SanDisk First Quarter 2016 Results - Splash Region ... · PDF fileThis presentation contains...

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April 27, 2016

SanDisk First Quarter 2016 Results

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Forward-Looking Statements This presentation contains certain forward-looking statements, including those regarding our expectations for: our financial, operational and strategic plans and priorities; growth of enterprise SSD usage and enterprise revenues; gaining qualifications and customer adoption of our products; product and product category share and revenue growth and market position; industry trends such as growth of automotive, connected home and industrial; timing of production ramps; extending the JV partnership with Toshiba to a new wafer fab; 3D NAND development, development of next generation of 3D NAND, capacity expansion, production ramp and output timing; impact of movements in yen to dollar exchange rate; industry bit supply and SanDisk bit supply in 2016; expected date of closing of the acquisition by Western Digital Corporation (“Western Digital”); level of Available Cash and ability to meet relevant targets in the merger agreement with Western Digital; capital investment plans and cash usage; and continued use of joint venture equipment lease financing, that are based on our current expectations and involve numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate. Risks that may cause these forward-looking statements to be inaccurate include, among others: (a) the announcement and pendency of our merger agreement with Western Digital or the failure of the pending merger to be completed on a timely basis, or at all, or any materially burdensome conditions that may be imposed, or inability to achieve the expected benefits from the acquisition; (b) inability to complete the merger due to failure to satisfy conditions to completion of the merger, including the receipt of all regulatory approvals related to the merger; (c) uncertainties as to the timing of the consummation of the merger and the ability of each party to consummate the merger; (d) failure to effectively or efficiently execute on our financial, operational or strategic plans or priorities, which may change, may not have the effects that we anticipate or otherwise be successful on the timeline that we expect or at all or may have unanticipated consequences; (e) changes in industry supply and demand environment, and production and pricing levels being different than what we anticipate; (f) competitive pricing pressures or product mix changes, resulting in lower average selling prices, lower revenues and reduced margins; (g) excess or mismatched captive memory output, capacity or inventory, resulting in lower average selling prices, financial charges and impairments, lower gross margin or other consequences, or insufficient or mismatched captive memory output, capacity or inventory, resulting in lost revenue and growth opportunities; (h) inability to develop, or unexpected difficulties or delays in developing or ramping with acceptable yields, new technologies, such as 3D NAND technology, 3D ReRam, or the failure of new technologies to effectively compete with those of our competitors; (i) inability to reduce product costs to keep pace with reductions in average selling prices, resulting in lower or negative product gross margin; (j) potential delays in product development or lack of customer acceptance and qualification of our solutions, including on new technologies, particularly our 3D NAND technology, enterprise solutions, client SSDs and embedded flash storage solutions; (k) slower than anticipated growth, lower than anticipated demand or weakness in demand in one or more of our product categories, such as enterprise, embedded products or SSDs, or adverse changes in our product or customer mix; (l) failure to successfully sell enterprise solutions on the timelines or in the quantities we expect or transition our enterprise customers to our leading edge solutions; (m) failure or delays in making new products or technologies available in the manner and capacities we anticipate, whether due to technology or supply chain difficulties or other factors; (n) our 15 nanometer process technology, our X3 NAND memory architecture, our 3D NAND technology or our solutions utilizing these new technologies may not be available when we expect, in the capacities we expect or perform as expected; (o) failure to continue to expand or manage the risks associated with our ventures, strategic partnerships and commercial relationships, such as with Toshiba, including the risk of early termination; (p) inability to achieve the expected benefits from acquisitions and strategic relationships in a timely manner, or at all; (q) industry and technology trends not occurring in the timeline we anticipate or at all; (r) capital investments requiring additional cash or the unavailability of lease financing on terms acceptable to us, and (s) the other risks detailed from time-to-time under the caption “Risk Factors” and elsewhere in our Securities and Exchange Commission filings and reports, including, but not limited to, our Annual Report on Form 10-K for the year ended January 3, 2016, and the joint proxy statement/prospectus included in the Registration Statement on Form S-4 filed by Western Digital and declared effective on February 5, 2016. The Q1 2016 results and metrics contained in this presentation are preliminary and could be adjusted or otherwise changed. All statements made in this presentation are made only as of the date of this presentation. We undertake no obligation to update the information in this presentation in the event facts or circumstances change after the date of this presentation. All references to annual and quarterly periods refer to our fiscal year and fiscal quarters.

