SanDisk Corporation (SNDK) Moore Stress in Play - Expect Gross Margin Upside, Raise PT to $59

Transcription

1 COMPANY NOTE USA Technology Semiconductors SanDisk Corporation () Moore Stress in Play - Expect Gross Margin Upside, Raise PT to $59 Key Takeaway We continue to believe Moore Stress is driving industry NAND supply moderations, which we believe is likely to translate into stability in NAND prices over the next 6-to-12 months. We expect favorable NAND prices and a mix shift toward SSD to drive ~300bps of GM upside in Q4, and think depreciation of JPY vs. USD could add ~150bps to the GM upside. Reit Buy and raise PT to $59. Expect Gross Margin Upside in Q4 and Q1. Excluding a favorable JPY/USD exchange rate which could contribute ~150bps of gross margin upside, we expect favorable NAND prices to drive ~300bps of gross margin upside in Q4. Furthermore, we think favorable NAND prices are likely to drive ~400bps of gross margin upside in Q1. We raised our Q4 and Q1 non-gaap GM to 36% (from 33%) and 37% (from 35%). Favorable NAND Prices and SSD Growth. According to DRAMeXchange, NAND contract prices increased by 17% QoQ in Q4 (spot prices up 31%), and are tracking ~flat QTD. We also expect a positive mix shift toward SSD in Q4, and model SanDisk's NAND ASPs up 10% QoQ in Q4, and up 4% QoQ in Q1. Moore Stress Drives Price Stability. We model Q1 bit decline of 3%, in line with 7yr avg. seasonality, but model Q1 ASP to increase by 4% QoQ, beating seasonal decline of 20%. We model CY13 supply bit growth of 39% (vs. 60% and 80% in CY12 and CY11), ASP decline of 10% (vs. 45% and 35%), and cost reduction of 20% (vs. 35% and 30%). As the industry faces challenges in migrating to more advanced nodes and the mix shifts toward MLC from TLC, we expect cost reductions to decelerate, and stabilize prices. Recent Reports. Semis: DRAM/NAND: Moore Stress Evidence, Win8 Tablet-PC Potential 3Q12 Results: Gross Margin Upside - Maintain Buy 3Q12 Preview: Gross Margin Upside Potential Semis: Moore Stress in DRAM and NAND = Structural Price Stability Valuation/Risks Over the last 3 years, 's stock price has consistently traded at P/E multiples ranging from ~8x to 14x. Our $59 PT (from $51) assumes a P/E of 13x applied to our CY14 non-gaap EPS of $4.50. We think a P/E of 13x is appropriate because we believe estimates are biased upward. Downside risks include 1) wafer capacity additions and/or weak NAND pricing, 2) appreciation of the Japanese Yen, 3) mis-execution, and 4) share loss. Financial Summary BUY Price target $59.00 (from $51.00) Price $48.46 Book Value/Share: $29.80 Net Debt (MM): ($922.9) Market Data 52 Week Range: $ $30.99 Total Entprs. Value (MM): $11,022.5 Market Cap. (MM): $11,945.4 Insider Ownership: 1.6% Institutional Ownership: 82.6% Shares Out. (MM): Float (MM): Avg. Daily Vol.: 4,722,625 Sundeep Bajikar * Equity Analyst (415) sbajikar@jefferies.com Mark Lipacis * Equity Analyst (415) mlipacis@jefferies.com Jonnathan Lee * Equity Associate (415) jlee@jefferies.com * Jefferies & Company, Inc. EQUITY RESEARCH AMERICAS USD Prev. 2011A Prev. 2012E Prev. 2013E Prev. 2014E Rev. (MM) -- 5, , , , , , ,329.3 EV/Rev 1.9x 2.2x 1.8x 1.5x Consensus EPS Mar A Jun A Sep A Dec FY Dec FY P/E 12.0x 32.1x 16.4x 12.5x Price Performance JAN-12 MAY-12 SEP-12 JAN-13 Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 10 to 15 of this report.

