Does SanDisk’s margin have scope for expansion?

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How does SanDisk’s relationship with Apple impact SanDisk’s margins?

As mentioned in the earlier part of the series, Apple (AAPL) is a key customer of SanDisk’s (SNDK) embedded, NAND, and SSD (solid state drives) products, and SanDisk relies substantially on Apple for its revenues. Though these products have played a major role in increasing revenues, they do not contribute in the same manner to margins. This suggests that their high inclusion in overall revenues would lead to SanDisk earning lower-than-average margins.

Though Apple is known for its high quality and high margin products, it is known for not sharing profits with suppliers.

SSD market share

SanDisk’s financials reveal the company expenditure on selling, general, & administrative expenses (or SG&A) in 8% in comparison to industry peer Micron’s (MU) 4%. The probable reason for SanDisk’s high SG&A costs is that the company supports various product lines.

Improved product portfolio’s impact on SanDisk’s margins

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Increased contribution of embedded solutions towards SanDisk’s overall revenues is a positive sign. However, custom embedded storage solutions are low margin products. Increased mix of SSD product sales have offset this margin dilution to an extent, as they are high margin products whose contribution towards overall revenues is also steadily rising.

As the above chart shows, SanDisk is only behind Samsung (SSNLF) in the SSD market. Intel (INTC), Micron (MU), and Toshiba are other leading players. Management expectations of SSD segment to contribute ~25% of its overall revenue in FY 2014 were accurate until 3Q14. If this trend continues into 2Q14, gross margin will witness a significant expansion.

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