Q3 2014 Results Earnings Conference Call
October 16, 2014, 5:00 p.m. ET
Jay Iyer – Senior Director, IR
Sanjay Mehrotra – President and CEO
Judy Bruner – EVP of Administration and CFO
Mehdi Hosseini – Susquehanna Financial Group
Doug Freedman – RBC Capital Markets
Timothy Arcuri – Cowen & Company
Craig Ellis – B. Riley & Company
Ambrish Srivastava – BMO Capital Markets
Mark Newman – Sanford Bernstein Mark Delaney – Goldman Sachs
John Pitzer – Credit Suisse
CJ Muse – ISI Group
Joe Moore – Morgan Stanley
Good day and welcome to the SanDisk third quarter 2014 financial results conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Jay Iyer. Please go ahead, sir.
Jay Iyer – Senior Director, IR
Thank you, operator, and good afternoon everyone. With me on the call are Sanjay Mehrotra, President and CEO of SanDisk, and Judy Bruner, Executive Vice President of Administration and CFO. In a moment, we will hear remarks from both of them, followed by Q&A.
Before we begin, please note that any non-GAAP financial measures being discussed during the call, as defined by the SEC in Regulation G, will be reconciled to the most directly comparable GAAP financial measure.
That reconciliation is now available along with supplemental schedules on our website at SanDisk.com/ir. Please note that non-GAAP to GAAP reconciliation tables for all applicable guidance will also be posted on our website. This guidance is exclusive of any one-time transactions and does not reflect the effect of any acquisitions, divestitures, or similar transactions that may be completed after October 16, 2014.
In addition, during our call today we will make forward-looking statements that refer to expectations, projections, or other future events. Please refer to today’s press release and our SEC filings, including the most recent 10-Q, for information on the risk factors that could cause results to differ materially from those expressed in the forward-looking statements. SanDisk assumes no obligation to update these forward-looking statements which speak as of today.
This communication does not constitute an offer to buy or solicitation of an offer to sell any securities. The tender offer to purchase all of the outstanding shares of common stock of Fusion-io, Inc. is being made solely by means of the offer to purchase, the letter of transmittal and related documents, which contain the full terms and conditions of the tender offer and have been mailed to Fusion-io’s stockholders and filed with the SEC. Investors and security holders of Fusion-io are urged to read these and other documents filed with the SEC, as well as any amendments or supplements to those documents carefully in their entirety when they become available, because they contain or will contain important information about the proposed transaction.
With that, I’ll turn the call over to Sanjay.
Sanjay Mehrotra – President and CEO
Thank you, Jay, and good afternoon everyone. We are very pleased to report record revenue, strong earnings and cash flow, and to have returned more than half a billion dollars of capital to shareholders during the quarter.
With the acquisition of Fusion-io, SanDisk now has the most comprehensive enterprise portfolio in the industry. Our solutions range from the highest performance, lowest latency products that enable application acceleration and disrupt traditional IT architectures, to products that have a compelling value proposition to replace hard drives in a variety of applications.
This portfolio, coupled with our broad and expanding customer reach and well established vertical integration capabilities, positions us well to accelerated our momentum in the fast-growing market for enterprise flash. We expect our enterprise SSD revenue to surpass $1 billion in 2015, a year ahead of our previously stated timeline.
Our enterprise SSD revenue grew strongly on a year over year basis during the third quarter, driven by our SaaS leadership position and growing presence in enterprise SATA, and it was further bolstered by a partial quarter of revenues from Fusion-io solutions.
We have now converted the vast majority of Smart Storage’s products to captive NAND flash and this provides us with an important advantage as we pursue several large opportunities with hyperscale customers.
We are delighted to report first revenue shipments of ULLtraDIMM, our high-performance, low-latency SSDs to leading server and storage OEMs. [Design] traction for ULLtraDIMM SSDs continues to grow with successful qualifications at Super Micro Computer and Huawei, achieve in the third quarter.
The Fusion-io business performed in line with our expectations post-acquisition. On the product front, multiple OEMs have now qualified and are offering our next-generation Fusion-io PCIe products. Our plan is to continue supporting the majority of Fusion-io products on non-captive NANDs in 2015.
In addition to the growth of the enterprise SSD portfolio, we are pleased that Dell will begin incorporating SanDisk DAS Cache software into certain Dell-powered edge servers as part of the base configuration.
This FlashSoft server side caching software that allows customers to benefit from server attached SSDs as a cache, for an application’s most frequently accessed data. Following the completion of the Fusion-io acquisition in late July, we have made excellent progress in integrating Fusion-io into SanDisk.
To best realize the capabilities, talent, and scale of the two teams, we have decided to accelerate the combination of the legacy SanDisk enterprise storage solutions group and the newly added Fusion-io team by forming one enterprise storage organization under John Scaramuzzo.
As planned at the time of the acquisition of Fusion-io, the sales team has been integrated under the leadership of Henri Richard. Lance Smith has decided to leave SanDisk to pursue other opportunities.
In client SSDs, we saw healthy year over year revenue growth as attach rate of SSDs to PCs continues to increase, and our overall market share position remains strong. During the quarter, we had a successful launch of our X3-based SanDisk Ultra II SSD for retail and the product has garnered several awards from top reviewers.
We also began shipment of our 1Y nanometer X2 SSDs and qualification efforts for our 1Y nanometer X3 SSDs are underway with multiple OEM customers. Our combined sales from enterprise and client SSDs drove 27% of our third quarter revenue.
Trying to mobile embedded, the launch of several new smartphones containing our embedded solutions enabled healthy sequential revenue growth with particular strength from sales growth of custom embedded solutions. We believe that Apple’s decision to increase the embedded storage in their mid-tier and top-tier iPhone to 64 GB and 128 GB respectively is indicative of pent-up consumer demand for higher storage capacities.
We expect other OEMs to follow suit by increasing their embedded storage capacities in their respective offerings and this bodes well for the prospects for our iNAND portfolio as well, as well as the overall demand for [unintelligible] flash.
We are pleased with the broadening customer traction of our embedded X3 solution. Our X3 flash and systems technology capabilities allow our customers to increase overall mobile device capacities at competitive cost structures while still delivering outstanding application experience.
In retail, revenue increased slightly from the previous quarter but declined modestly on a year over year basis with growth in Micro SD cards offset by decline in SD cards. Our over global retail presence remain solid, backed by our valuable brand and consumer recognition of our high-quality products. We are positioned well as we head into the seasonally strong period of the year.
Turning to industry demand, we continue to see multiple strong growth drivers for flash, and the demand outlook remains robust. Even as mobile market shares shift among different OEMs, overall smartphone shipments remain on a strong trajectory and we are very pleased to see the average capacity growth in these devices drive strong demand for flash.
In client computing, I’m sure you will agree with me that once you have become used to an SSD-powered laptop, there is no going back. Consequently, the increasing penetration rate of flash in corporate laptops will spill into the consumer space and drive significant growth in flash penetration in the PC platforms in the years ahead.
Finally, enterprise and hyperscale customers continue to work with market leaders like SanDisk to find new ways to use flash in an ever-increasing number of applications and workloads, as flash technology is a critical foundation of the modern day responsive enterprise. To summarize, we believe that near term and secular demand drivers for flash remain strong, and we continue to be confident in the future prospects for the industry.