2 SanDisk () BUY: $59 Price Target Scenarios Target Investment Thesis Moore Stress leads to price stability in NAND. NAND ASPs decrease by ~10% while costs decrease by 15-20% in CY13. Revenues grow by ~20% in SanDisk grows share in SSD, and Embedded EPS: $4.50; P/E(NTM): 13x; Target Price $59 Upside Scenario Consolidation in the SSD industry translates to faster than expected market penetration of SanDisk SSDs. Better than expected NAND ASPs and cost reductions. Depreciation of the Japanese Yen vs. the USD EPS: $5.00; P/E(NTM): 13x; Target Price: $65 Downside Scenario Industry NAND capacity increases, leading to weakness in NAND ASPs. Mobile and SSD demand is slow to materialize, or comes at the expense of margins. Appreciation of the Japanese Yen vs. the USD impacts gross margins EPS: $2.60; P/E(NTM): 15x; Target Price: $39 THE LONG VIEW Long Term Analysis 1 Year Forward P/E Long Term Financial Model Drivers Other Considerations LT Earnings CAGR 5-20% Organic Revenue Growth 5-20% Acquisition Contribution 0-5% Operating Margin Expansion -5-5% Given relatively higher levels of profitability in the NAND market, we expect increased competition for SanDisk in NAND going forward. SanDisk has indicated the pace of cost reductions in NAND is likely to decelerate to ~25-35% per year, from 30-55% over the last 6 years. Source: Capital IQ, Jefferies estimates Peer Group: Group P/Es Revenue Growth vs P/E Recommendation / Price Target Ticker Rec. PT Buy $59 MU Buy $10 Source: Capital IQ, Jefferies estimates Source: Capital IQ, Jefferies estimates CODE NC INTC Hold $24 OCZ NC FIO NC STEC NC Catalysts Daily/weekly market NAND prices. Growth in SSD. Changes in the exchange rate for the Japanese Yen vs. the USD. Industry commentary about Supply/Demand (e.g. Samsung, Hynix, Micron). Company Description SanDisk, a Fortune 500 and S&P 500 company (since April 2006), is the world's largest dedicated provider of flash memory storage solutions. SanDisk s mission is to enrich people s lives through digital storage anytime, anywhere. SanDisk has approximately 4,000 employees and approximately 250,000 retail outlets around the world offer SanDisk products to consumers. page 2 of 15

3 Gross Margin Upside Potential According to DRAMeXchange, NAND contract prices increased by 17% QoQ in Q4 (spot prices up 31%), and are tracking ~flat QTD. Excluding a favorable JPY/USD exchange rate which could contribute ~150bps of gross margin upside, we expect favorable NAND prices to drive ~300bps of gross margin upside in Q4 and ~400bps of gross margin upside in Q1. We expect a positive mix shift toward SSD in Q4, and model SanDisk's NAND ASPs up 10% QoQ in Q4, and up 4% QoQ in Q1. We think the bear case of large negative ASP seasonality in Q1 is unlikely to materialize. Chart 1: JEF vs. Guidance and Street estimates 4Q12E 1Q13E 2012E 2013E 2014E JEF GUIDANCE STREET JEF STREET JEF STREET JEF STREET JEF STREET 1/18/2013 1/18/2013 1/18/2013 1/18/2013 1/18/2013 Revenues YoY -11% -11% 21% 19% 20% 11% Total GM - GAAP 35% 32% 36% 32% Total GM - Non-GAAP 36% 33% 33% 37% 33% 33% 32% 38% 37% 38% 38% Product GM - Non-GAAP R&D - non-gaap 11% 10% 10% S&M - non-gaap 4% 4% 3% G&A - non-gaap 3% 2% 2% OpEx - GAAP Extraordinary OpEx - Non-GAAP % of revs 18% 16% 15% Other Inc - GAAP Extraordinary Other Inc - Non-GAAP EBIT % of revs 13% 20% 21% EBIT non-gaap 15% 21% 23% Taxes - GAAP 35% 35% 32% 35% 32% 34% 32% 35% 32% 35% 32% Extraordinary Taxes - Non-GAAP 32% 32% 33% 31% 33% 33% EPS - GAAP EPS - non-gaap Total CapEx JV CapEx 100 SanDisk Non-Fab CapEx D&A Total FCF 10 (2) ,069 Bits QoQ 12% -3% ASP/bit QoQ 10% 4% Cost/bit QoQ -1% -3% Source: Source: Company data, Capital IQ, DRAMeXchange, Jefferies estimates Note: White on Black formatting indicates previously provided guidance which is no longer valid. Our CY13 revenues decreased to $6.1B (from $6.3B) due to lower supply bit growth of 39% (from 50%), but non-gaap gross margins and non-gaap EPS increased to 38% (from 36%) and $3.57 (from $3.38). page 3 of 15