SanDisk First Quarter 2016 Results | April 27, 2016

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Q1 2016 Results & Metrics

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Q1 2016 Summary P&L Results

Q1 2016 Q4 2015 Q1 2015

Revenue $1.37 $1.54 $1.33

Non-GAAP Gross Margin(1a) 42% 43% 43%

Non-GAAP Operating Expenses(1a) as a % of revenue 25% 21% 28%

Non-GAAP Operating Margin(1a) 17% 22% 15%

Non-GAAP EPS(1a)(1b) $0.82 $1.26 $0.62

(1a)(1b) See Endnotes for further information

($ in billions)


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($ in millions) Q1 2016 Q4 2015 Q1 2015

Net cash provided by operating activities $355 $434 $309

Capital Investments

Acquisition of property and equipment, net ($59) ($131) ($98) Change in investment and notes receivable activity with Flash Ventures $189 ($27) ($11)

Total Capital Investments $129 ($158) ($109) Free Cash Flow(2a) $484 $276 $200

Capital Return Program Dividends ($3) ($0) ($65) Share repurchases $0 $0 ($750) Taxes paid related to net share settlement of equity awards ($31) ($3) ($34)

Total Capital Return Program ($33) ($3) ($848)

Cash, cash equivalents, short and long-term marketable securities $4,633 $4,123 $4,394 Net cash(2b) $2,137 $1,627 $1,898 Fab operating lease guarantees (off-balance sheet) $984 $766 $606

Q1 2016 Key Balance Sheet and Cash Flow Metrics

Calculation of subtotals and totals may not agree to the sum of the components presented due to rounding (2a)(2b) See Endnotes for further information


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Revenue Mix(3) by Category

% of Revenue

40% 40% 38% 33% 38% 44% 37% 41% 39%

20% 19% 24% 26%

25% 20%

27% 22% 16%

6% 8% 10% 15% 14% 14% 11% 13%

16%

22% 21% 17% 16% 13% 10% 10% 12% 13%

11% 12% 11% 10% 10% 11% 15% 12% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Removable Embedded Enterprise Solutions Client SSD Solutions Other

Percentages may not add to 100% due to rounding (3)-(8) See Endnotes for further information.

(4) (5) (6) (7) (8)


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Revenue Mix(3) by Channel

65% 67% 68% 69% 65%

61% 67%

61% 64%

35% 33% 32% 31% 35%

39% 33%

39% 36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Commercial Retail(9)

(3)(9) See Endnotes for further information

% of Revenue


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Quarterly Metrics Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Q/Q change in gigabytes sold -10% 31% 9% 4% -15% -1% 49% 23% -6%

Y/Y change in gigabytes sold 20% 51% 43% 32% 24% -6% 30% 53% 71%

Q/Q change in ASP/gigabyte -3% -16% -3% -4% -10% -6% -22% -10% -8%

Y/Y change in ASP/gigabyte -7% -26% -26% -24% -29% -21% -37% -41% -40%

Q/Q change in cost/gigabyte(10) -3% -12% -3% 3% -6% -4% -24% -12% -6%

Y/Y change in cost/gigabyte(10) -23% -28% -23% -15% -17% -10% -29% -40% -39%

Average gigabyte/unit capacity 13.9 14.1 16.5 22.3 20.8 19.2 23.5 23.9 25.6

As of end of period:

