Sandisk (SNDK) Q2 2026 Earnings Call Transcript

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DATE

Thursday, Jan. 29, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — David V. Goeckeler
• Chief Financial Officer — Luis Visoso

TAKEAWAYS

• Revenue -- $3,025 million, up 31% quarter over quarter and 61% year over year, exceeding guidance of $2,550 million-$2,650 million due to higher pricing.
• Non-GAAP Gross Margin -- 51.1%, up from 29.9% in the previous quarter and above guidance of 41%-43% due to elevated segment pricing.
• Non-GAAP Operating Margin -- 37.5%, a significant sequential increase from 10.6%, reflecting both revenue growth and a nonrecurring expense benefit of $35 million.
• Non-GAAP EPS -- $6.20, a rise from $1.22 in the prior quarter, exceeding the $3.00-$3.40 guidance.
• Free Cash Flow -- $843 million (27.9% margin), driven by $1,019 million operating cash flow, partially offset by $176 million net capital spending.
• Non-GAAP Operating Expenses -- $413 million, at 13.7% of revenue, below guidance ($450 million-$475 million) owing to the new qualification unit treatment.
• Data Center Revenue -- $440 million, up 64% quarter over quarter, driven by broad acceleration in enterprise SSD demand and new product qualifications.
• Edge Revenue -- $1,678 million, reflecting 21% sequential growth as AI adoption elevated storage requirements in PCs and mobile devices.
• Consumer Revenue -- $907 million, up 39% sequentially as premium products and new USB launches contributed to mix and profitability improvements.
• Unit Bit Shipments -- Rose 22% year over year and low single digits sequentially; bit growth guided to remain mid to high teens percent for coming years.
• Cash and Debt Position -- Closed with $1,539 million cash and $603 million debt after $750 million additional paydown, ending net cash positive by $936 million.
• JV Extension with Kyoccia -- Yokohama joint venture extended through Dec. 31, 2034; Sandisk to pay $1,165 million for manufacturing between 2026 and 2029, expensed through COGS over nine years.
• Product Advancement -- Completed PCIe Gen 5 TLC drive qualification at two hyperscalers; Bix 8 QLC (Stargate) in final trials, with revenue shipments expected in several quarters.
• Long-Term Agreements (LTA) -- One LTA signed (with prepayment component); further multiyear supply/pricing negotiations ongoing, targeting supply certainty and pricing visibility.
• Fiscal Q3 2026 Guidance -- Revenue predicted at $4.4 billion-$4.8 billion, non-GAAP gross margin 65%-67%, and non-GAAP EPS of $12-$14 based on 157 million shares.

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RISKS

• Supply remains constrained, as management stated, "demand for our products continues to exceed supply" and "unable to fulfill demand for our customers this quarter."
• Guidance indicates "bits to be down mid-single digits" in the next quarter, signaling lower than historical seasonality despite strong pricing.
• Management acknowledged, "Any material increase in capital deployment would require high confidence that demand at attractive pricing levels is durable over a several-year horizon with financial commitments," indicating growth could be capped without further visibility.

SUMMARY

Sandisk (NASDAQ:SNDK) reported sequential and annual revenue acceleration outpacing prior guidance, led by sharp gross margin expansion on broad segment pricing gains. Management pointed to AI-driven structural changes in end-market demand, especially in data centers, where Sandisk products are central to an accelerated shift in storage content requirements and customer engagement frameworks. The company highlighted the transition towards long-term agreements, with initial deals closed and additional negotiations underway, as essential to securing future growth and supply alignment across hyperscaler and strategic customers. Capital discipline remains in focus, with further investments contingent on securing multiyear customer commitments, while cash generation enabled continued debt reductions and a reinforced net cash position.

• Gross capital expenditures reached $525 million, representing 8.4% of revenue, as Sandisk maintained capex discipline through the Bix 8 transition.
• Management introduced the SanDisk Extreme Fit USB-C flash drive and rebranded the SSD line to Sandisk Optimus, targeting higher-value consumer and gaming segments.
• Guidance for continued margin improvement signals confidence in price durability and mix management, with projected gross margins rising to a structural midpoint of 66% next quarter.
• The expansion of the Yokohama JV matches Kitakami JV expiration, underpinning supply assurance for the next nine years amid expanding global demand.
• Bit growth targets were reaffirmed at mid to high teens percent annually, and management reiterated that all segment prices are rising, with NAND flowing to the most attractive markets.

INDUSTRY GLOSSARY

• Bix 8: Latest generation NAND technology node from Sandisk, enabling higher storage density and performance.
• QLC/TLC: NAND flash technologies storing four (QLC) or three (TLC) bits per cell, central to product mix for enterprise SSDs.
• LTA (Long-Term Agreement): Multiyear supply and pricing contracts providing supply assurance and financial predictability in customer relationships.
• Hyperscaler: Large-scale cloud service providers consuming massive data storage and compute resources for AI and cloud infrastructure.
• Stargate: Codename for Sandisk Bix 8 QLC storage class product aimed at data center deployments.

Full Conference Call Transcript

David V. Goeckeler: Thanks, Ivan. Afternoon, and thank you for joining Sandisk's fiscal second-quarter earnings call. In the quarter, revenue was $3 billion, up 31% sequentially, with non-GAAP earnings per share of $6.20. Artificial intelligence continues to drive a step change in demand, with data center and edge workloads expanding system complexity and storage content requirements. This shift, along with disciplined commercial actions and strategic capacity allocation, has strengthened our business results. Let me frame the NAND industry's evolution before discussing our end markets. NAND is now recognized as indispensable to the world's storage needs, driving a foundational shift in how commercial relationships between suppliers and customers are structured.