4 We believe annual NAND supply bit growth decelerated to ~60% in CY12 from ~70-80% in CY11 and CY10. We expect NAND supply bit growth to decelerate further to ~40% in CY13 from ~60% in CY12, primarily to due to a combination of Moore Stress and limited wafer capacity growth. As SanDisk, Samsung, and SKHynix report earnings over the next few weeks, we expect to hear about cuts to CY13 supply bit growth forecasts. As supply bit growth gets cut, we expect NAND prices to remain stable/favorable. Chart 2: Memory Industry Supply Outlook Date 2013 Supply Bit NAND DRAM Updated Growth Outlook Industry Company Industry Company 12/20/2012 Micron 40% 28% 10/18/2012 SanDisk (captive) 30-40% ~30-35% Date 2012 Supply Bit NAND DRAM Updated Growth Outlook Industry Company Industry Company 10/12/2012 Micron 61% 29% 10/18/2012 SanDisk (captive) 60% 80% 10/26/2012 Samsung low-60% ~ industry ~29% ~ industry 7/25/2012 SKHynix > industry ~industry 8/15/2012 Applied Materials 60-65% ~30% 7/25/2012 LAM Research ~65% ~30% Source: Micron, SanDisk, Samsung, SKHynix, Applied Materials, LAM Research, Jefferies Our checks in Asia confirm Moore Stress is slowing the next DRAM node transition to 20nm, and lowering NAND bit growth from process migration. We expect this to translate into price stability in both DRAM and NAND. Buy-rated MU and are among our top ideas for CY13. page 4 of 15

5 64Gb MLC NAND Contract Price ($) 4GB Memory Card Price ($) 1/2/2012 1/14/2012 1/26/2012 2/7/2012 2/19/2012 3/2/2012 3/14/2012 3/26/2012 4/7/2012 4/19/2012 5/1/2012 5/13/2012 5/25/2012 6/6/2012 6/18/2012 6/30/2012 7/12/2012 7/24/2012 8/5/2012 8/17/2012 8/29/2012 9/10/2012 9/22/ /4/ /16/ /28/ /9/ /21/ /3/ /15/ /27/2012 1/8/2013 1/20/ /31/2011 1/30/2012 2/29/2012 3/30/2012 4/29/2012 5/29/2012 6/28/2012 7/28/2012 8/27/2012 9/26/ /26/ /25/ /25/2012 1/24/ Gb MLC NAND Spot Price ($) 8GB Memory Card Price ($) 1/2/2012 1/14/2012 1/26/2012 2/7/2012 2/19/2012 3/2/2012 3/14/2012 3/26/2012 4/7/2012 4/19/2012 5/1/2012 5/13/2012 5/25/2012 6/6/2012 6/18/2012 6/30/2012 7/12/2012 7/24/2012 8/5/2012 8/17/2012 8/29/2012 9/10/2012 9/22/ /4/ /16/ /28/ /9/ /21/ /3/ /15/ /27/2012 1/8/2013 1/20/ /30/2011 1/29/2012 2/28/2012 3/29/2012 4/28/2012 5/28/2012 6/27/2012 7/27/2012 8/26/2012 9/25/ /25/ /24/ /24/2012 1/23/2013 NAND Prices Increased in 4Q12 According to DRAMeXchange, NAND Contract Prices increased by 17% in 4Q12, while NAND Spot Prices increased by 31% QoQ. Prices for 4GB, 8GB, and 16GB memory cards, which we believe together represent the majority of the card volume, decreased by 2-4% in 4Q12 QoQ. We estimate that NAND contract prices decreased by 13% in CY12, while NAND spot prices decreased by 15%. We model SanDisk s NAND ASPs to decrease by 10% in CY13. Chart 3: NAND Contract Price (64Gb MLC) 6 NAND Contract Prices increased by 17% in 4Q12, and are 5.5 tracking flat QTD Chart 4: NAND Spot Price (64Gb MLC) 7 NAND Spot Prices 6.5 increased by ~31% in 4Q12, and are 6 tracking up 1% QTD Source: DRAMeXchange, Jefferies Source: DRAMeXchange, Jefferies Chart 5: 4GB NAND Memory Card Prices GB Card Prices decreased by 2% in 4Q12, and are tracking up 3% QTD Chart 6: 8GB NAND Memory Card Price 5.5 8GB Card Prices decreased 4% in 4Q12, and are tracking flat QTD Source: DRAMeXchange, Jefferies Source: DRAMeXchange, Jefferies page 5 of 15

