SNDK: SanDisk Cutting Everything That Doesn’t Count

By William Trent, CFA of Stock Market Beat

Now that we’re finally being proven correct in our semiconductor oversupply thesis, it is fair to start wondering when we will close out the trade, metaphorically at least. Truth is, a month ago we thought we would be doing so right about now. But with the sudden rise in new equipment orders in January and comments like those that follow, we’re afraid there is another leg down for the semiconductors.
SanDisk cuts, jobs, salary’s and prices – Semiconductor Fabtech

With NAND Flash prices rapidly declining by close to 50 percent in the last two months and little prospect of a pick-up in demand to counter a significant over-supply, SanDisk is making important cuts in its business operations to weather the storm….The company now expects to cut its workforce by up to 10 percent that will take effect in March this year. This equates to a headcount reduction of approximately 250 and will be from worldwide operations, according to the company.

Executives will also see cuts in salaries that include a 20 percent cut in base pay for the CEO, Eli Harari and a 15 percent cut in wages for SanDisk’s President and other Executive VP’s. All other Vice Presidents will have to accept a 10 percent cut in base pay.

Though the rest of the workforce will not have to accept pay cuts, a freeze on salaries is being imposed. The company did not guide as how long this would be in place. A selective hiring freeze has also been implemented.

“Industry wide NAND component pricing has deteriorated by approximately 50% in the past two months due to excess supply of NAND components coupled with first quarter seasonally weak demand. This is impacting pricing for our retail and OEM products at a steeper rate than we had been anticipating and in order to maintain market share we now expect to lower Q1 prices for many of our products to 30%-40% below fourth quarter levels,” said Eli Harari, Chairman and CEO of SanDisk. “Although we believe there will be strong pickup in demand for our products in the second half of the year, we do not have visibility as to when the current aggressive pricing cycle will run its full course, and gross margins are likely to remain under significant pressure for several quarters.”

Now that sounds like a company that realizes there is too much supply and is doing everything it can to rein in overproduction. Everything, that is, except the one thing that would help:

Eli Harari, reiterated commitments to invest in adding fab capacity due to the company’s belief that in the 2008-2010 time frame the demand for NAND Flash will need such investments now.

Call us when Harari wakes up. It may finally mark the bottom.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Landstar (LSTR) put options; Plantronics (PLT) put options;

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