Factory headcount(11) (12) 1,366 2,874 3,276 3,284 3,149 3,149 3,322 3,456 3,536

Non-factory headcount(13) 4,490 4,664 5,461 5,412 5,490 5,371

5,292 5,334 5,333

Total headcount 5,586 7,538 8,737 8,696 8,639 8,520 8,614 8,790 8,869

(10)-(13) See Endnotes for further information SanDisk First Quarter 2016 Results | April 27, 2016

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Q1 2016 Business Review

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Business Updates Enterprise Solutions

– Revenue grew 9% Q/Q and 15% Y/Y • Strength in enterprise SATA SSDs and PCIe solutions and growth from hyperscale customers

– Growing contribution and strengthening customer engagements from InfiniFlash™ all-flash storage platform

– Sampled 2nd generation 12 Gb/s enterprise SAS SSD based on 15nm technology

– On track to launch 15nm 12 Gb/s enterprise SAS SSD and NVMe PCIe SSD later in 2016

Client SSDs – Revenue declined 6% Q/Q, reflecting seasonality, and grew 6% Y/Y

• Excluding the Q1 2015 client SSD revenue from a large customer which ended its client SSD program, client SSD revenue grew 55% Y/Y

• Strong Y/Y revenue growth in both commercial and retail channels

– Finished qualification of 15nm X3 client SSD at a major OEM, with production ramp expected in Q2 2016

– Expecting to complete additional qualifications of 15 nm X3 client SSDs in Q2 2016


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Embedded Solutions – Revenue declined 33%, both Q/Q and Y/Y, due to:

• Weak demand from smartphone customers • SanDisk’s focus on X3 eMMC embedded solutions, which are in the early stages of market adoption

– X3-based iNAND 7232 achieved additional design wins, including in the HTC 10, with production ramp of the iNAND 7232 continuing throughout 2016 as these designs come to market

Removable – Revenue declined 15% Q/Q due to retail seasonality

• Gained global retail market share from Q4 to Q1 in both cards and USBs

– Revenue grew 6% Y/Y, benefitting from:

• New retail solutions such as SanDisk iXpand™ and SanDisk Ultra® Dual USB Drives • Growing usage of cards in new commercial applications in the connected home and industrial sectors

Other – Other category increased 12% Q/Q and 54% Y/Y, with growth driven by sales of components and wafers

Business Updates


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Business Updates Technology & Operations

– Now receiving initial 3D NAND production output at New Fab 2 facility; began OEM qualification work on 3D NAND

– On track for development of the next generation 3D NAND, expected to be in volume production in 1H 2017

– Began 5% wafer capacity expansion which will include both 2D and 3D NAND, with completion expected in Q2 2016

– SanDisk’s back-end supply operations executed well in Q1, responding to demand upsides and continuing to be ranked best in class for on-time delivery and support by nearly all of SanDisk’s top OEM and enterprise customers

• Captive assembly and test facilities in Shanghai and Penang, along with our network of contract manufacturing partners continue to provide the scale and agility to meet customer requirements

Supply

– 2016 Y/Y industry bit supply growth expected to be in the low-30% range

– 2016 Y/Y SanDisk bit supply growth expected to be somewhat lower than industry average, likely close to 30%

– 3D NAND is estimated to represent 15% to 20% of the industry’s total NAND wafer capacity exiting 2016

– SanDisk’s 3D NAND wafer capacity is estimated to be approximately 15% of our total wafer capacity exiting 2016


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SanDisk Key Strengths

Vertical integration

Broad NAND solutions portfolio

JV scale, technology

development

Global brand recognition

Diverse customer base IP portfolio

Deep expertise in flash storage systems

management


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Endnotes, Appendices • Endnotes • Basis of presentation for Non-GAAP to

GAAP Operating Results • Reconciliations of Non-GAAP to GAAP

Statements of Operations • Reconciliation of GAAP to Non-GAAP

Cost of Revenue • Reconciliation of GAAP Cash Flows

from Operations to Free Cash Flow

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Endnotes 1a Gross margin, operating expenses, operating margin and EPS are non-GAAP excluding the impact of share-based compensation, inventory step-up expense, amortization and

impairment of acquisition-related intangible assets, Western Digital acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital, gains and losses due to the modification and termination of warrants, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017 and related tax adjustments. See appendices for a reconciliation of non-GAAP to GAAP financials. Gross margin and operating margin are a percent of the revenue for the period shown.