6 NAND Price Changes QoQ (%) Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 16GB Memory Card Price ($) Dec-11 Mar-12 Jun-12 2/1/2012 2/15/2012 2/29/2012 3/14/2012 3/28/2012 4/11/2012 4/25/2012 5/9/2012 5/23/2012 6/6/2012 6/20/2012 7/4/2012 7/18/2012 8/1/2012 8/15/2012 8/29/2012 9/12/2012 9/26/ /10/ /24/ /7/ /21/ /5/ /19/2012 1/2/2013 1/16/2013 1/30/2013 Sep-12 Dec-12 NAND Price Changes QoQ (%) Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 We believe 8GB and 16GB memory cards represent the mainstream portion of the card market, which we believe now represents a smaller portion (~30%) of the overall NAND memory market, than it did a couple of years go (~50%). Historically, Micron and SanDisk have generated ~50% of their NAND revenues from the memory card market. With growth in Smartphone and SSD embedded NAND content, we expect the memory card market to become less important over time. Chart 7: 16GB NAND Memory Card Prices GB Card Prices decreased by 5% in DecQ, and are tracking down 1% QTD. Source: DRAMeXchange, Jefferies NAND ASP vs. Contract/Spot Prices SanDisk s NAND ASPs QoQ appear to have some correlation with corresponding changes in NAND Spot and Contract prices, but tend to exhibit lower volatility than market prices. Chart 8: NAND ASP QQ vs. Contract Price 40% 30% 20% 10% 0% -10% -20% -30% Chart 9: NAND ASP QQ vs. Spot Price 45% 35% 25% 15% 5% -5% -15% -25% -35% -40% -45% NAND Contract Price NAND ASP% (Q/Q) NAND Spot Price NAND ASP% (Q/Q) Source: DRAMeXchange, Jefferies Source: DRAMeXchange, Jefferies page 6 of 15

