SUNNYVALE, CA, July 18, 2001 -- SanDisk Corporation (NASDAQ:SNDK), the world's largest supplier of flash memory data storage products, today announced results for its second quarter ended June 30, 2001. Total second quarter revenues were $107.1 million, an increase of 6% from $101.3 million in the first quarter of 2001. Product revenues were $88.1 million, unchanged from the prior quarter with an increase in units shipped offset by lower average selling prices. Revenues from licenses and royalties were $19.0 million, increasing from $13.2 million in the first quarter of 2001 due to higher royalty bearing sales by licensees. Net loss in the second quarter of 2001 was $10.0 million, or $0.15 per share and includes inventory write-down and equipment write-off charges of $30.7 million. This compares to a net loss of $29.1 million, or $0.43 per share in the first quarter of 2001, excluding the $114 million write-down of the UMC investment. In the second quarter, the Company would have had net income of $3.0 million, or $0.04 per diluted share compared to a net loss of $0.3 million, or $0.01 per share in the first quarter of 2001, excluding any inventory write-down and equipment write-off charges.
Total second quarter revenues decreased 26% from $143.9 million in the second quarter of 2000. Product revenues declined 28% from $122.6 million in the same period of the prior year due to a 44% decline in average unit selling prices, partially offset by an increase in unit sales of 16%. Revenues from licenses and royalties decreased 11% from $21.4 million in the second quarter of 2000. Second quarter 2001 net loss of $10.0 million, or $0.15 per share compares to earnings of $24.3 million, or $0.33 per diluted share, for the second quarter of 2000.
Product gross margin for the second quarter of 2001 was negative 21% due primarily to inventory write-down and equipment write-off charges of $30.7 million, compared to negative 35% in the first quarter of 2001 which included an inventory charge of $45.3 million. This second quarter charge consisted of a $23.1 million write-down of current inventory due to lower market pricing and $7.6 million for the write-off of tools and equipment related to an accelerated technology transition from NOR to NAND. Excluding the current and prior quarter charges, product gross margins were 14% in the second quarter of 2001, compared to 17% in the prior quarter. While unit shipments increased 16%, product gross margin was impacted by a decline of 22% in the average selling price per megabyte compared to the first quarter of 2001, which was partially offset by product cost reductions. The current quarter increase in license and royalties was attributable to the alignment of prior period estimates based on actual reports received.
"Considering the current market conditions, this second quarter turned out moderately better than expected notwithstanding the current quarter charges, " said Dr. Eli Harari, President and CEO of SanDisk. "Pricing pressures continued during the quarter due to weak demand and excess market supply. Ongoing inventory corrections continued throughout the quarter for our OEM customers and the industrial distribution channels. On the positive side, we experienced a strong pickup in demand in the retail channels in the US, as well as in Europe where we had a record sales quarter. While current market conditions remain challenging and most of our projected sales in the third quarter are expected to come from turns business that has yet to be booked, we are encouraged by the strength of the sell through of our products in the retail market, as well as the quote activity for our SD cards and our NAND flash components.
"We are aggressively executing the technology transition from .24 micron NOR flash to .16 micron NAND flash. We are tightly controlling our expenses and our cash flow. We are also continuing our investments in advanced flash technology and in the FlashVision manufacturing joint venture with Toshiba in Virginia. In the second quarter, qualification was successfully completed for the 512 megabit .16 micron wafers jointly developed with Toshiba and we commenced production shipments of cards built with these chips. As we ramp up the NAND production volume in Virginia, we are in parallel ramping down NOR production output from our wafer foundries in Taiwan. This technology transition, expected to be essentially completed by year-end, we believe will be the key to achieving a highly competitive cost structure and improved margins in 2002. "
The financial projections contained herein are based on information available to us now, which is highly likely to change over time. Although our projections and the factors influencing them will likely change, we do not plan to update them.
We are projecting third quarter product revenues to be approximately unchanged from the second quarter, with more than half of our projected sales coming from the retail channel. Gross margins in the third quarter may be lower than in the second quarter and NAND inventories may be higher due to the startup costs and volume ramp up of NAND production wafers, respectively at the Virginia fab. Revenues from licenses and royalties are expected to be approximately $9.0 million in the third quarter as the current soft market conditions will likely result in lower royalty bearing sales by our licensees. Net loss from operations for the third quarter is currently estimated to be approximately $0.10 to $0.15 per share.
We are hopeful that our OEM customers' inventories will become depleted by the end of the summer, and expect that the steep product price reductions that we and our competitors have implemented in the past few quarters will spur a significant pickup in demand for our products from consumers in subsequent quarters. Although we cannot yet determine if we have reached the low point of the current down cycle, we are encouraged by some positive trends for renewed sales activity later in the year as we head into the fourth quarter holiday sales season. However, because of the high level of economic and market uncertainty that is outside of our control, we cannot predict our revenues and earnings per share beyond the third quarter of 2001.
SanDisk will provide its investors and analysts with information and forward-looking guidance in its quarterly financial news releases and conference calls. The Company will not provide any further guidance or updates on its performance during the quarter unless done through a news release, conference call or SEC filing in compliance with Regulation Fair Disclosure.
This news release contains certain forward looking statements including our expectations for future product revenues and bookings, average selling prices, gross margin and profits 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 capacity and price competition that is more severe than normal learning curve price reductions; increased expenses and fluctuations in operating results and yields related to the startup of wafer production at our FlashVision foundry joint venture; 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, Taiwan and the Philippines; seasonality of product sales; success in developing brand name preference and an efficient distribution system for SanDisk's products in the retail channel; economic conditions and exchange rates in Japan, the Pacific Rim, Europe and other geographic regions as they affect SanDisk's customers; the successful production and launch of our Secure Digital 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 March 31, 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 world's 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
SanDisk's second quarter 2001 conference call is scheduled for 2:00 p.m. PDT, Wednesday, July 18th. The phone number is (973) 633-6740. A webcast of the conference call will be available on www.sandisk.com/q2results and on www.streetevents.com. Both webcasts will be available until Saturday, July 21, 2001, at 6:00 p.m. Pacific Time.
CompactFlash and CF are trademarks of SanDisk Corporation.