Supply certainty, longer planning horizons, and multiyear commitments are increasingly essential to support structural demand that extends beyond the traditional cyclical model of our market. As a result, we are engaged in discussions with customers to evolve from quarterly negotiations toward multiyear agreements with firmer commitments on supply and pricing, enabling better planning practices and more attractive returns. These changes would better align our planning cycles with customers' demand profiles to our mutual benefit. Accordingly, our supply plans will continue to be designed around predictable, long-term demand at current and forecasted market prices. These dynamics reveal the true value of our NAND technology and reinforce the need for continued innovation and disciplined execution.

Our products are enabled by decades of sustained investment in R&D and innovation across NAND and system solutions, supported by substantial capital investments in world-class front-end and back-end manufacturing. As a result, we believe NAND is becoming a more durable, structurally attractive industry with higher average returns.

Turning to our end market highlights. During the quarter, we continued to execute against our roadmap, advancing next-generation product innovations and qualifications across the business with key customer programs progressing on schedule. In the data center, we are at the center of a broad expansion in AI infrastructure. Enterprise SSD demand is accelerating across the ecosystem as AI workloads scale, with inference, in particular, driving a meaningful increase in NAND content per deployment. This momentum reflects deepening engagement with a wider range of customers building and deploying AI at scale, reshaping our data center business, which we expect to grow meaningfully in both the near and long term.

We are seeing strong adoption across all types of AI infrastructure builders, including cloud hyperscalers, edge and enterprise data centers, OEMs, and system integrators deploying AI at scale. Our technology has become a critical enabler of these deployments, delivering the performance characteristics required for optimized AI infrastructure. The breadth of customer adoption across the AI ecosystem underscores the strength of our technology and the depth of our product portfolio. Within hyperscalers, we have completed qualification of our PCIe Gen 5 high-performance TLC drives at a second hyperscaler and are on track to complete qualification at additional hyperscalers over the coming quarters, with Bix 8 TLC solutions soon thereafter.

This product is driving significant revenue growth across our data center portfolio, which was up 64% sequentially. Our Bix 8 QLC storage class product, code-named Stargate, continues advancing through with two major hyperscalers and is expected to begin shipping for revenue within the next several quarters, providing an additional tailwind for data center growth.

In edge, demand meaningfully exceeded supply as replacement cycles in AI adoption across PCs and mobile devices drove richer configurations and higher storage content per device. In this allocation environment, we are partnering with key edge customers to prioritize their mission-critical needs and optimize product mix within our available supply, ensuring the best long-term returns across our portfolio. In consumer, the mix shifted toward premium products and higher-value configurations, supporting storage content growth and profitability. We introduced a breakthrough in the USB form factor with the launch of our SanDisk Extreme Fit, our smallest high-capacity USB-C flash drive. This breakthrough stay-put product gives our customers a seamless and affordable way to significantly expand storage on their PCs and smartphones.

We expanded key licensing initiatives with global household names, Crayola and FIFA, bringing full circle the commitments underscored last February with the debut of colorful SanDisk Crayola USB-C flash drives and officially licensed FIFA World Cup 2026 products. This strong momentum continued through the holidays with demand driven by targeted gaming-led initiatives, including our Don't Delete Your Games campaign. At CES 2026, we introduced the Sandisk Optimus lineup, rebranding WD Black and WD Blue NVMe SSDs to sharpen brand architecture and reinforce performance leadership. Together, these actions reflect our continued focus on driving demand through brand innovation and disciplined go-to-market execution, reinforcing Sandisk Corporation's leadership across gaming, creator, and everyday consumer segments.

These wins across our end markets reflect the agility of our operations and the resilience of our broad portfolio. Looking ahead, we continue to see customer demand well above supply beyond calendar year 2026, which requires careful allocation planning and alignment with our customers. We remain focused on disciplined execution through the Bix 8 transition, supporting average long-term bit growth in the mid to high teens while maintaining our capital expenditure plan. We are working diligently to support customer demand while ensuring profitability supports the substantial R&D and capital investment required to deliver some of the world's most advanced semiconductor technologies. With that, I'll turn the call over to Luis to dive deeper into our financial performance and guidance.

Luis Visoso: Thank you, David. Before diving into the financials, I would provide a brief market overview. We believe that the NAND market is going through a structural evolution catalyzed by AI. The evolution is more pronounced in data centers, where data growth is accelerating as the temperature of data is rising, token intensity is accelerating, and storage is a critical enabler for inference. As a result, NAND is an increasingly critical component of the AI infrastructure. Higher demand for NAND in data centers impacts other markets, which are also growing as NAND flows to the most attractive markets.

It is our view that this structural evolution is sustainable and should reduce the cyclicality of our NAND business, creating higher average long-term margins and returns. In the December quarter, we experienced a clear and significant improvement in conditions across end markets, which led to higher pricing. During the quarter, we made strategic allocation decisions as demand for our products continues to exceed supply. The framework we use to allocate bits is to maximize value creation. We prioritize supply for our strategic customers, those who recognize the value we can create together. These are the customers with whom we intend to build valuable partnerships, thus establishing sustainable multiyear business practices with high predictability of demand, returns, and capital deployment.

Given the strength of the market, we were unable to fulfill demand for our customers this quarter. We are evolving how we define strategic engagement, prioritizing customers with multiyear supply frameworks and shared planning commitments over transactional short-term demand signals. We continue to be prudent and are not changing our capital spending plans, which support mid to high teens bit growth through the Bix 8 transition. Our investment posture remains focused on serving attractive sustained demand and healthy profitability levels. Any material increase in capital deployment would require high confidence that demand at attractive pricing levels is durable over a several-year horizon with financial commitments.