7 Chart 10: SanDisk Corporation Income Statement Source: Company data, Jefferies estimates 1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2012E 2013E 2014E Total Revenues 1,205,561 1,032,255 1,273,190 1,539,535 1,545,322 1,538,338 1,528,502 1,484,539 5,050,541 6,096,702 7,329,337 QoQ -24% -14% 23% 21% 0% 0% -1% -3% YoY -7% -25% -10% -2% 28% 49% 20% -4% -11% 21% 20% 5-yr avg. seasonality -21% 5% 12% 15% COGS - Non-GAAP 773, , , , , , , ,414 3,377,999 3,795,408 4,544,189 - Product Gross Profit $ - GAAP 317, , , , , , , ,427 1,260,330 1,910,157 2,371,876 Product GM (%) - GAAP 29% 20% 25% 31% 33% 34% 33% 33% 27% 33% 34% Gross Profit $ - GAAP 416, , , , , , , ,625 1,624,940 2,273,294 2,759,148 SBC 1,537 1,923 1,929 1,500 1,500 1,500 1,500 1,500 6,889 6,000 6,000 Amortization of Intangible Assets 13,731 9,181 9,800 8,000 7,000 5,000 5,000 5,000 40,712 22,000 20,000 Others Gross Margin (%) - GAAP 35% 27% 30% 35% 36% 38% 38% 38% 32% 37% 38% R&D - Non-GAAP 130, , , , , , , , , , ,443 - S&M - Non-GAAP 45,406 48,627 54,144 55,000 55,000 54,876 54,700 53, , , ,746 - G&A - Non-GAAP 28,704 33,619 36,357 35,000 36,000 35,919 35,804 35, , , ,925 - Other OpEx - Non-GAAP Operating Income - Non-GAAP 226,738 67, , , , , , , ,023 1,304,186 1,691,034 % of revs 19% 7% 13% 20% 21% 22% 22% 21% 15% 21% 23% Other Income/Loss - Non-GAAP (3,429) 5,158 8,990 5,000 5,000 5,000 5,000 5,000 15,719 20,000 20,000 Profit Before Taxes - Non-GAAP 223,309 73, , , , , , , ,742 1,324,186 1,711,034 Taxes - Non-GAAP (66,993) (21,906) (55,418) (100,136) (106,624) (112,016) (111,012) (106,527) (244,453) (436,179) (569,403) Tax rate - Non-GAAP 30% 30% 32% 32% 33% 33% 33% 33% 31% 33% 33% Net Income - GAAP $ 114,385 $ 12,969 $ 76,507 $ 167,396 $ 179,445 $ 189,458 $ 187,593 $ 179, , , ,178 Extraordinary $ (28,020) $ (22,567) $ (26,771) $ (20,000) $ (17,000) $ (15,000) $ (15,000) $ (15,000) (97,358) (62,000) (60,000) Net Income - Non-GAAP (ex-1x, i $ 142,405 $ 35,536 $ 103,278 $ 187,396 $ 196,445 $ 204,458 $ 202,593 $ 194, , ,761 1,043,178 SBC $ (13,911) $ (15,577) $ (14,486) $ (21,700) $ (22,700) $ (22,662) $ (22,594) $ (22,291) (65,674) (90,246) (98,453) Net Income - Non-GAAP $ 156,316 $ 51,113 $ 117,764 $ 209,096 $ 219,145 $ 227,120 $ 225,187 $ 216, , ,007 1,141,631 EPS - Non-GAAP $ 0.63 $ 0.21 $ 0.48 $ 0.85 $ 0.89 $ 0.92 $ 0.90 $ Shares - GAAP 247, , , , , , , , , , ,533 page 7 of 15

8 Chart 11: SanDisk Corporation Balance Sheet ($, K) (in thousands, except for per share amou 1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E ASSETS: Current assets: Cash and cash equivalents $ 1,093,263 $ 1,070,454 $ 1,110,485 $ 1,294,522 $ 1,497,713 $ 1,740,574 $ 1,980,668 $ 2,227,214 Short-term investments 1,575,339 1,468,206 1,485,584 1,485,584 1,485,584 1,485,584 1,485,584 1,485,584 Cash and short-term investments 2,668,602 2,538,660 2,596,069 2,780,106 2,983,297 3,226,158 3,466,252 3,712,798 Accounts receivable, net 362, , , , , , , ,846 Inventories, net 764, , , , , , , ,438 Deferred tax assets 97,202 97, , , , , , ,454 Other Current Assets 192, , , , , , , ,888 Total current assets 4,084,546 4,136,879 4,318,628 4,469,594 4,666,085 4,890,188 5,121,615 5,329,424 Investment securities 2,803,622 2,724,382 2,818,969 2,818,969 2,818,969 2,818,969 2,818,969 2,818,969 Property and equipment, net 453, , , , , , , ,633 Notes Receivable 1,821,841 1,871,148 1,770,355 1,770,355 1,770,355 1,770,355 1,770,355 1,770,355 LT Deferred tax assets 190, , , , , , , ,454 Goodwill 197, , , , , , , ,735 Intangible Assets 287, , , , , , , ,876 Other Non Current Assets 173, , , , , , , ,918 Total Assets $ 10,012,107 $ 10,075,749 $ 10,321,511 $ 10,400,883 $ 10,598,358 $ 10,821,273 $ 11,051,028 $ 11,251,364 LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable trade 224, , , , , , , ,476 Accounts payable to related parties 201, , , , , , , ,074 Other Accrued liabilities 299,394 1,116,166 1,091, , , , , ,135 Deferred income and Deferred Revenue 179, , , , , , , ,372 Total current liabilities 904,131 1,824,395 1,896,914 1,221,379 1,216,444 1,200,924 1,193,270 1,159,057 Convertible Long-term Debt 1,627, , , , , , , ,464 Non-Current liabilities 451, , , , , , , ,122 Total Liabilities 2,983,146 3,037,868 3,113,500 2,437,965 2,433,030 2,417,510 2,409,856 2,375,643 Stockholders' equity: Common Stock 4,988,521 4,956,959 5,014,573 5,014,573 5,014,573 5,014,573 5,014,573 5,014,573 Retained Earnings 1,870,356 1,829,364 1,882,265 2,049,661 2,229,106 2,418,564 2,606,157 2,785,422 Accumulated other comprehensive income ( 173, , , , , , , ,520 Total stockholders' equity 7,032,635 7,041,844 7,212,358 7,967,265 8,169,675 8,408,110 8,645,519 8,880,068 Non-Controlling Interest $ (3,674) $ (3,963) $ (4,347) $ (4,347) $ (4,347) $ (4,347) $ (4,347) $ (4,347) Total Equity 7,028,961 7,037,881 7,208,011 7,962,918 8,165,328 8,403,763 8,641,172 8,875,721 Total Liabilities and Equity 10,012,107 10,075,749 10,321,511 10,400,883 10,598,358 10,821,273 11,051,028 11,251,364 Source: Company data, Jefferies estimates page 8 of 15

