Continuing Growth In Global Retail Sales
SUNNYVALE, CA, October 17, 2001-- SanDisk Corporation (NASDAQ:SNDK), the worlds largest supplier of flash memory data storage products, today announced results for its third quarter ended September 30, 2001. Total third quarter revenues were $65.9 million, a decrease of 39% from $107.1 million in the second quarter of 2001. Product revenues were $57.3 million, down 35% from the prior quarter due to severe pricing pressures and a further deterioration in retail market conditions subsequent to the events of September 11th. Revenues from licenses and royalties were $8.6 million in the third quarter compared to $19.0 million for the second quarter of 2001, reflecting lower royalty bearing sales by licensees due to weak market conditions. Net loss in the third quarter of 2001 was $170.5 million, or $2.50 per share and includes losses related to investment in equity security write-downs in UMC of $96.2 million and Tower of $19.9 million, $16.1 million of inventory write-down charges and $8.5 million of restructuring charges related to the closing of card assembly and test manufacturing operations in Sunnyvale. This compares to a net loss of $10.0 million, or $0.15 per share in the second quarter of 2001, which included inventory write-down and equipment write-off charges of $30.7 million. Excluding the write-downs of investments in equity securities, inventory write-downs and restructuring charges, the company had a third quarter net loss from operations of $33.0 million, or $0.48 per share.
Product gross margin for the third quarter of 2001 was negative 56% due primarily to the $16.1 million of inventory write-down to net realizable value and $8.5 million of start-up charges related to the ramp up of the FlashVision foundry joint venture in Virginia. This compares to negative 21% in the second quarter of 2001, which included inventory write-down and equipment write-off charges of $30.7 million. Excluding these charges in both quarters, product gross margins were negative 13% in the third quarter of 2001, compared to positive 14% in the prior quarter. Product gross margin was adversely impacted by a sequential decline of 34% in revenue per megabyte. Units shipped declined sequentially by 30%; however, total megabytes shipped increased by 17% in the third quarter compared to the previous quarter due to a marked shift to higher average capacity per card.
Total third quarter revenues decreased 61% from $170.8 million in the third quarter of 2000. Product revenues declined 62% from $151.8 million in the same period of the prior year due to a 56% decline in revenue per megabyte and lower shipment volumes. Revenues from licenses and royalties decreased 55% from $19.0 million in the third quarter of 2000. The third quarter 2001 net loss of $170.5 million, or $2.50 per share compares to earnings of $25.6 million, or $0.35 per diluted share, for the third quarter of 2000.
"Pricing pressures accelerated during the quarter due to continuing excess supply," said Dr. Eli Harari, President and CEO of SanDisk. "Sell-through in our retail channel was strong in the first two months of the quarter, then declined sharply in the weeks after the events of September 11th. In recent weeks, we have seen a pick-up in our retail orders; however, it is too early to say if retail sales in the fourth quarter will meet our previous expectations for the holiday season. Sales to our OEM customers remained depressed during the quarter as these customers are continuing their inventory correction. We are encouraged by the high level of design-in activities for our products and believe that customers are beginning to respond favorably to the value offered through the lower card prices. In the current quarter, we expect to sell for the first time Memory Stick cards supplied under our recently announced strategic agreement with Sony, as well as our new line of SanDisk Ultra™ high performance CompactFlash cards introduced this month.
"We are focused on returning to operational profitability as soon as possible and continue to take aggressive steps to reduce our product costs, minimize our operating expenses and preserve the strength of our balance sheet. We expect essentially all card assembly and test manufacturing operations to transfer offshore by the end of the current quarter, resulting in a reduction of approximately 25% of our total workforce. Additionally, we have implemented a company wide temporary salary reduction and holiday week shutdown in the upcoming quarter, and are continuing to tightly control all discretionary spending. These actions are expected to lower our product overhead cost structure and our operating expenses in future quarters.
"We expect to complete the transition of all production from 0.24 micron NOR to .16 micron NAND Flash by the end of the current quarter. We believe that our investments in advanced technology NAND flash memory are beginning to bear first fruits. Further technology advancements, which are expected to be implemented in production throughout 2002 will give us a lower, highly competitive cost structure, and we see ourselves heading back to positive margin territory when these changes are implemented. Because of market uncertainties and continuing pricing pressures, we currently believe that the fourth quarter of 2001 may be the low point of the current down cycle. However, we are cautiously optimistic of renewed gradual growth in our business in 2002 and corresponding improvement in our financial performance."
This news release contains certain forward looking statements including our expectations for future product revenues and bookings, product demand, average selling prices, gross margin and earnings that are based on current expectations and involve risks and uncertainties that may significantly and adversely affect our business, financial condition and results of operations. In addition to the factors discussed above, other risks include: future average selling price erosion due to excess industry capacity and extreme price competition; increased expenses and fluctuations in operating results and yields related to the startup of wafer production at our FlashVision foundry joint venture in Virginia; the timely development, internal qualification and customer acceptance of new products based on the 512megabit .16 micron NAND flash chips that SanDisk is obligated to purchase from FlashVision; fluctuations in royalty revenues due to industry wide declines in demand for flash memory products which reduce royalty bearing sales of our licensees; the timely introduction and acceptance of new consumer products that incorporate our flash storage devices; slower than expected growth in the emerging markets for our products which may result in reduced sales and increased inventory; successful management of assembly operations in China and Taiwan; the unknown economic impact of the recent terrorist attacks and the military response thereto; seasonality of product sales; success in developing brand name preference and an efficient distribution system for SanDisks products in the retail channel; economic conditions and exchange rates in Japan, the Pacific Rim, Europe and other geographic regions as they affect SanDisks customers; the successful launch of our Secure Digital and Memory Stick card products; and the other risks detailed from time to time in our Securities and Exchange Commission filings and reports, including, but not limited to, the Form 10Q for the quarter ended June 30, 2001 and the Annual Report on Form 10-K for the year ended December 31, 2000. Future results may differ materially from those previously reported. We assume no obligation to update the information in this release.
SanDisk Corporation, the worlds largest supplier of flash data storage products, designs, manufactures and markets industry-standard, solid-state data, digital imaging and audio storage products using its patented, high density flash memory and controller technology. SanDisk is based in Sunnyvale, CA.
SanDisks third quarter 2001 conference call is scheduled for 2:00 p.m. PDT, Wednesday, October 17th. The phone number is (973) 872-3100. A webcast of the conference call will be available on www.sandisk.com/q3results and on www.streetevents.com. Both webcasts will be available until Monday, October 22, 2001, at 8:00 a.m. Pacific Time.
CompactFlash and CF are trademarks of SanDisk Corporation.