1b Non-GAAP shares are adjusted for the impact of expensing share-based compensation and include the impact of offsetting shares from the call options related to the convertible senior notes.

2a Free cash flow is defined as net cash provided by operating activities less (a) acquisition of property and equipment, net, and (b) net investments and notes receivables activities with Flash Ventures.

2b Net cash equals cash, cash equivalents, short and long-term marketable securities less the principal amount of SanDisk’s outstanding convertible debt.

3 Revenue by category and by channel are estimated based on analysis of the information SanDisk collects in its sales reporting processes. 4 Removable includes products such as cards, USB flash drives and audio/video players. 5 Embedded includes products that attach to a host system board.

6 Enterprise Solutions includes SSDs, systems solutions and software used in data center applications. 7 Client SSD Solutions includes SSDs used in client devices and associated software. 8 Other includes wafers, components, accessories and license and royalties.

9 Commercial includes revenue from OEMs, system integrators, value-added resellers, direct sales, and license and royalties. 10 Cost per gigabyte and cost reduction are non-GAAP and are computed from non-GAAP cost of revenue. See appendices for a reconciliation of non-GAAP to GAAP cost of revenue. 11 Reflects SanDisk’s China and Malaysia factory employees, excluding temporary and contract workers.

12 During 2014, 1,505 employees were converted from contractor to employee status in SanDisk’s assembly and test facility in China.

13 Reflects SanDisk non-factory employees, excluding temporary and contract workers.


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Basis of Presentation for Non-GAAP to GAAP Operating Results To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), we use non-GAAP measures of operating results, net income and net income per share, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user's overall understanding of our current financial performance and our prospects for the future. Specifically, we believe the non-GAAP results provide useful information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that we believe are not indicative of our core operating results and because they are consistent with the financial models and estimates published by many analysts who follow us. For example, because the non-GAAP results exclude the expenses we recorded for share-based compensation, amortization of acquisition-related intangible assets related to our acquisitions, inventory step-up expense, impairment of acquisition-related in-process research and development intangible assets, Western Digital Corporation acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital, gains and losses due to the modifications and terminations of warrants, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017 and related tax adjustments, we believe the inclusion of non-GAAP financial measures provides consistency in our financial reporting. In addition, our non-GAAP diluted shares are adjusted for the impact of expensing share-based compensation and include the impact of the call options which, when exercised, will offset the issuance of dilutive shares from the convertible senior notes, while our GAAP diluted shares exclude the anti-dilutive impact of these call options. These non-GAAP results are some of the primary indicators management uses for assessing our performance, allocating resources, and planning and forecasting future periods. Further, management uses non-GAAP information that excludes certain charges, such as share-based compensation, amortization of acquisition-related intangible assets, inventory step-up expense, impairment of acquisition-related in-process research and development intangible assets, Western Digital acquisition-related expenses, gains and losses related to the shortened duration or liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital, gains and losses due to the modifications and terminations of warrants, non-cash economic interest expense associated with the convertible senior notes, non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017 and related tax adjustments, as these non-GAAP charges do not reflect the cash operating results of the business or the ongoing results. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP measures may be different than the non-GAAP measures used by other companies.


