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SNDK > SEC Filings for SNDK > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for SANDISK CORP


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, and elsewhere in this report. Our business, financial condition or results of operations could be materially harmed 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 a global leader in flash memory storage solutions. Our goal is to provide simple, reliable and affordable storage solutions for consumer and enterprise use in a wide variety of formats and devices. We sell our products globally to original equipment manufacturers, or OEMs, and retail customers.

We design, develop and manufacture data storage solutions in a variety of form factors using our flash memory, proprietary controller and firmware technologies. We purchase the vast majority of our NAND flash memory supply requirements through our significant flash venture relationships with Toshiba Corporation, or Toshiba, which produce and provide us with leading-edge, low-cost memory wafers. Our removable card products are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. Our embedded flash products are also used in a wide range of products such as mobile phones, tablets, eReaders, ultrabooks, notebooks and other computing platforms, as well as global positioning system, or GPS, devices, gaming systems and imaging devices. For computing platforms, which include notebooks, desktop computers and servers, we provide high-speed, high-capacity storage solutions such as solid state drives, or SSDs, that can be used in lieu of hard disk drives.

Our strategy is to be an industry-leading supplier of NAND flash storage solutions and to develop large scale markets for NAND-based storage products. We intend to maintain our technology leadership by investing in advanced technologies and NAND flash memory fabrication capacity in order to produce leading-edge, low-cost NAND flash memory for use in a variety of end-products, including consumer, mobile phone and computing devices. We are a one-stop-shop for our OEM and retail customers, selling in high volumes all major NAND flash storage solutions for our target markets.

Our results are primarily driven by worldwide demand for flash storage devices, which in turn primarily depends on demand for consumer electronic products and for SSDs in computing devices and enterprise storage systems. We believe the markets for flash storage are generally price elastic, meaning that a decrease in the price per gigabyte results in increased demand for higher capacities and the emergence of new applications for flash storage. 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 this price elasticity, we must reduce our cost per gigabyte at a rate similar to the decrease in selling price per gigabyte, while at the same time increasing the average capacity and/or the number of product units sold. We continually seek to achieve these cost reductions through technology improvements, primarily by increasing the amount of memory stored in a given area of silicon.

Our industry is characterized by rapid technology transitions. Since our inception, we have been able to scale NAND flash technology through fifteen generations over approximately twenty-two years. However, the pace at which NAND flash technology is transitioning to new generations is expected to slow due to inherent physical technology limitations. We currently expect to be able to continue to scale our NAND flash technology through a few additional generations, but beyond that there is no certainty that further technology scaling can be achieved cost-effectively with the current NAND flash technology and architecture. We also continue to invest in future alternative technologies, including our 3-Dimensional resistive RAM, or 3D ReRAM, technology, which we believe may be a viable alternative to NAND flash technology, when NAND flash technology can no longer scale at a sufficient rate, or at all. We have made investments in Bit-cost scaleable 3-Dimensional NAND, or BiCS, and other technologies. We believe BiCS technology, if successful, could enable further memory cost reductions beyond the NAND roadmap. However, even when NAND flash technology can no longer scale further, we expect NAND flash technology and potential alternative technologies to coexist for an extended period of time.