In the current environment, we are committed to supplying our three end markets as we believe that diversification maximizes value creation. We plan to continue to build strategic relationships with a diversified customer mix within these markets, allowing us to have a deeper understanding of their long-term needs. In the quarter, we continue to make progress with customers in establishing shared commitments that improve the predictability of the business. Customer commitments and agreed commercial terms are the most effective mechanism to deliver supply certainty and return on invested capital predictability, allowing us to more prudently manage our capital-intensive business across geographies.

With that context, I will dive deeper into the quarter's results. Revenue for the second quarter was $3,025 million, up 31% quarter over quarter and 61% year over year. This compares favorably to our guidance of $2,550 to $2,650 million. The revenue over-delivery came from higher prices across segments, which strengthened during the quarter. Bits were up 22% year over year and low single digits quarter over quarter. In the second quarter, we saw strong sequential demand across all end markets. Edge revenue came in at $1,678 million, up 21% sequentially. Consumer came in at $907 million, up 39% quarter over quarter. And data center came in at $440 million up 64% sequentially.

Our non-GAAP gross margin for the second quarter was 51.1%, up from 29.9% in the prior quarter. This compares favorably to our guidance of 41 to 43%. The gross margin over-delivery came from higher pricing. Unit cost reductions came in as expected, reinforcing margin improvement. In the second quarter, we incurred $24 million in start-up costs. Excluding these costs, our non-GAAP gross margin would have been 51.9%. Non-GAAP operating expenses for the second quarter were $413 million and represent 13.7% of revenue. This compares favorably to our guidance range of $450 to $475 million, reflecting a nonrecurring benefit from changing how we manage new product introductions.

As a result, non-GAAP operating margins at 37.5% are up from 10.6% in the prior quarter. Non-GAAP EPS for the second quarter was $6.20, up from $1.22 in the prior quarter. This compares favorably to our guidance range of $3 to $3.40. The non-GAAP EPS beat reflects higher than expected revenue and lower costs. Key GAAP to non-GAAP reconciliation items include $52 million in stock-based compensation, net of taxes, which represents 1.7% of revenue, and $93 million related to certain legal matters. Moving on to the balance sheet. We closed the quarter with $1,539 million in cash and cash equivalents and $603 million in debt.

During the quarter, we paid an additional $750 million of debt and closed the quarter with a net cash position of $936 million.

Moving on to free cash flow. During the quarter, we generated $843 million in adjusted free cash flow, which represents a 27.9% free cash flow margin. This includes $1,019 million from operations, partially offset by $176 million from net cash capital spending. Our gross capital spending totaled $525 million and represented 8.4% of revenue. Earlier today, we announced that we have reached an agreement with Kyoccia to extend the Yokohama joint venture through 12/31/2034. With this extension, the Yokohama and Kitakami JVs will have the same expiration date. Building on more than twenty-five years of partnership, we believe that the JV reflects the scale of our operations and the significant mutual value created over time.

The JV enables both companies to design and manufacture the highest performing, lowest cost nanotechnology that powers the world's infrastructure. As part of this extension, Sandisk agreed to pay for the manufacturing services that Kyusha will provide, enabling continued availability of product supply for a total of $1,165 million. This amount will be paid between calendar years 2026 and 2029. The cost will flow through our cost of goods sold over the next nine years.

Moving on to guidance. For the third quarter, we expect revenue between $4.4 billion and $4.8 billion. We anticipate the market to be more undersupplied than it was in the second quarter. We expect bits to be down mid-single digits due to lower than historical seasonality as we benefit from accelerating strength in the data center. Our forecast for non-GAAP gross margin for the third quarter is between 65 and 67%. For the third quarter, we expect non-GAAP operating expenses between $450 million and $470 million. We expect non-GAAP interest and other expenses between $25 and $30 million and non-GAAP tax expenses between $325 and $375 million.

We forecast non-GAAP EPS for the third quarter between $12 and $14, assuming 157 million fully diluted shares. With that, let me turn the call back to David.

David V. Goeckeler: Thank you, Luis. In summary, we continue to successfully navigate these early stages of a far-reaching evolution in our business. In addition to its central role in technology we use every day, like PCs, smartphones, tablets, the cloud, cars, gaming devices, robotics, and more, NAND is a critical technology enabling the development and proliferation of artificial intelligence. For the first time, the data center is expected to become the largest market for NAND in 2026, driven by some of the world's largest and most well-capitalized technology companies. Fueled by the performance our technology delivers, customers across all our end markets are increasingly seeking business practices built around shared commitments and agreed financially attractive terms aligned with our preexisting supply plans.

Our supply plans will remain aligned to such attractive, real, and sustainable long-term demand. With this backdrop, margins are expected to reset at a structurally higher level, delivering fair returns on the substantial innovation and investment required. Our technology and product portfolios intersect these changing market dynamics at the perfect moment, positioning us to manage a balanced portfolio and deliver industry-leading financial performance. With that, let's open up for questions.

Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. The first question will come from Mark Newman with Bernstein. Please go ahead.

Mark Newman: Hi. Thanks so much, and congratulations on fantastic numbers today. Really, really great numbers, especially the third-quarter guidance. So clearly, what's happening is that prices are rebounding at unprecedented rates. I guess my question goes to Dave's comments at the beginning. How are you thinking about long-term agreements? Obviously, there are pros and cons to long-term agreements because they lock in prices. When prices are going up so fast, you may not want so many long-term agreements, I guess. But I'd like to understand how you're thinking about that, how we should think about that in terms of your portion of agreements that are going longer-term, and how that may impact going forward, that'd be great.

And if you could also just touch on the supply-demand balance longer term, if there's any plan to be adding supply or how you're thinking about that would be also great. Thanks very much.

David V. Goeckeler: Thanks, Mark. Appreciate the comments. So let me say a few words about what's happening in the business, and then we'll move on to the long-term agreements (LTAs). There are a number of things happening in the dynamics of our business that are contributing to the results you're seeing. First of all, it starts with the portfolio and innovation. Our Bix 8 node, which we've started ramping now and continue to ramp, is just a fantastic node. The performance, the QLC performance, the two-terabit die - there's a lot of things that just position us very, very well. Customers are responding very strongly to that fundamental NAND technology we're producing.