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Reconciliation of Non-GAAP to GAAP Statements of Operations Three months ended April 3, 2016 (in thousands, except percentages and per share amounts, unaudited)

% of Rev Other % of RevRevenue 1,365,736$ 100.0% ―$ ―$ ―$ ―$ ―$ 1,365,736$ 100.0%

Cost of revenue 788,759 57.8% 5,376 (a) ― ― ― ― 794,135 58.1%Amortization of acquisition-related intangible assets ― ―% ― 28,276 (b) ― ― ― 28,276 2.1% Total cost of revenue 788,759 57.8% 5,376 28,276 ― ― ― 822,411 60.2%

Gross profit 576,977 42.2% (5,376) (28,276) ― ― ― 543,325 39.8%

Operating expenses:Research and development 222,227 16.3% 21,960 (a) ― ― ― ― 244,187 17.9%Sales and marketing 86,675 6.3% 9,355 (a) ― ― ― ― 96,030 7.0%General and administrative 33,582 2.5% 7,008 (a) ― ― ― ― 40,590 3.0%Amortization of acquisition-related intangible assets ― ―% ― 6,397 (b) ― ― ― 6,397 0.5%Restructuring and other 47 0.0% ― ― ― ― ― 47 0.0%Western Digital acquisition-related expenses ― ―% ― ― 18,963 (c) ― ― 18,963 1.4%

Total operating expenses 342,531 25.1% 38,323 6,397 18,963 ― ― 406,214 29.7% Operating income 234,446 17.2% (43,699) (34,673) (18,963) ― ― 137,111 10.0%

Other income (expense), net 8,007 0.6% ― ― (24) (d) (23,333) (e) ― (15,350) (1.1%)Income before income taxes 242,453 17.8% (43,699) (34,673) (18,987) (23,333) ― 121,761 8.9%

Provision for income taxes (f) 75,161 5.5% (11,597) (8,417) (6,891) (8,470) 3,622 43,408 3.2%

Net income 167,292$ 12.2% (32,102)$ (26,256)$ (12,096)$ (14,863)$ (3,622)$ 78,353$ 5.7%

Net income per share, diluted 0.82$ 0.37$

Diluted shares used in computing net income per share 204,001 64 (g) 5,858 (h) 209,923

Effective tax rate (f) 31.0% 26.5% 24.3% 36.3% 36.3% 35.6%

(a) (b)

(c) (d)

(e)

(f)

(g) (h)

Q1'16Non-GAAP

Share-based compensation expense.Amortization of acquisition-related intangible assets, primarily developed technology, customer relationships, and trademarks and trade names related to the acquisitions of FlashSoft Corporation (February 2012), Schooner Information Technology, Inc. (June 2012), SMART Storage Systems (August 2013) and Fusion-io, Inc. (July 2014).Incremental expense related to the pending acquisition of SanDisk by Western Digital, primarily for transaction, legal, employee-related and other costs.

Q1'16GAAP

Share-based

Compen-sation

PurchaseAcctg

Adj

Western Digital Aquisition

Related

Convertible Debt Adj

Gains and losses related to the shortened duration and expected liquidation prior to their effective maturity of marketable securities, and gains and losses related to the modifications and terminations of the warrants, due to the pending acquisition of SanDisk by Western Digital.Incremental interest expense related to the non-cash economic interest expense associated with the convertible senior notes and the non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017.Income taxes associated with certain non-GAAP to GAAP adjustments and the effects of one-time income tax adjustments recorded in a specific quarter for GAAP purposes are reflected on a forecast basis in the non-GAAP tax rate but not in the forecasted GAAP tax rate.Adjustment for the impact of expensing share-based compensation.Adjustment for the impact of offsetting shares from the call options related to the convertible senior notes.


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Reconciliation of Non-GAAP to GAAP Statements of Operations Three months ended January 3, 2016 (in thousands, except percentages and per share amounts, unaudited)

% of Rev Other % of RevRevenue 1,543,150$ 100.0% ―$ ―$ ―$ ―$ ―$ 1,543,150$ 100.0%

Cost of revenue 884,729 57.3% 4,743 (a) ― ― ― ― 889,472 57.6%Amortization of acquisition-related intangible assets ― ―% ― 28,820 (b) ― ― ― 28,820 1.9% Total cost of revenue 884,729 57.3% 4,743 28,820 ― ― ― 918,292 59.5%