9 Chart 12: SanDisk Corporation Cash Flow ($, K) (in thousands, except for per share amounts) 1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E Cash flows from operating activities: Net (loss) income 114,385 12,969 76, , , , , ,265 Adjustments to reconcile NI to net cash provided by operating activities: Deferred Taxes 5, ,591 Depreciation 33,178 36,525 42,768 33,000 33,000 33,000 33,000 33,000 Amortization 45,146 41,303 42,376 44,000 44,000 44,000 44,000 44,000 Provision for doubtful accounts (1,285) (439) 1,794 Shared based Compensation Expenses 19,080 20,253 19,950 19,950 19,950 19,950 19,950 19,950 Tax Benefit from SBC (8,597) (2,424) (3,095) (3,095) (3,095) (3,095) (3,095) (3,095) Impairments, restructuring and others (5,454) (1,333) (4,385) Other non-operating 29,662 22,525 14,879 Changes in operating assets and liabilities: Accounts receiveable 160,474 81,197 (185,590) (47,560) (1,929) 2,328 3,279 14,654 Inventories (85,212) (98,503) 9, ,257 9,208 15,732 4,404 19,686 Other assets 65,706 (52,594) 22,275 Accounts payable trade (34,293) 30,883 63,174 (42,013) (3,541) (6,051) (1,694) (7,571) Accounts payable to related parties (75,203) 33,771 (8,707) 72,305 (3,825) (6,535) (1,829) (8,177) Other liabilities (195,916) (105,478) 32,481 Total Adjustments (47,211) 6,146 51, ,843 93,767 99,330 98, ,446 Net cash (used in) provided by operating act 67,174 19, , , , , , ,711 Cash flows from investing activities: Purchases of short-term and long-term securities (756,357) (605,709) (588,098) Proceeds from sale of short-term and long-term se 625, , ,323 Proceeds from maturities of short-term and long-te 192, ,588 71,045 Acquisition of Property and equipments (144,218) (96,076) (142,361) (200,000) (75,000) (50,000) (50,000) (50,000) Proceeds from sale of assets Disribution in Flash Forward Ltd Investment Flash Forward Ltd (12,526) (37,913) Notes receivable issuances, Flash Partners Ltd. a (51,130) (91,186) Notes receivable proceeds, Flash Partners Ltd. an 63, , ,090 Acquisition of Pliant Technology, Inc./MusicGremlin, net of cash acquired (14,666) Purchased technology and other assets (54,566) (194) (213) Net cash (used in) provided by investing acti (136,386) 64,241 (103,214) (200,000) (75,000) (50,000) (50,000) (50,000) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs Purchase of convertible bond hedge Proceeds from issuance of warrants 1142 Repayment of debt financing Proceeds from employee stock programs 45,318 5,354 27,098 Excess tax benefit from share-based compensatio 8,597 2,424 3,095 5,798 4,978 4,074 4,486 4,834 Share repurchase program (60,911) (113,164) (15,896) Net cash provided by (used in) financing act (5,854) (105,386) 14,297 5,798 4,978 4,074 4,486 4,834 Effect of exchange rate changes on cash and cash 833 (779) 1,009 Net increase (decrease) in cash and cash equiva (74,233) (22,809) 40, , , , , ,545 Source: Company data, Jefferies estimates page 9 of 15