Table of Contents

Results of Operations
                                              Three months ended                                                                 Nine months ended
                     September 30,                         October 2,                                   September 30,                         October 2,
                          2012          % of Revenues         2011          % of Revenues                    2012          % of Revenues         2011          % of Revenues
                                                                                (In millions, except percentages)
Product revenues    $      1,182.2           92.9 %      $     1,321.9           93.4 %                $      3,233.8           92.1 %      $     3,814.1           93.4 %
License and royalty
revenues                      91.0            7.1 %               94.1            6.6 %                         277.2            7.9 %              271.1            6.6 %
Total revenues             1,273.2          100.0 %            1,416.0          100.0 %                       3,511.0          100.0 %            4,085.2          100.0 %
Cost of product
revenues                     880.5           69.2 %              790.5           55.9 %                       2,398.1           68.3 %            2,281.3           55.8 %
Amortization of
acquisition-related
intangible assets              9.8            0.7 %               13.1            0.9 %                          32.7            0.9 %               26.5            0.7 %
Total cost of
product revenues             890.3           69.9 %              803.6           56.8 %                       2,430.8           69.2 %            2,307.8           56.5 %
Gross profit                 382.9           30.1 %              612.4           43.2 %                       1,080.2           30.8 %            1,777.4           43.5 %
Operating expenses
Research and
development                  150.3           11.8 %              135.3            9.6 %                         443.7           12.6 %              400.1            9.8 %
Sales and marketing           57.9            4.5 %               48.5            3.4 %                         159.2            4.5 %              144.2            3.5 %
General and
administrative                40.2            3.2 %               40.6            2.8 %                         110.5            3.2 %              116.0            2.8 %
Amortization of
acquisition-related
intangible assets              2.4            0.2 %                1.9            0.1 %                           6.7            0.2 %                2.7            0.1 %
Total operating
expenses                     250.8           19.7 %              226.3           15.9 %                         720.1           20.5 %              663.0           16.2 %
Operating income             132.1           10.4 %              386.1           27.3 %                         360.1           10.3 %            1,114.4           27.3 %
Other income
(expense), net               (13.7 )         (1.1 %)             (23.5 )         (1.7 %)                        (56.2 )         (1.6 %)             (56.2 )         (1.4 %)
Income before
income taxes                 118.4            9.3 %              362.6           25.6 %                         303.9            8.7 %            1,058.2           25.9 %
Provision for
income taxes                  41.9            3.3 %              129.3            9.1 %                         100.0            2.9 %              352.4            8.6 %
Net income          $         76.5            6.0 %      $       233.3           16.5 %                $        203.9            5.8 %      $       705.8           17.3 %



Product Revenues
                                              Three months ended                                          Nine months ended
                               September 30,       October 2,                              September 30,       October 2,
                                   2012               2011        Percent Change               2012               2011        Percent Change
                                                                    (In millions, except percentages)
OEM                          $         697.7     $      859.3          (18.8 %)          $       1,946.3     $    2,528.8          (23.0 %)
Retail                                 484.5            462.6            4.7 %                   1,287.5          1,285.3            0.2 %
Product revenues             $       1,182.2     $    1,321.9          (10.6 %)          $       3,233.8     $    3,814.1          (15.2 %)

The decrease in our product revenues for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was comprised of a decline in average selling price per gigabyte of 49%, partially offset by an increase in gigabytes sold of 76%. A primary factor in the decrease in product revenues was a steep rate of price decline in the nine months ended September 30, 2012, largely due to oversupply in the NAND industry in the first half of fiscal year 2012. OEM product revenues in the three months ended September 30, 2012 decreased compared to the three months ended October 2, 2011, due primarily to decreased sales of cards and embedded products for mobile devices, partially offset by increased sales of SSDs for the notebook market. Retail product revenues in the three months ended September 30, 2012 increased compared to the three months ended October 2, 2011, due primarily to higher sales of cards for mobile devices, and SSDs, partially offset by lower sales of cards for the imaging market and lower sales of audio/video products.


Table of Contents

The decrease in our product revenues for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was comprised of a decline in average selling price per gigabyte of 49%, partially offset by an increase in gigabytes sold of 65%. A primary factor in the decrease in product revenues was a steep rate of price decline in the nine months ended September 30, 2012 largely due to oversupply in the NAND industry in the first half of fiscal year 2012. OEM product revenues in the nine months ended September 30, 2012 decreased compared to the nine months ended October 2, 2011, due primarily to lower sales of cards and embedded products for mobile devices, and lower sales of wafers and components, partially offset by increased sales of SSDs for the server and notebook markets. Retail product revenues in the nine months ended September 30, 2012 increased compared to the nine months ended October 2, 2011, due primarily to higher sales of cards for mobile devices, as well as SSDs and USB drives, partially offset by lower sales of cards for the imaging market, and lower sales of audio/video products.

Our ten largest customers represented approximately 46% and 40% of our total revenues in the three and nine months ended September 30, 2012, respectively, compared to 48% and 50% in the three and nine months ended October 2, 2011, respectively. One customer represented 16% of our total revenues in the three months ended September 30, 2012 and no customer exceeded 10% of our total revenues during the nine months ended September 30, 2012. No customer exceeded 10% of our total revenues during the three months ended October 2, 2011 and one customer represented 11% of our total revenues in the nine months ended October 2, 2011.