Gross profit 658,421 42.7% (4,743) (28,820) ― ― ― 624,858 40.5%

Operating expenses:Research and development 206,789 13.4% 23,674 (a) ― ― ― ― 230,463 14.9%Sales and marketing 83,435 5.4% 9,416 (a) ― ― ― ― 92,851 6.0%General and administrative 33,174 2.1% 7,375 (a) ― ― ― ― 40,549 2.6%Amortization of acquisition-related intangible assets ― ―% ― 12,731 (b) ― ― ― 12,731 0.8%Restructuring and other 2,090 0.1% ― ― ― ― ― 2,090 0.1%Western Digital acquisition-related expenses ― ―% ― ― 28,065 (c) ― ― 28,065 1.8%

Total operating expenses 325,488 21.1% 40,465 12,731 28,065 ― ― 406,749 26.4% Operating income 332,933 21.6% (45,208) (41,551) (28,065) ― ― 218,109 14.1%

Other income (expense), net (1,335) (0.1%) ― ― (920) (d) (25,207) (e) ― (27,462) (1.8%)Income before income taxes 331,598 21.5% (45,208) (41,551) (28,985) (25,207) ― 190,647 12.4%

Provision for income taxes (f) 74,679 4.8% (12,353) (12,612) (10,521) (9,088) 25,073 55,178 3.6%

Net income 256,919$ 16.6% (32,855)$ (28,939)$ (18,464)$ (16,119)$ (25,073)$ 135,469$ 8.8%


Diluted shares used in computing net income per share 203,228 10 (g) 5,863 (h) 209,101

Effective tax rate (f) 22.5% 27.3% 30.4% 36.3% 36.1% 28.9%

(a) (b)

(c) (d) (e)

(f)

(g) (h)

Income taxes associated with certain non-GAAP to GAAP adjustments and the effects of one-time income tax adjustments recorded in a specific quarter for GAAP purposes are reflected on a forecast basis in the non-GAAP tax rate but not in the forecasted GAAP tax rate.

Amortization of acquisition-related intangible assets, primarily developed technology, customer relationships, and trademarks and trade names related to the acquisitions of FlashSoft Corporation (February 2012), Schooner Information Technology, Inc. (June 2012), SMART Storage Systems (August 2013) and Fusion-io, Inc. (July 2014).

Incremental interest expense related to the non-cash economic interest expense associated with the convertible senior notes and the non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017.

Incremental expense related to the pending acquisition of SanDisk by Western Digital, primarily for transaction, legal, employee-related and other costs.

Share-based compensation expense.

Q4'15Non-GAAP

Gains and losses related to the shortened duration and expected liquidation prior to their effective maturity of marketable securities due to the pending acquisition of SanDisk by Western Digital.

Adjustment for the impact of expensing share-based compensation.Adjustment for the impact of offsetting shares from the call options related to the convertible senior notes.

Q4'15GAAP

Share-based

Compen-sation

PurchaseAcctg

Adj

Western Digital Aquisition

Related



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Reconciliation of Non-GAAP to GAAP Statements of Operations Three months ended March 29, 2015 (in thousands, except percentages and per share amounts, unaudited)

% of Rev Other % of RevRevenue 1,332,241$ 100.0% ―$ ―$ ―$ ―$ 1,332,241$ 100.0%

Cost of revenue 758,421 56.9% 4,062 (a) ― ― ― 762,483 57.2%Amortization of acquisition-related intangible assets ― ―% ― 24,756 (b) ― ― 24,756 1.9% Total cost of revenue 758,421 56.9% 4,062 24,756 ― ― 787,239 59.1%

Gross profit 573,820 43.1% (4,062) (24,756) ― ― 545,002 40.9%

Research and development 201,683 15.1% 21,043 (a) ― ― ― 222,726 16.7%Sales and marketing 92,285 6.9% 9,535 (a) ― ― ― 101,820 7.6%General and administrative 41,277 3.1% 6,770 (a) ― ― ― 48,047 3.6%Amortization of acquisition-related intangible assets ― ―% ― 13,681 (b) ― ― 13,681 1.0%Impairment of acquisition-related intangible assets ― ―% ― 61,000 (c) ― ― 61,000 4.6%Restructuring and other 40,541 3.0% ― ― ― ― 40,541 3.0% Total operating expenses 375,786 28.2% 37,348 74,681 ― ― 487,815 36.6% Operating income 198,034 14.9% (41,410) (99,437) ― ― 57,187 4.3%