By the way, I'll just note that we extended the JV, which we're very happy about, and that's going to continue for now another decade. That's enabling a very strong enterprise SSD portfolio. This is something we've been driving for a while. I talked last quarter about seeing growth of that throughout the fiscal year. We saw, I think, 29% sequential growth in the first fiscal quarter. Now we just saw 64% sequential growth in the second fiscal quarter, and I think you'll see that accelerate from here in the second half of the fiscal year. The third leg of major business innovation is happening in the consumer business, quite frankly. A lot of new product introductions.

This Extreme Fit product that we announced this year is really a breakthrough product. It allows our customers to very seamlessly and affordably increase storage capacity of their devices. It's kind of an innovation in the USB space. You wouldn't think that would happen anymore, but it's not a removable product. It's designed just to plug in and stay. You see the agreements we're doing with people like FIFA, which could be the biggest event of this entire year. We have great co-branded products there. When we look at our consumer business, we saw 50% year-over-year growth. So really strong performance there. This improving portfolio, innovation-driven excellence in the product, is allowing us to have a better portfolio mix.

If we look back over the last several quarters, we're literally able to trade out the lowest margin business for the highest margin business, which provides a significant tailwind to the business as well. Then on top of all of that, you've got the supply-demand dynamics, which are pushing the entire market forward. So it's really a combination of all of these that's driving the business forward. It's not simply just pricing. Although it's great to be in a strong pricing environment.

Moving on to LTAs, I will talk a little bit about this, and I know Luis will have some great comments about this as well. As we reach points where we believe we're getting a more fair return for our technology, and customers, quite frankly, are looking for more supply assurance. I think it's important to note in the market right now, this is a completely demand-driven phenomenon, what's going on in the market. We've been very transparent for well over a year about what our supply plans are. We're investing heavily in this market, investing hundreds of millions of dollars in R&D to push the roadmap forward.

We're investing billions of dollars in CapEx, and we've been very clear we're going to drive mid-teens to high-teens bit growth on a sustained basis, which we think is a great market. What's happening is we're just not getting enough visibility into what the demand side really is. If we look at the data center, we've had three forecast cycles now. Last quarter, we went from mid-20s to high-40s percent growth in that market. Now we're looking at high 60% exabyte growth in the data center market. For 2026. I think our customers realize this, especially in the data center market. Their numbers are big, the number of exabytes they're going to need in '26, '27, '28.

We're even talking to some of them about '29 and '30. They're doing their own planning. The amount of exabytes they're going to need is substantial. So the long-term agreements are about coming up with a model where we can get confidence in supplying that level of demand on a sustained basis. For us, it's not about what demand is next quarter or the quarter after that. There's not much we can do about that given the dynamics of our business. We want to get the long-term growth rate aligned with where the long-term sustained demand is to your point at attractive financials. Let me turn it over to Luis with that.

Luis Visoso: Yeah. David covered most of it. What I would say, Mark, is we're seeing customers across end markets reach out to us and across geographies. So this is not just a few. We're really seeing a broad base, which is it's very interesting for us. We're making significant progress. We're making significant progress with several of our customers who really want us to prioritize or assure supply. To David's point, they see that as a critical enabler for their business, and that's what they're looking for. Now to your point, we're being very thoughtful about how we define a few metrics.

One is the length of the agreement, the price at which we will transact, the quantities, how much of our business we want to put in there, and any prepayment component of that. So we're being super thoughtful, and this should be a value accretion, should be value accretive and not the opposite.

Mark Newman: Great. Thanks very much. And any quick comments on how you're thinking about supply-demand longer term and any flexibility to add supply?

David V. Goeckeler: No. I mean, Mark, we've got our supply plans. Again, we've been very clear on what our CapEx plans are, what our bit growth plans are. That's what they are. It's about meeting our customers' demand at that supply level and understanding how we allocate that. And then as we said, it's about all of us picking up our head and looking a little further out on the horizon as to what demand is really going to be in this market and what sustained demand is going to be. We just really need to get out of this idea that this is a transactional market where we only get a strong signal a quarter at a time.

We get demand signals from our customers in all fairness on a yearly basis, but we really only transact that. We negotiate price every quarter, which just makes it very, very difficult to increase any kind of spending because we just don't have visibility to the economics of it. Again, especially as the market transitions to the data center, I think data center customers are more willing, as Luis said, it's across all of them.

I think data center customers, given their demand profiles and how big they're growing, quite frankly, are kind of a little more proactive in engaging in that conversation and really wanting to understand supply assurance several years out and how we come up with what business practices we can put around that. That's what I said in the prepared remarks when I say we're early in this transition, that's where the early part is. I think the business practices are going to change, and I think that's all for the good. We got to get through those conversations over the next couple of quarters.

Mark Newman: Thanks very much. Congrats again, guys.

David V. Goeckeler: Thanks, Mark. We appreciate it.

Operator: The next question will come from Joe Moore with Morgan Stanley. Please go ahead.

Joe Moore: At the Consumer Electronics Show, Jensen talked about this key value cache and gave some numbers in terms of, I think, terabytes per GPU. Seems like a pretty big market. Are you getting indications around that? Do you think there's—should take that as kind of straight math? Does everybody have different implementations? And just the ramifications for what happens to data center NAND?

David V. Goeckeler: Yeah, Joe, we're working through that right now. We're working through it with NVIDIA and kind of how they're thinking about it. And, of course, then we'll work through it with our customers about how they're going to configure it in deployments. So it's still a bit early. I'll say a couple things about it. First of all, none of that demand is in the numbers we're talking about. Demand numbers at this point. I think it's a perfect example of how we all need to collaborate a little bit more on what future demand is going to be.

