SanDisk Down Big Initially After Earnings

SanDisk (SNDK) was getting kicked where it counts in the after-hours. They posted $0.61 non-GAAP EPS and revenues of $751 million. Those are above expectations $0.57 and revenues of $738 million.

The company just said on CNBC that the pricing was more aggressive than they thought, although the company really didn't say much negative. The data in the press release shows margin pressures, and that is something they have been hamstrung with before. The CEO said they expect a very good quarter, but did not give any formal guidance here yet. He also said he thinks 550 million cel phones will be music-enabled globally in 2007 and he sees tremendous growth and demand there.

The real reason the shares are getting hit so hard on the data is that they had run up 50% since the end of July.

"We are very pleased with our third quarter results," said Eli Harari, chairman and chief executive officer of SanDisk Corporation. "Demand for our mobile products continued to be strong in the fast growing mobile phone market and we are pleased with our flash audio player U.S. retail market share gains in the third quarter. Despite a challenging pricing environment in the third quarter we delivered non-GAAP operating margin of 21%, primarily due to our highly competitive product cost structure from our captive Flash business ventures in Japan. We expect to benefit in the fourth quarter from projected seasonally strong holiday sales of digital cameras, handsets, flash audio players, USB flash drives and gaming consoles and we now believe growth in our megabytes sold will be approximately 200% for 2006."

Here are the metrics the company gave:

* Product revenue grew 27% and license and royalty revenue grew 31% year-over-year.
* Megabytes sold in the third quarter increased 217% year-over-year and 40% from the second quarter of 2006.
* Average capacity per card sold in retail grew 16% sequentially to 882 megabytes.
* Average price per megabyte sold declined 25% sequentially and 60% from the third quarter of 2005.
* GAAP product gross margin for the third quarter of 2006 was 32% of product revenue similar to 32% in the second quarter of 2006 and compared to 37% in the third quarter of 2005.
* GAAP operating income for the third quarter of 2006 was $128 million or 17% of revenues. Non-GAAP operating income was $158 million or 21% of revenue compared to GAAP operating income of $159 million or 27% of revenue in the third quarter of 2005.
* Cash flow from operations was $291 million compared to $209 million in the third quarter of 2005, and total cash and investments increased sequentially by $286 million to $3.0 billion.
* SanDisk entered into a definitive agreement to acquire msystems(TM) Ltd. in an all stock transaction expected to close around the end of the calendar year.
* SanDisk introduced high capacity new products including the 4-gigabyte (GB) SD Ultra II High Capacity (HC) card, the 4-GB miniSDHC, the 2-GB microSD(TM) and the 16-GB Extreme III Compact Flash.
* Retail presence grew to more than 196,000 storefronts including 62,000 in the mobile channel.
* SanDisk and Toshiba began construction on a new 300-millimeter NAND wafer fabrication facility in Yokkaichi, Japan, with initial production expected to begin in the fourth quarter of 2007.


Jon C. Ogg