Other income (expense), net (1,436) (0.1%) ― ― (22,134) (d) ― (23,570) (1.8%)Income before income taxes 196,598 14.8% (41,410) (99,437) (22,134) ― 33,617 2.5%

Provision for (benefit from) income taxes 62,911 4.7% (10,832) (29,346) (8,054) (20,087) (e) (5,408) (0.4%)

Net income 133,687$ 10.0% (30,578)$ (70,091)$ (14,080)$ 20,087$ 39,025$ 2.9%


Diluted shares used in computing net income per share 216,842 (220) (f) 7,427 (g) 224,049

Effective tax rate 32.0% 26.2% 29.5% 36.4% -16.1%

(a) (b)

(c) (d)

(e)

(f) Non-GAAP diluted shares are adjusted for the impact of expensing share-based compensation.(g) Non-GAAP diluted shares include the impact of offsetting shares from the call options related to the convertible senior notes.

Q1'15Non-GAAP

Share-based

Compen-sation

PurchaseAcctg

Adj


Q1'15GAAP

Income taxes associated with certain non-GAAP to GAAP adjustments and the effects of one-time income tax adjustments recorded in a specific quarter for GAAP purposes are reflected on a forecast basis in our non-GAAP tax rate but not in our forecasted GAAP tax rate.

Share-based compensation expense.Amortization of acquisition-related intangible assets, primarily developed technology, customer relationships, and trademarks and trade names related to the acquisitions of FlashSoft Corporation (February 2012), Schooner Information Technology, Inc. (June 2012), SMART Storage Systems (August 2013) and Fusion-io, Inc. (July 2014).

Incremental interest expense related to the non-cash economic interest expense associated with the convertible senior notes and the non-cash change in fair value of the liability component of the convertible senior notes due to the conversion of a portion of the 1.5% Convertible Senior Notes due 2017.

Impairment of acquisition-related in-process research and development intangible assets related to the acquisition of Fusion-io, Inc.


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Reconciliation of GAAP to Non-GAAP Cost of Revenue (in thousands, unaudited)

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

GAAP COST OF REVENUE $760,655 $874,361 $929,353 $995,484 $787,239 $752,817 $849,455 $918,292 $822,411

Share-based compensation (a) (2,610) (3,507) (4,001) (4,601) (4,062) (5,022) (5,479) (4,743) (5,376)

Amortization of acquisition-related intangible assets (b) (19,616) (19,721) (28,523) (33,039) (24,756) (28,822) (28,822) (28,820) (28,276)

Inventory step-up expense (c) - - (4,903) (2,931) - - - - -

NON-GAAP COST OF REVENUE $738,429 $851,133 $891,926 $954,913 $758,421 $718,973 $815,154 $884,729 $788,759

(a) Share-based compensation expense.

(b)

Amortization of acquisition-related intangible assets, primarily developed technology, customer relationships, and trademarks and trade names related to the acquisitions of Pliant Technology, Inc., FlashSoft Corporation, Schooner Information Technology, Inc., SMART Storage Systems and Fusion-io, Inc.

(c) Inventory step-up expense related to acquisition of Fusion-io, Inc.


21

Reconciliation of GAAP Cash Flows from Operations to Free Cash Flow (in thousands, unaudited)


Three months ended

March 29, 2015 April 3, 2016 Net cash provided by operating activities $ 308,865 $ 355,143

Acquisition of property and equipment, net (98,287) (59,458) Notes receivable issuances to Flash Ventures (100,499) (45,723)

Notes receivable proceeds from Flash Ventures 89,693 234,524

Free cash Flow $ 199,772 $ 484,486

22 SanDisk First Quarter 2016 Results | April 27, 2016

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