SUNNYVALE, CA, April 18, 2001 -- SanDisk Corporation (NASDAQ:SNDK), the world's largest supplier of flash memory data storage products, today announced results for its first quarter ended March 31, 2001. Total first quarter revenues were $101.3 million, a decrease of 7% from $109.4 million in the first quarter of 2000. Product revenues were $88.1 million, down 9% from $97.2 million in the same period of the prior year. Revenues from licenses and royalties were $13.2 million, up 9% from $12.1 million in the first quarter of 2000. Net loss from business operations for the first quarter of 2001 was $29.1 million, or $0.43 per share on a diluted basis and includes an inventory charge of $45.3 million. Excluding the current quarter inventory charge, the net loss per share from business operations would have been approximately $0.01. This compares to earnings from business operations of $15.3 million, or $0.21 per share, for the first quarter of 2000.
In the first quarter of 2001, SanDisk recognized an unrealized after tax loss of $114.0 million on the decline in fair market value of the United Microelectronics Corporation, or UMC, shares held by the company. Due to the continued downturn in the semiconductor industry and economy in general, the company believes the decline in the market value of its investment in UMC as of March 31, 2001 was other than temporary and recorded an unrealized loss as required by generally accepted accounting principles. The net loss for the first quarter, including this unrealized loss, was $143.1 million or $2.11 per share. This compares to first quarter 2000 earnings of $219.3 million or $3.00 per share on a diluted basis, which includes the gain on the exchange of our United Silicon, Inc. shares for UMC shares.
Total first quarter revenues decreased 43% from $177.7 million in the fourth quarter of 2000. Product revenues declined 43% from $154.7 million in the previous quarter due primarily to a decrease in demand and lower average selling prices. Revenues from licenses and royalties decreased 42% from $22.9 million in the fourth quarter of 2000 due to lower royalty bearing sales by licensees. First quarter 2001 net loss from business operations of $29.1 million, or $0.43 per share compares to earnings of $29.5 million, or $0.44 per share, for the fourth quarter of 2000.
Product gross margin for the first quarter of 2001 was negative 35% compared to 34% in the fourth quarter of 2000 primarily due to the inventory charge reflecting substantially lower market pricing, reduced demand for the company's products and the write off of obsolete components. Excluding the current quarter inventory charge, product gross margins were 17%. Product gross margins were also adversely impacted by a 23% decline in units shipped and a decline of 15% in average unit selling prices compared to the fourth quarter of 2000.
"The first quarter was a disappointment, particularly compared to the fourth quarter record results," said Dr. Eli Harari, President and CEO of SanDisk. "Weak economic conditions and ongoing customer inventory corrections throughout the quarter have contributed to the significant slowdown in our business. Pricing pressures continued throughout the quarter as a result of customers' weak demand, coupled with excess market supply. Despite the difficult current market conditions, and the near term low bookings visibility, we are encouraged by the high level of design-in activity, particularly for our SD Cards. This quarter we made our first production shipments for SD cards, which we believe will contribute to renewed growth in our sales in the second half of this year.
"As stated previously, we believe the current situation is likely to adversely impact the second quarter and possibly continue into the third quarter. We are taking aggressive steps to reduce our inventory levels and are tightly controlling our expenses. At the same time, we are continuing our investments in advanced flash technology and in the FlashVision manufacturing joint venture with Toshiba. In the second quarter we expect to commence production shipments of cards built with the 512 megabit .16 micron flash chips jointly developed with Toshiba and produced at their Yokkaichi fab. It has been just one year since we began production of our 256 megabit .24 micron flash. This 512 megabit (64 megabytes on one monolithic chip) is, we believe, the most advanced of its kind in production today. Progress at the Virginia fab has been excellent, and they have begun qualification of the 512 megabit .16 micron wafers and are on schedule to ship first production chips before the end of the second quarter. We believe that this .16 micron flash technology will give us substantially lower product cost once we complete the startup and production ramp up phase at FlashVision in Virginia. This is the key to expanding our consumer markets and maintaining our leadership. The steep decline in selling prices is very good news for consumers, and will, we believe, accelerate the pervasive adoption of our flash storage products in the digital consumer, wireless and internet appliances emerging markets. "
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.
Low order visibility, weak worldwide economic conditions and uncertainty continue to make it difficult to predict future market demand for our products. We currently believe that our second quarter sales will be adversely impacted by pricing pressures and weak demand. We are projecting second quarter product revenues to be approximately unchanged from the just completed quarter, and net loss per share to be approximately $0.05. Revenues from licenses and royalties are expected to be approximately $10 million in the second quarter as the current weak market conditions will likely result in lower royalty bearing sales by our licensees.
We expect our customers' inventory corrections to be essentially completed by the summer, and believe that new customer designs employing our flash memory will spur a pickup in demand for our products in the second half, in preparation for the Christmas Holiday season. However, because of the high level of economic and market uncertainty which is outside of our control, we cannot predict our revenues and earnings per share in the second half 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: the timely introduction and acceptance of new consumer products that incorporate our flash storage devices; future average selling price erosion due to excess capacity and price competition that is more severe than normal learning curve price reductions; slower than expected growth in the emerging markets for our products which may result in reduced sales and increased inventory; 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; 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 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 first quarter 2001 conference call is scheduled for 2:00 p.m. PDT, Wednesday, April 18th. The phone number is (973) 633-1010. A webcast of the conference call will be available on www.sandisk.com/q1results and on www.streetevents.com. Both webcasts will be available until Saturday, April 21, 2001, at 5:00 p.m. Pacific Time.
CompactFlash and CF are trademarks of SanDisk Corporation.