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SanDisk Turns A Profit In Q2

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

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

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

“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.”