Apple’s Samsung Order May Benefit SanDisk

Yesterday, SanDisk Corporation (NASDAQ:SNDK), a leading flash storage cards supplier, reported disappointing second quarter results that yet again missed analyst estimates. Results were driven by falling NAND flash prices and oversupply despite increasing demand. There are reports that Apple might change this situation with the huge demand for 3G iPhones and its ripple effect.

Apple, which sold about a million 3G iPhones in the first weekend alone, has reportedly placed an order for 50 million 8Gb NAND chips with Samsung, following an order of 25 million chips in June. Samsung has recently made efforts to reduce oversupply of NAND, and this huge order would lead to its reducing supply to other customers. Earlier coverage on SanDisk is available here.

This news would be good for SanDisk, which is reeling under the price pressure situation in the NAND market. It is also taking steps to reduce its supply following the disappointing second quarter.

Q2 revenue declined 1% y-o-y to $816 million. Net loss was $68 million or $0.30 per share compared with net income of $28 million, or $0.12 per diluted share last year. Non-GAAP net loss was $22 million, or $0.10 per share. Analysts estimated a profit of $0.13 per share on sales of $906.1 million.

Product gross margin declined to 3.3% compared to 16.2% last year and 18.4% last quarter due to lower sales volumes and a substantial inventory write down.

Product revenue was down 5% to $688 million, down 5% year-over-year, while license and royalty revenue was up 20% to $129 million. Total megabytes sold increased a phenomenal 120% y-o-y and 14% q-o-q but average price per megabyte sold declined 55% y-o-y and 15% q-o-q.

To curtail its supply growth rate, SanDisk plans to push back the next major phase of Fab-4 wafer output increase to April 2009, delay its investment plans for Fab-5 till a better phase in the market, and increase its non-captive purchases of Flash memory from nearly zero to 15% to 20% over a period of one to three years.

Despite cost reduction efforts, SanDisk is maintaining its R&D expenses in developing future generations of NAND Flash as well as developing the 3D read/write memory in collaboration with Toshiba.

SanDisk’s marketing focus will be on three markets:
* storage-centric mobile consumer electronics
* mobile storage in handsets with its microSD, M2 card standards and the new MegaSIM and embedded storage solutions
* solid state disk storage in portable computing

For Q3, SanDisk expects revenue between $750 million and $850 million, including license and royalty revenue of about $129 million. ASP per megabyte is expected to decline further and non-GAAP gross margins are expected to be zero.

SanDisk this morning hit a new 52-week low of $13.06. Market cap is about $3 billion. The company has recently been downgraded by Citigroup and Needham. It’s a dangerous stock to play with, and I would only recommend you touch it if you have nerve.