Secondly, our initial looks at it when we look at, let's say, 2027 demand, we think that's roughly maybe 75 to 100 additional exabytes. And then a year after that, you can double that. So it is a significant amount of demand, and I think it is again, just another example of NAND being front and center in the AI architecture that's very, very clear.

Joe Moore: At this point, if it wasn't before, the AI architecture is changing. Right? And that's not a surprise. Any kind of technology that's this profound and is being deployed at this much scale, we're gonna continue to see innovation and evolution of the architecture. We're gonna stay very close to that. NAND is just gonna be a big part of that architecture. It's the most scalable semiconductor storage technology or maybe the most scalable semiconductor technology at all. So we're looking at those configurations. It's very real demand. We're just trying to get our arms around it. And then we'll put it in the numbers, probably for the back half of this year going into 2027 and 2028.

Joe Moore: Great. Thank you. And then as a follow-up, the enterprise SSD opportunity, how does that break down between TLC and QLC at this point, and how is that changing going forward?

David V. Goeckeler: You know, I think we're roughly tracking the market right now. It's predominantly TLC. I would say it's tilted toward TLC, especially for us. And then, you know, we haven't launched our Stargate product yet for the storage class QLC. It's in qualification. We'll start shipping that for revenue in the next couple of quarters, which we're excited about, providing another tailwind to growth in our data center portfolio. And that will up the mix of QLC. But at this point, I think the overall market in our portfolio is tilted toward TLC.

Joe Moore: Great. Thank you. Great numbers.

David V. Goeckeler: Thanks, Joe. Appreciate it.

Operator: The next question will come from C. J. Muse with Cantor Fitzgerald. Please go ahead.

C. J. Muse: Yeah. Good afternoon. Thanks for taking the question. I guess the first question, is there a way to quantify incremental demand for NAND related to AI infrastructure build-out? I'm not including KV cache, but you know, we were mid to high teens before, and I'm curious now based on your conversations with customers, and the demand trends that you're seeing, where do you think the new demand growth CAGR is looking out '26, '27, '28?

David V. Goeckeler: I think the best proxy we have for that right now, CJ, is just what we're seeing in exabyte demand in the data center. As I said earlier, I mean, two cycles ago, we were looking at, you know, call it mid-twenties exabyte growth in '26 for data centers. Last quarter, we were talking about, we upped that to mid-40s given the CapEx cycle that went on. We're now looking at high sixties exabyte growth in data centers in our forecast. And that doesn't include any CapEx raises on this earnings cycle. So you know, significant increase just quarter over quarter in demand. And we think most of that is driven by AI, obviously.

C. J. Muse: Perfect. Thanks. And then I guess you paid down a considerable amount of debt in the quarter. You only have $600 million outstanding. Probably can pay that down this quarter. So, curious, you know, when you're in a completely, you know, cash position, how should we think about capital return, particularly around share repurchases over the coming quarters?

Luis Visoso: Yeah. We feel very proud of the progress we've made in reducing our debt. Remember, we started with $2 billion, and it's coming down very, very quickly, $600 million this quarter, and we'll continue to take that down. CJ, our priority is to continue to invest in the business as we have been doing. And to build prudent cash resources. You know, this is a business where having cash on hand is helpful. We're not gonna waste your cash. Don't worry. But we're gonna build prudent cash reserves, and we'll continue to reduce our debt. At the right time, we'll continue to expand and give you an update. But, so far, those are our priorities.

C. J. Muse: Thank you.

David V. Goeckeler: Thanks, CJ.

Operator: The next question will come from Jim Schneider with Goldman Sachs.

Jim Schneider: Good evening. Thanks for taking my question. First of all, on the supply side, I was wondering if you could give us a snapshot of the factory network across Yokohama and Kitakami and kind of where things stand now? I'm assuming utilisations are basically flat out, but as you think more tactically sort of beyond this year about the high teens bit growth outlook, how do you expect to sort of ramp your overall kind of JV factory network, over, say, the next, you know, eighteen months or so?

And then maybe give us any kind of view on your view on the sort of industry greenfield capacity expansions that you see possible, given some of the announcements of some of your competitors recently?

David V. Goeckeler: So, first of all, we have, as you said, we have two major sites, Yokohama and Kitakami. I think a big step forward this quarter is what we announced in extending the JV agreements around Yokohama to coincide with the agreements in Kitakami so they now are all run through 2034. That gives us really good supply assurance for the next nine years. We'll keep talking about what happens after that. But this has been an unbelievable relationship with Keoksha for decades now, and it's going to go on for quite some time into the future. So I feel like we're in a really good position there.

Look, we haven't had any underutilization in the fab for a couple of quarters now. Yeah. You know, we got past that a couple of quarters ago. There may be a little bit of memory, some of the costs flowing through. I guess those were all last quarter. We're done. So they're running at full capacity. Kitakami is where we're expanding. You know, we just opened the K2 fab. And so we have additional space there. I think the JV, led by Keoksha on this part of it, has done really good capacity planning and has good plans about how we're able to now expand into the Kitakami site as needed over the next many years.

So we feel really good about how we're positioned there.

As far as the rest of the industry, you know, as you know, it's a long lead time. We see some announcements recently. I would consider those kind of normal course. We're all constantly building clean room space. As I talked about earlier, this is a market on the supply side where we've been very consistent. We're going to grow bits in the mid to high teens rate. We're going to do that through innovation. We're going to do that through, you know, that innovation is going to take additional clean room space. That's all in the plan. I would expect to see continued spending to meet that number, but we don't see anything that's out of the ordinary.