Geographical Product Revenues
                                             Three months ended                                                                                Nine months ended
               September 30,     % of Product     October 2,      % of Product                                  September 30,     % of Product     October 2,      % of Product
                   2012            Revenues          2011           Revenues     Percent Change                     2012            Revenues          2011           Revenues     Percent Change
                                                                                      (In millions, except percentages)
United
States       $         164.2        13.9 %      $       180.8        13.7 %            (9.2 %)                $         464.9        14.4 %      $       540.2        14.2 %           (13.9 %)
Asia-Pacific           806.6        68.2 %              889.4        67.3 %            (9.3 %)                        2,140.6        66.2 %            2,628.0        68.9 %           (18.5 %)
Europe,
Middle East
and Africa             153.7        13.0 %              188.3        14.2 %           (18.4 %)                          461.9        14.3 %              491.8        12.9 %            (6.1 %)
Other
foreign
countries               57.7         4.9 %               63.4         4.8 %            (9.0 %)                          166.4         5.1 %              154.1         4.0 %             8.0 %
Product
revenues     $       1,182.2       100.0 %      $     1,321.9       100.0 %           (10.6 %)                $       3,233.8       100.0 %      $     3,814.1       100.0 %           (15.2 %)

The decrease in product revenues in Asia-Pacific, or APAC, which includes Japan, for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was primarily due to decreased OEM sales of cards and embedded products for mobile devices, partially offset by higher retail sales of mobile cards, USB drives and imaging cards. The decrease in product revenues in the United States for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was primarily due to lower OEM sales of cards and embedded products for mobile devices, and lower retail sales of USB drives, partially offset by increased sales of SSDs for the server and notebook markets. The decrease in product revenues in Europe, Middle East and Africa, or EMEA, for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was primarily due to lower OEM sales of cards and embedded products for mobile devices.

The decrease in product revenues in APAC for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was primarily due to decreased OEM sales of cards and embedded products for mobile devices, partially offset by higher retail sales of cards for mobile devices, USB drives and SSDs. The decrease in product revenues in the United States for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was primarily due to lower retail sales of cards for mobile and imaging devices, and lower OEM sales of cards and embedded products for mobile devices, partially offset by increased SSD revenue for the server and notebook markets. The decrease in product revenues in EMEA for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was primarily due to decreased OEM sales of cards and embedded products for mobile devices and lower retail sales of cards for the imaging market, partially offset by increased retail sales of mobile cards and USB drives, and increased sales of SSDs for the server market.


Table of Contents

License and Royalty Revenues
                                              Three months ended                                           Nine months ended
                               September 30,      October 2,                               September 30,       October 2,
                                   2012              2011         Percent Change               2012               2011         Percent Change
                                                                     (In millions, except percentages)
License and royalty revenues $          91.0     $      94.1           (3.3 %)           $         277.2     $      271.1             2.3 %

The decrease in our license and royalty revenues for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was due primarily to decreased card royalties.

The increase in our license and royalty revenues for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was due primarily to higher licensable flash memory sales reported by our licensees.

Gross Profit and Margin
                                            Three months ended                                       Nine months ended
                              September 30,     October 2,                             September 30,     October 2,
                                  2012             2011        Percent Change              2012             2011       Percent Change
                                                                 (In millions, except percentages)
Product gross profit         $       291.9     $     518.3          (43.7 %)          $       803.0     $  1,506.3          (46.7 %)
Product gross margin (as a            24.7 %          39.2 %                                   24.8 %         39.5 %
percent of product revenues)
Total gross margin (as a              30.1 %          43.2 %                                   30.8 %         43.5 %
percent of total revenues)

The decrease in product gross margin for the three and nine months ended September 30, 2012, compared to the three and nine months ended October 2, 2011, was due primarily to average selling price reductions exceeding cost reductions, with the average selling price reduction largely influenced by oversupply in the NAND industry in the first half of fiscal year 2012.

In addition, for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, the decrease in product gross margin also reflected an increased mix of certain lower margin embedded mobile products.

In addition, for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, the decrease in product gross margin was due to inventory-related charges and an increase in amortization of acquisition-related intangible assets resulting from our acquisitions, partially offset by an insurance recovery in the first quarter of fiscal year 2012 primarily resulting from a Flash Ventures power outage that occurred in the fourth quarter of fiscal 2010.


Table of Contents

Research and Development
                                           Three months ended                                  Nine months ended
                               September 30,     October 2,      Percent           September 30,     October 2,      Percent
                                   2012             2011          Change               2012             2011          Change
                                                             (In millions, except percentages)
Research and development      $       150.3     $     135.3       11.1 %          $       443.7     $     400.1       10.9 %
Percent of revenue                     11.8 %           9.6 %                              12.6 %           9.8 %

The increase in our research and development expense for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was due primarily to higher employee-related costs of $4.6 million as headcount increased, and higher third-party engineering costs of $7.8 million.