10 Company Description SanDisk Corporation designs, develops, manufactures, and markets NAND-based flash data storage card products that are used in various consumer electronics products. The company offers removable cards under the SanDisk Ultra and SanDisk Extreme brands; embedded products under the inand brand; universal serial bus (USB) drives under the Cruzer brand; flash-based digital media players under the Sansa brand; and wafers and components. The company also provides high-capacity storage solutions, such as solid-state drives for use in hard disk drives. Analyst Certification I, Sundeep Bajikar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Jonnathan Lee, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Jefferies Group, Inc. makes a market in the securities or ADRs of SanDisk Corporation. Jefferies Group, Inc. makes a market in the securities or ADRs of Lenovo Group Ltd. Jefferies Group, Inc. makes a market in the securities or ADRs of Intel Corporation. Jefferies Group, Inc. makes a market in the securities or ADRs of Micron Technology, Inc.. Within the past twelve months, Jefferies & Company, Inc. and/or its affiliates received compensation for products and services other than investment banking services from non-investment banking, securities related compensation for client services it provided to Advanced Micro Devices, Inc.. Within the past twelve months, Jefferies & Company, Inc. and/or its affiliates received compensation for products and services other than investment banking services from non-investment banking, securities related compensation for client services it provided to Intel Corporation. Meanings of Jefferies Ratings Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12- month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months. Conviction List Methodology 1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research page 10 of 15

11 2. Only stocks with a Buy rating are allowed to be included in the recommended list. 3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen is used to ensure a well-diversified portfolio. 4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis. 5. Once a month, analysts are invited to recommend their best ideas. Analysts stock selection can be based on one or more of the following: non-consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relative to the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached their target price, been downgraded over the course of the month or where a more suitable candidate has been found are removed. 6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list during the month. 7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$. 8. The conviction list is published once a month whilst global equity markets are closed. 9. Transaction fees are not included. 10. All corporate actions are taken into account. Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report Advanced Micro Devices, Inc. (AMD: $2.46, BUY) Intel Corporation (INTC: $21.25, HOLD) Lenovo Group Ltd (992 HK: $7.74, UNDERPERFORM) Micron Technology, Inc. (MU: $7.89, BUY) SanDisk Corporation (: $48.46, BUY) page 11 of 15

12 page 12 of 15

13 Distribution of Ratings IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY % % HOLD % % UNDERPERFORM % % Other Important Disclosures Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group, Inc. ( Jefferies ) group companies: United States: Jefferies & Company, Inc., which is an SEC registered firm and a member of FINRA. page 13 of 15

14 United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Services Authority; registered in England and Wales No ; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0) ; facsimile +44 (0) Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen s Road Central, Hong Kong. Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore , telephone: Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, Yuraku-cho, Chiyoda-ku, Tokyo ; telephone ; facsimile India: Jefferies India Private Limited, which is licensed by the Securities and Exchange Board of India as a Merchant Banker (INM ) and a Stock Broker with Bombay Stock Exchange Limited (INB ) and National Stock Exchange of India Limited (INB ) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai , India; Tel This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information set forth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligation under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies & Company, Inc., a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of Transactions by or on behalf of any US person may only be effected through Jefferies & Company, Inc. In the United Kingdom and European Economic Area this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or have been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. Jefferies International Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of which are available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancy work. Jefferies International Limited s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage any potential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limited pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact Jefferies Singapore Limited. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. 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Jefferies assumes no obligation to maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors, and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or services to certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons or under differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term views expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. None of Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s). Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein are those of the author(s) and may differ from the views of Jefferies. This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. 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15 providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Jefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. For Important Disclosure information, please visit our website at or call JEFFERIES 2013 Jefferies Group, Inc. page 15 of 15