And, you know, I think as all of us know, if you want to start building a new fab, you're talking years before you have that up and running and have production coming out of it. So just a little bit of how we see the market. And final comment, all this is factored into our numbers when we talk about supply and demand.

Jim Schneider: Thank you. And then maybe as a follow-up, could you maybe address—clearly you mentioned the qualification with another enterprise. This is the hyperscale customer. Exiting this calendar year, for example, how large do you expect your enterprise SSD exposure to be as a percentage of the total revenue? Thank you.

David V. Goeckeler: Yeah. We're not going to put an exact number around that just yet, but I would say just stay tuned. I think we said this, our business is going to continue to grow in this market. You know, we've seen 29% sequential growth followed by 64% sequential growth. Without getting into too much detail, I think you're going to see a substantial step up next quarter as well. So we feel really good about where the portfolio is. Like I said, the reception from customers is not just hyperscalers but across the entire ecosystem of people building out AI infrastructure.

The compute-focused TLC product we have in the market is really driving that growth right now. We're going to see our Bix A QLC product start shipping for revenue here in the next couple of quarters, which is going to be another tailwind for growth. And as we've talked about, the Bix A QLC performance has been extremely well received. So we continue to see very high interest in those products and work through the qualifications. And, you know, we'll look forward to continued growth, and it'll be part of the balanced portfolio we always talk about of how we're going to allocate our supply into that part of the market.

But we're excited about where we're at and where we're headed.

Jim Schneider: Thank you.

David V. Goeckeler: Thanks, Jim.

Operator: The next question will come from Mehdi Hosseini with SIG.

Mehdi Hosseini: Yes. Thanks for taking my question. Two follow-ups for me. And this is for the team. When I look at your guide for the March fiscal year, assuming low single-digit bit growth, there's a big jump in ASP and blended. What I wanted to ask you is how should we think about the mix that impacts the ASP? Obviously, as you scale your SSD, there is a higher premium. There is more than bits, and a premium that you capture or economic value that you capture. Is there any way you can help me understand? Because just thinking about the ASP absolute may give us a wrong impression.

So any help you can provide will be great, and I'll have a follow-up.

Luis Visoso: Yeah. So the mix impacts that we have are less related to changes in our end market and more related to the customers and how we serve the market. So I talked a little bit about this in my prepared remarks, and what you've seen is we're driving a better mix. We're partnering with those customers that value our relationship, that value our products, and therefore, we're getting, you know, much better gross margins as a result of that. So there is a mix component in that to your point, Mehdi, and there is some pricing as well. Now, we believe that the market will go ahead. Sorry.

Mehdi Hosseini: Oh, I was just gonna say just a quick follow-up. Is there any mix breakout you can offer us so that we're not so fixated with the raw NAND ASP trends?

Luis Visoso: Yeah. I will provide that to you next quarter. I don't have anything to share with you at this point in the guide, Mehdi.

Mehdi Hosseini: Okay. Great. And one question for David. Look, we're sitting here, and there is increased shortage. It's intensifying. You and your peers are involved in discussion for a multiyear contract. And as you highlighted, these projects take several years. Building a fab and putting equipment is a very long process. Why isn't there more urgency? Why aren't your customers' customers willing to commit more? They're committing investment throughout the AI supply chain. But when it comes to memory or NAND, I don't get a sense of urgency. Is it going to wait till the second half of this year, meaning the shortage is going to intensify unless the SSD exabyte growth of 60% is maybe just a short list?

How can I reconcile the two?

David V. Goeckeler: I have lots of thoughts on that, Mehdi. I mean, first of all, I mean, I would argue that there actually is a fair amount of urgency, and things are changing rather dramatically rather quickly. I mean, you're talking about a market that's operated the way it's operated for, you know, arguably decades. And the way that market has operated is there's essentially been a quarterly auction for NAND that goes on that sets the price, and then we all talk about what the price was every quarter. And then on the supply side, we've tried to get it right on how much we supply. And often gotten it wrong.

And when you get it wrong, the economics just completely crater. So we're trying to navigate out of that world. There are a lot of reasons why we're navigating out of that world. There are a lot of technology reasons and all kinds of stuff we've talked about in the past. We could talk a lot about it. But to change behavior on something you've been doing for, you know, a decade and just wake up within a quarter and decide to completely change the business practices of an industry is almost really, really hard to do. But I do think it's happening.

I do think that customers are starting to look, like I said, they're starting to look further down the horizon, especially in the data center. I don't think this can be underestimated, this idea that now the data center is the largest market in NAND. I mean, it's a market that's been dominated by not dominated, but where the primary customers were then smartphones and PCs. What I talk about is, you know, I kind of view that as traditionally being the commodity NAND market. I hate that term, but that's what people think about it. The data center is not that market. Like, the data center is not a commodity NAND market.

The data center is NAND is a highly strategic product, part of a very sophisticated AI architecture. And I need extraordinarily high performance, and I need innovation, and I need, you know, a specific enterprise SSD that fits my configuration. It's way on the other side of, you know, I just need the same product and I can plug in anyone from, you know, five different suppliers. That's not you know. So that market now becoming the primary market and especially the primary growth engine is really, I think, starting to challenge the business practices of the way the market has traditionally worked. And again, I'm actually quite optimistic that this is happening pretty quickly. Now we'll see how quickly.

I mean, do we actually get to the point where we're announcing contracts? We're not quite there yet. We've got, you know, some that are coming along. But, you know, from my perspective, on a relative basis, it's going pretty quick. For a market this big, we're talking $150 billion maybe this year. For a market this big, this many players, this much business transacted every quarter. To see it change as fast as it's changing is pretty remarkable. Actually.

Mehdi Hosseini: Got it. Thank you for the details.

David V. Goeckeler: Sure thing. Thanks, Mehdi.