The increase in our research and development expense for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was due primarily to higher employee-related costs of $22.7 million as headcount increased, an increase in third-party engineering costs of $35.3 million and higher technology license amortization of $10.2 million, partially offset by the elimination of Fab 5 start-up costs, which were $24.7 million in the first nine months of fiscal year 2011, and other expense reductions.

Sales and Marketing
                                         Three months ended                                  Nine months ended
                              September 30,     October 2,     Percent           September 30,     October 2,      Percent
                                  2012             2011         Change               2012             2011          Change
                                                            (In millions, except percentages)
Sales and marketing          $        57.9     $     48.5       19.4 %          $       159.2     $     144.2       10.4 %
Percent of revenue                     4.5 %          3.4 %                               4.5 %           3.5 %

The increase in our sales and marketing expense for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was due primarily to increased employee-related costs of $4.2 million as headcount increased, and increased branding and merchandising costs of $5.4 million.

The increase in our sales and marketing expense for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was due primarily to increased employee-related costs of $7.8 million as headcount increased, and increased branding and merchandising costs of $8.1 million, partially offset by lower outside service costs of $0.9 million.

General and Administrative
                                             Three months ended                                        Nine months ended
                               September 30,     October 2,                             September 30,     October 2,
                                   2012             2011        Percent Change              2012             2011         Percent Change
                                                                   (In millions, except percentages)
General and administrative    $        40.2     $     40.6           (1.0 %)           $       110.5     $     116.0           (4.7 %)
Percent of revenue                      3.2 %          2.8 %                                     3.2 %           2.8 %

Our general and administrative expense for the three months ended September 30, 2012, was approximately the same as the three months ended October 2, 2011.

The decrease in our general and administrative expense for the nine months ended September 30, 2012, compared to the nine months ended October 2, 2011, was due primarily to insurance recoveries of ($4.6) million recorded in the second quarter of fiscal year 2012 for previously recorded legal expense.


Table of Contents

Amortization of Acquisition-Related Intangible Assets
                                               Three months ended                                     Nine months ended
                                  September 30,        October 2,      Percent           September 30,       October 2,      Percent
                                       2012               2011          Change                2012              2011          Change
                                                                  (In millions, except percentages)
Amortization of
acquisition-related intangible
assets                          $          2.4       $       1.9        26.3 %          $        6.7       $       2.7       148.1 %

Percent of revenue 0.2 % 0.1 % 0.2 % 0.1 %

The increase in amortization of acquisition-related intangible assets in the three and nine months ended September 30, 2012, compared to the three and nine months ended October 2, 2011, reflected increased amortization of intangible assets from our acquisitions of Pliant Technology, Inc., or Pliant, which was completed on May 24, 2011, FlashSoft Corporation, which was completed on February 13, 2012, and Schooner Information Technology, Inc., which was completed on June 23, 2012.

Other Income (Expense), Net
                                                 Three months ended                                        Nine months ended
                                   September 30,     October 2,                             September 30,     October 2,
                                       2012             2011        Percent Change              2012             2011        Percent Change
                                                                      (In millions, except percentages)
Interest income                   $        14.7     $      14.8           (0.7 %)          $        44.7     $      46.9           (4.7 %)
Interest expense                          (30.1 )         (30.9 )          2.6 %                   (89.2 )         (94.4 )          5.5 %
Other income (expense), net                 1.7            (7.4 )        123.0 %                   (11.7 )          (8.7 )        (34.5 %)
Total other income (expense), net $       (13.7 )   $     (23.5 )         41.7 %           $       (56.2 )   $     (56.2 )            - %

The change in total other income (expense), net for the three months ended September 30, 2012, compared to the three months ended October 2, 2011, was due primarily to an expense of ($11.5) million incurred in the three months ended October 2, 2011 for the change in fair value of the liability component of the convertible debt related to the repurchase of a portion of the 1% Notes due 2013.

Total other income (expense), net was the same for the nine months ended September 30, 2012 and the nine months ended October 2, 2011. Other income (expense), net for the nine months ended September 30, 2012 included a non-recurring charge incurred by Flash Ventures and losses on non-designated foreign exchange contracts in the first quarter of fiscal year 2012, a loss related to our portion of the net loss incurred by one of our equity method investments. Other income (expense), net for the nine months ended October 2, 2011 included an expense of ($11.5) million for the change in fair value of the . . .

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