SanDisk Q3 worse than expected, CEO says layoffs in Q4

As loss climbs on weak NAND prices, SanDisk looks to lower expenses by canceling or exiting a number of product and marketing activities, which will result in job cuts.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 10/21/2008

SanDisk Corp reported Q3 results Monday afternoon that were met with one analysts' descriptions of the memory maker's September quarter as one that saw "continued excess supply" and a "greater than expected" loss.

Total Q3 revenue was $821 million, a decrease of 21% on a year-over-year basis. Net loss on a GAAP basis was $155 million, compared to net income of $85 million in Q3 2007. Excluding the impact of acquisition-related charges, share-based compensation expense, and the related tax effect, the third quarter pro forma net loss was $132 million, compared to Q3 2007 non-GAAP net income of $130 million.

SanDisk reported that total megabytes sold in the quarter increased 105% year over year and 44% from Q2, however, ASPs (average selling prices) per megabyte sold declined 63% on a year-over-year basis and 30% sequentially.

"SanDisk (SNDK) reported Monday a much greater than expected Q3 pro forma loss of $132 million and as expected gave a grim Q4 outlook due to the continued excess supply of NAND and fatiguing global consumer," Betsy Van Hees, an analyst at Caris Company, said in a research note this morning.

Van Hees had made Q3 financial estimates on Monday after SanDisk announced it had entered into plans to sell Toshiba Corp 30% of the current manufacturing capacity from the two companies' joint ventures, Flash Partners and Flash Alliance.

At the time, Van Hees estimated market NAND contract prices posted deep sequential declines in Q3 with 16-Gb MLC NAND contract ASPs dropping more than 40%. She also estimated blended retail memory card ASPs fell about 25% quarter over quarter as memory card manufacturers dropped prices in hopes of enticing the consumer to purchase higher density cards. Caris Company expects NAND and retail memory card blended ASPs to decline about 20% and 15%, respectively, in Q4.

"In the face of this unprecedented industry down-turn management is taking further action to cut costs and preserve its balance sheet to navigate through the tumultuous waters of the NAND markets unwavering 'perfect storm.' Although we are encouraged by SNDK’s hard line cost cutting measures, we recommend investors’ stay on the sidelines as we are concerned there is potential for further downside risk to the stock given the continuous deterioration of the NAND market and further weakening of the global consumer," Van Hees said.

Indeed, SanDisk Chairman and CEO Eli Harari revealed on the company's Q3 call with analysts that capital expenditures have been cut and that layoffs are on the way.

"We now expect our 2008 capital investment outlays to be approximately $500 million below the $2.4 billion in our original 2008 plan," he said, adding that 2009 capex investments are now projected to be approximately $1.3 billion, down from the company's previously planned $3 billion.

In addition to the capex cuts, Harari noted SanDisk is restructuring its supply commitments and is taking actions to lower its operating expenses.

"These actions will be implemented in the current quarter and will include canceling or exiting a number of product and marketing activities, and will result in employee reductions in R&D, sales and marketing, G&A [general and administrative] and operations," Harari continued.

The company gave no further detail on the job cuts during its quarterly call.

"We will continue to invest in the areas that are most strategic for our future, including advanced NAND and 3D read/write development,  mobile storage, solid-state disk, and slotMusic," Harari said.

SanDisk's stock reached $14.72 at 1:33pm eastern, up more than 2% on its Monday close of $14.42.