Operator: Again, if you have a question, please press star then 1. Please limit yourself to one question. The next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Ruplu Bhattacharya: Hi. It's Ruplu filling in for Wamsi. Can I ask Luis a question? This quarter OpEx came in lower. You said you had a benefit from how you're managing NPI. Can you just elaborate on that, what that benefit was? And can you talk about capital allocation plans, how much are you expecting to spend on HB flash and data center expansion? And as well as any capital return plans or M&A plans? Thank you.

Luis Visoso: Yeah. So let me try to unpack the OpEx question because I thought somebody was going to ask. So we made a recurring change to how we sell our products. Right? And basically, we're now moving into charging for our qualification units. So in the past, we used to record cost as they were incurred. Right? They were period costs. And this is the nonrecurring element, which is a gain of a onetime benefit as we move from period costs into inventories as we're now selling this qualification unit. Does that make sense?

Ruplu Bhattacharya: Yes. That's clear.

Luis Visoso: Good. So we're going to get an ongoing saving as we charge our customers for this qualification unit, and there is a onetime benefit as we do the transition and we go through inventory. On the capital allocation question, now as I said earlier, our capital allocation strategy is unchanged. We will continue to invest in the business. We will build prudent cash reserves, which are very helpful for this business. Particularly, given where we are. We believe we need to continue to build our cash reserves, and we'll continue to reduce our debt. So we've gone from $2 billion to $650 million. So we're making great progress, and we'll continue to make progress there. We're fully funding the business.

You know, we're funding the business from a Bix 8 transition. We're funding our OpEx. We feel that we're properly funding the business itself.

Ruplu Bhattacharya: Are there any underutilization charges in the guide?

Luis Visoso: No. Not in the guide and not in actuals either.

Ruplu Bhattacharya: Alright. Thank you so much.

Operator: The next question will come from Vivek Arya with Mizuho. Please go ahead.

Vijay Rakesh: Hi, David, and Luis. Awesome quarter here, just phenomenal numbers. Just wondering on the 2026, '27, what you're looking at in terms of bit growth and obviously, ASP pricing has been on a tear. Just wondering how the price trends have been across the different segments, you know, from the data center to retail to consumer SSDs. If you can give us some color. Thanks.

Luis Visoso: Yeah. So the bit growth that we're seeing across your '26, '27, '28 is consistent with what we talked about, you know, very at the very February. We're still talking about mid to high teens bit growth every single year. And unless we see that demand is sustainable and profitable, we're not going to change our assumptions. So still, our planning is our plan of record is that kind of high teens number for bit growth year over year.

On pricing across what we call end markets, it's very interesting. Right? What you see is prices are moving not identically, but pretty much at the same pace. Now we're seeing what happens is that NAND can flow to any market. At the end of the day, so NAND will naturally flow to the markets that are most attractive. So when prices go up in data center, they do have an impact in other markets, to give you an example. Right? So that's what we're seeing across all markets. Prices go up pretty much across the board.

Operator: The next question will come from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Hi. Thank you for taking my question and congratulations on the very good quarter. Back to the roadmap. I think now your data center mix has reached 15%. And Nanoflash is now increasingly being attached to AI compute. So I think it's creating new requirements for performance. Can you update us with your production roadmap to meet these new requirements? Like, I think there are high IOPS SSDs and you have engagements with HEF. How are those new products looking like?

David V. Goeckeler: Yeah. So I think this is a very good example of the amount of innovation that's going on and being driven out of data center, kind of what I was referring to before. You're right. What we call the compute focus, the TLC high-performance drive, is what's been driving the portfolio at this point. As I said, we just saw 64% sequential growth. So we continue to see really strong pull for those high-performance products. As I said, we feel like we're extremely well-positioned as we start to migrate those to Bix 8. But there's all a bunch of new innovation going on as you said.

The innovation engine is alive and well across the whole industry, which is how are we going to satisfy the demands for the storage of AI. Models get bigger, more tokens get generated, caches get bigger. This is naturally a thing where you start to think about NAND, and its tremendous scaling properties. You're right, there's a lot of innovation there. There's the high IOPS enterprise SSD, which of course is something you could imagine we're working on. We had our own ideas about this. Two years ago, and we talked about it at our Investor Day that we believe there was a chance to re-architect NAND to bring it into AI. We trademarked that high bandwidth flash.

I think over the last year, that's become a more recognized path forward. And there's now lots of folks working on that. We continue to work on it, by the way. We're very happy with the progress. We're deep in conversations with customers on use cases. We're designing the NAND die. We're building the controller so that continues to go forward. Obviously, we'll have more to say about it. As we go forward and plans firm up. I think all of this is just an example of the tremendous opportunity for innovation as the AI architecture continues to scale.

It's incredibly exciting that we are just in the very early innings of driving this technology and scaling it around the globe. The technology industry writ large is incredibly well-positioned to do that. Some of the largest, most capable technology companies in history are obviously putting an enormous amount of resources into how they drive this technology and scale it around the world at a very rapid pace. I think that is incredibly exciting. I think this is going to go on. I think we're super early in this, and I think this is going to go on for a very long time.

Operator: The next question will come from Aaron Rakers with Wells Fargo.

Michael Sadnoff: Hi, guys. Thank you. This is Michael Sadnoff on behalf of Aaron. I wanted to go back to the LTA discussion. Have you guys finalized any of these agreements yet? And if so, have partial or full prepayments been a part of, I guess, any finalized agreements, or is that something we should expect moving forward? I know you kind of alluded to it.

Luis Visoso: Yeah. We've signed and closed one agreement so far. We're not disclosing the terms. There was a prepayment component of it, which we think is important in this type of agreement. But that's what I would say, Michael. So we have one and several in the queue.

Operator: The next question will come from Assia Merchant with Citigroup. Please go ahead.

