduction in average selling price per gigabyte. Memory units sold were up 31% and 16% for the three and nine months ended September 27, 2009, respectively, compared to the prior year periods.
The decline in retail product revenues for the three and nine months ended September 27, 2009, versus the comparable period in fiscal year 2008, was due to price declines not fully offset by a higher number of gigabytes sold. This was primarily attributable to a weak worldwide consumer spending environment.
The increase in OEM product revenues for the three and nine months ended September 27, 2009, versus the comparable period in fiscal year 2008, was due to increased sales of cards and embedded products primarily in the mobile phone markets and increased sales to new OEM channels, including the sale of private label cards, wafers and components.
Our ten largest customers represented approximately 46% and 43% of our total revenues in the three and nine months ended September 27, 2009, respectively, compared to 49% and 47% in the three and nine months ended September 28, 2008, respectively. Revenue from Samsung Electronics Co. Ltd., or Samsung, which included both license and royalty revenues and product revenues, accounted for 11% of our total revenues in the three and nine months ended September 27, 2009, respectively, and 13% of our total revenues in the three and nine months ended September 28, 2008, respectively. No other customer exceeded 10% of our total revenues during these periods.
Geographical Product Revenues.
Three months ended Nine months ended
September 27, % of Product September 28, % of Product Percent September 27, % of Product September 28, % of Product Percent
2009 Revenues 2008 Revenues Change 2009 Revenues 2008 Revenues Change
(In millions, except percentages)
United States $ 211.8 26.0 % $ 235.5 34.1 % (10.0 %) $ 654.0 32.5 % $ 706.4 33.6 % (7.4 %)
Japan 61.4 7.6 % 44.8 6.5 % 37.3 % 111.5 5.5 % 146.4 7.0 % (23.8 %)
Europe, Middle East & Africa 161.1 19.8 % 170.1 24.7 % (5.3 %) 464.1 23.1 % 539.7 25.7 % (14.0 %)
Asia-Pacific 351.9 43.2 % 220.0 31.9 % 59.9 % 733.6 36.5 % 658.7 31.3 % 11.4 %
Other foreign countries 27.6 3.4 % 19.2 2.8 % 43.8 % 49.1 2.4 % 49.9 2.4 % (1.6 %)
Product revenues $ 813.8 100.0 % $ 689.6 100.0 % 18.0 % $ 2,012.3 100.0 % $ 2,101.1 100.0 % (4.2 %)
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Product revenue decreased in the United States and Europe, Middle East and Africa, or EMEA, for the three and nine months ended September 27, 2009, versus the comparable periods in fiscal year 2008, primarily due to a weak consumer spending environment. Product revenues in Japan increased for the three months ended September 27, 2009, versus the comparable periods in fiscal year 2008, due primarily to an increase in the sale of gaming cards in the OEM channel. Product revenues in Japan decreased for the nine months ended September 27, 2009, versus the comparable periods in fiscal year 2008, due to a weak consumer spending environment and a reduction in sales of gaming cards in the first half of fiscal 2009. Product revenues in Asia-Pacific increased for the three months and nine months ended September 27, 2009, versus the comparable periods in fiscal year 2008, primarily due to growth in the OEM channel for the mobile phone markets and growth in the sale of private label cards, wafers and components.
License and Royalty Revenues.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
License and royalty revenues $ 121.4 $ 131.9 (8.0 %) $ 312.9 $ 386.4 (19.0 %)
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The decrease in our license and royalty revenues for the three and nine months ended September 27, 2009, versus the comparable period of fiscal year 2008,was primarily due to lower flash memory revenues reported by our licensees partially offset by new licensees. In addition, the first quarter of fiscal year 2009 royalty revenues were reduced by a prior period adjustment identified by a licensee. The licensee claimed that they incorrectly computed certain royalties for periods prior to fiscal year 2008, and this amount was offset against current payments. Beginning in the fourth quarter of fiscal year 2009, we expect our license and royalty revenues will decline due to a new license agreement with an existing licensee at a lower effective royalty rate as compared to the previous license agreement.
Gross Profit and Margin.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Product gross profit $ 314.9 $ (137.9 ) 328.4 % $ 371.3 $ 17.4 2033.9 %
Product gross margin (as
a percent of product
revenues) 38.7 % (20.0 %) 18.4 % 0.8 %
Total gross margin (as a
percent of total
revenues) 46.7 % (0.7 %) 29.4 % 16.2 %
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Product gross profit and margin for the three and nine months ended September 27, 2009, was higher than the comparable period of fiscal year 2008, due to manufacturing costs declining faster than prices and a net benefit of approximately $139 million and $256 million, respectively, primarily from the sale of inventory which had been previously partially reserved. Product gross margin for the three and nine months ended September 28, 2008 was negative due to aggressive industry price declines and related lower-of-cost or market inventory charges.
