SanDisk Turns A Profit In Q2

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UPDATED! Milpitas, Calif. - SanDisk posted profitable second-quarter results Wednesday after four consecutive quarters in the red, on the strength of licensing and royalty revenue.

The memory chip maker reported a second-quarter profit of $52.51 million, compared with a loss of $73.75 million, for the year-earlier period.

Revenue was $730.57 million, down from $816.01 million for the same quarter last year.

"We are very pleased with our return to profitability in the second quarter, driven by increased pricing, higher royalty revenue and strong execution," CEO Eli Harari said in a statement.

The company said it got a major boost from licensing and royalty revenue, which grew 68 percent sequentially to $120 million, although it was down 7 percent from the year-earlier period.

Harari noted that the company had renewed its patent cross license agreement with Samsung Electronics, "providing market certainty."

In a conference call with analysts, Harari said the company's Q4 2008 resizing, the restructuring of joint manufacturing ventures with Toshiba in Q1, and "strong execution in operations and technology" has provided SanDisk new financial flexibility.

Retail sales made up 59 percent and OEM 41 percent of SanDisk's Q2 product revenue. Unit sales were slightly down sequentially in both channels while prices increased. On a year-over-year basis, unit sales were up 3 percent, with unit sales of mobile handset memory products and USB products both growing faster than the average. Unit sales of imaging card products were up very slightly year over year, while gaming cards were down, according to executive VP and chief financial officer Judy Bruner.

Bruner said license and royalty revenue was $120 million compared to the company's preliminary estimate of $85 million to $95 million. The increase over our guidance came primarily from higher prices than were estimated in first-quarter licensee sales.

Bruner set gross profit for Q2 at $134 million or 22 percent of product revenue, up from -11 percent in Q1.

Harari went on to declare victory in one of the industry's long-standing format wars: flash memory.

"After a decade of relentless evangelizing, we believe that the Secure Digital SD format has now become the de-facto standard for universal storage of consumer content, photos, video, music, maps and games," Harari told analysts. "Apple's latest MacBook PCs for the first time features an SD card slot. Fuji and Olympus appear to be transitioning their new camera models to the SD format from their proprietary xD-Picture Card and most digital SLR cameras now support high-performance SD cards as well."

He then went on to predict another win, in MicroSD.

"Both the MicroSD as well as the M2, which is the equivalent of MicroSD for Sony Ericsson phones - I believe that we are the largest supplier of bundled cards to the top 10 handset vendors. Of course, Apple doesn't have a card slot. But other than that, I believe every other major handset vendor supports MicroSD and is a customer of ours."

Harari painted a competitive picture of the industry with regard to pricing. "I would say that the one impact of the higher prices that we have seen in the last four or five months, the impact in the OEM space has been that the bundled cards are trending to lower densities, lower capacities - in other words, the OEMs have a certain budget for cards and if the price goes up, they just reduce the capacity. And, in fact, if you take a look at the market today, there are tremendous shortages of 1GB MicroSD because business that used to be 2GB is going to 1GB because of that pricing."


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