Asiya Merchant: Great. Thanks for taking my question and great results here. David, last quarter, I think you shared some thoughts on how you thought about the edge market, PCs, smartphones, maybe even the consumer market. Just given the fact that, you know, memory is on allocation, people are talking about PC and smartphone units being down. Just how you're thinking about and what signals your customers, your OEM customers are providing to you regarding those markets and how that changes kind of your demand outlook through probably '26 and into '27. And if I can squeeze one in for Luis as well, you know, structurally, NAND is going through this dynamic where, you know, obviously highly strategic product.

How are you thinking about your true cycle margins, gross margins? Seems like it was quite a long time ago when you were hitting those levels. But how are you thinking about gross margins here structurally? Thank you.

David V. Goeckeler: Okay. Thanks, Assia. So look, a couple of thoughts on this. First of all, on the consumer market, I'm very happy with where the consumer portfolio is. As I said, we just turned in over 50% year-over-year growth. I think the work we're doing there on how we're thinking about the branding, the innovation, the portfolio, that's been a long-term market for us. It will be a long-term market for us. We think we're able to drive value there with the value of the Sandisk brand. We think that's a great business. We'll continue to be and will continue to invest in it. In some of the other markets, you know, I think this is one of the things—yeah.

I look at—I was looking at the numbers. Obviously, as we were preparing, you look, just look at '26. We've got PCs at 185,000,000 units. I don't think anybody would have picked that number at the beginning of the year. So just continued very strong results in these markets, in unit growth, content growth across those markets. So look. As we go into '26, or we're in '26 now, we're going to see some base effect of that, of some declines in units. You know, I think we're still getting very strong signals from customers in those markets of wanting supply. I mean, very strong signals on a continuous basis. We're working with them as closely as we can.

In this period of the market, it's extremely important to stay close to our customers and we're doing that. You're going to get some base effects there on units. I mean, there's been a lot of discussion on mix in the market. I just think that's normally how this market works. Of course, configurations are going to change as components change. Quite frankly, we saw it in '23, you know, all of a sudden, component mix went way up because prices went way down. And all of a sudden, the one terabyte drive became quite inexpensive and started showing up everywhere. And as the market goes a little bit in the other direction, you're going to see that change.

I think that's just a natural way this market works. I don't think it's something to be overly concerned about. So those are still strong markets. Customer relationships are very good. I expect us to still be heavily engaged in those markets. We've had a strong edge presence for a long time, and we'll continue that. Just big picture, this is one of the reasons why I think this business is so valuable is because we just play across every single device every single piece of technology touches. We touch it or sell NAND into it.

And now with just the AI deployments in the cloud and that market becoming the largest market in NAND is just changing the dynamics of the way this whole industry works. And as we said in the prepared remarks, we've invested an enormous amount of R&D over the last twenty-five years to get to where we are. And we've invested an enormous amount of capital to get to where we are that we can manufacture all this front end and back end. I think we're finally starting to get to the point where the value of that intellectual property, the value of that intensity is being recognized in our own results.

Luis Visoso: Yeah. And I think the way I would answer your question about, you know, through-cycle margins is similar to what David said, which is, in a high CapEx, high R&D industry or company, frankly, 35% is not where we would like to be. So we're not going to give you a new number today. But, clearly, that's not where we want to be. What I'll tell you is this is the first quarter, right, that we are above 35% with 51%. We're guiding, call it, a midpoint of 66. So we're making progress and we're getting to a place where we believe we can justify the CapEx. We can justify the investments in R&D that the business requires.

Operator: The next question will come from Tom O'Malley with Barclays. Please go ahead.

Matt Puhn: Hi. This is Matthew Puhn on for Tom O'Malley. Just a quick one for me. Apologies if you mentioned—just hopping around on the call. Wondering if you said the ESSD percentage of total bits in the quarter?

David V. Goeckeler: I don't think we said that. But, you know, it's in that high teens range. Yeah.

Operator: The next question will come from Blayne Curtis with Jefferies.

Blayne Curtis: Hey, guys, congrats and thanks for squeezing me in. I just want to talk about the model. Obviously, I mean, doubling sales over two quarters. I want to make sure I understand how you're going to handle OpEx. You know, I think the percentage of revenue is now halved, right? So, are you going to accelerate the way you look at investing in R&D? And then, you know, the tax rate as well, which is just dramatically higher profitability. Is there anything to think about in terms of the tax rate? I think you were talking about it maybe going to 20% at some point. Is that sooner than later?

Luis Visoso: Yeah. So in terms of OpEx, the first thing you should know is about 75% of our OpEx is R&D, right? So we're—that's where we're putting our money. And why do we do that? Because this is a technology company where innovation is our lifeblood. So that's what we believe, and that's where we're putting our dollars. So you should not look at this quarter's OpEx as an indication of where we should be because, as I mentioned earlier, it has a nonrecurring benefit. If you want to quantify that number, it is around $35 million. So you can use that number for your modeling. We think OpEx should not go significantly higher from where it is today.

We believe that the run rate is healthy. We will always be looking at where we need to invest and make sure that we fund innovation. But we're also on the other side looking at efficiency all the time and how do we make sure that there is no waste in the system. So, long way of saying, you know, the level of spending we had last quarter, what we're guiding this quarter, those are kind of more sustainable levels for now. The tax rate is kind of interesting, right? Because we had a lot of prior year losses, particularly accumulated in Malaysia, which we consumed very quickly, you know? That's what happens when you start generating profits.

So I think you should see our tax rate hover around a little bit above where it is today, maybe in the 14 to 15% range on an ongoing basis. That's what I would model for now.

Operator: This concludes our question and answer session. I would like to turn the conference back over to David for any closing remarks.

David V. Goeckeler: All right. Thanks, everybody, for joining us. We'll talk to you throughout the quarter. Have a great day. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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