Research and Development.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Research and development $ 94.9 $ 104.6 (9.3 %) $ 273.0 $ 328.1 (16.8 %)
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Our research and development expense reduction for the three months ended September 27, 2009, versus the comparable period in fiscal year 2008, was due primarily to lower employee-related costs of ($3.7) million related to decreased headcount and lower share-based compensation expense, and lower usage of third-party engineering services of ($4.5) million.
Our research and development expense reduction for the nine months ended September 28, 2009, versus the comparable period in fiscal year 2008, was due primarily to lower employee-related costs of ($20.1) million related to decreased headcount and lower share-based compensation expense, and lower usage of third-party engineering services of ($31.9) million.
Sales and Marketing.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Sales and marketing $ 55.8 $ 87.8 (36.4 %) $ 144.0 $ 245.6 (41.4 %)
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Our sales and marketing expense reduction for the three months ended September 27, 2009, versus the comparable period in fiscal year 2008, was primarily due to decreased branding and merchandising costs of ($26.4) million and lower outside service costs of ($4.5) million.
Our sales and marketing expense reduction for the nine months ended September 28, 2009, versus the comparable period in fiscal year 2008, was primarily due to decreased branding and merchandising costs of ($74.7) million, lower outside service costs of ($17.1) million, and lower employee-related expenses of ($6.5) million related primarily to decreased headcount and lower share-based compensation expense.
General and Administrative.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
General and administrative $ 45.3 $ 47.1 (3.8 %) $ 122.3 $ 158.6 (22.9 %)
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Our general and administrative expense reduction for the three months ended September 27, 2009, versus the comparable period in fiscal year 2008, was primarily related to lower legal and outside advisors costs of ($5.9) million offset by higher bad debt expense of $3.2 million.
Our general and administrative expense reduction for the nine months ended September 28, 2009, versus the comparable period in fiscal year 2008, was primarily related to lower legal and outside advisors costs of ($27.6) million, lower employee-related costs of ($6.7) million due to decreased headcount and lower share-based compensation expense, and lower bad debt expense of ($4.5) million.
Amortization of Acquisition-Related Intangible Assets.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Amortization of
acquisition-related
intangible assets $ 0.3 $ 4.8 (93.8 %) $ 0.9 $ 13.8 (93.5 %)
Percent of revenue 0.0 % 0.6 % 0.0 % 0.5 %
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Amortization of acquisition-related intangible assets was lower in the three and nine months ended September 27, 2009, compared to the three months ended September 28, 2008, due to the impairment of certain Matrix Semiconductor, Inc. and msystems Ltd. acquisition-related intangible assets in the fourth quarter of fiscal year 2008.
Restructuring and Other.
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Restructuring and others $ - $ - - $ 0.8 $ 4.1 (80.5 %)
Percent of revenue - - 0.0 % 0.1 %
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For the three and nine months ended September 27, 2009, we recorded zero and $0.8 million related to employee severance costs under our restructuring plans compared to zero and $4.1 million recorded for the same periods in fiscal year 2008, respectively. See Note 9, "Restructuring Plans," of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
Other Income (Expense).
Three months ended Nine months ended
September 27, September 28, Percent September 27, September 28, Percent
2009 2008 Change 2009 2008 Change
(In millions, except percentages)
Interest income $ 14.0 $ 26.0 (46.2 %) $ 47.4 $ 75.0 (36.8 %)
Interest expense (17.6 ) (16.6 ) 6.0 % (51.8 ) (49.1 ) (5.5 %)
Income (loss) from equity
investments (2.1 ) (0.6 ) 250.0 % ? 0.3 (100.0 %)
Other income (expense),
net 3.1 (21.7 ) (114.3 %) (12.2 ) (16.9 ) 28.4 %
Total other income
(expense), net $ (2.6 ) $ (12.9 ) 79.8 % $ (16.6 ) $ 9.3 (278.5 %)
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The decrease in total Other income (expense) for the three and nine months ended September 27, 2009, versus the comparable period in fiscal year 2008, was primarily due to lower interest income of ($12.0) million and ($27.6) million, respectively, as a result of reduced interest rates. Other income (expense) for the nine months ended September 27, 2009 included transaction costs of ($10.9) million related to the sale of equipment and transfer of lease obligations resulting from the restructuring of Flash Partners Ltd., or Flash Partners, and Flash Alliance Ltd., or Flash Alliance, hereinafter collectively referred to as Flash Ventures. Other income (expense) for the three and nine months ended September 28, 2008 included impairment charges of our investment in Tower Semiconductor Ltd., or Tower, of ($11.7) million and impairment charges of our investment in FlashVision Ltd., or FlashVision, of ($10.4) million.
Provision for Income Taxes. . . . |
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