Q2 2026 Earnings Call Transcript

Good day, and welcome to the Sandisk Corporation Second Quarter Fiscal 2026 Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone.

To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ivan Donaldson, Head of Investor Relations. Please go ahead.

Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our technology and product portfolio, our business plans and performance, market trends and opportunities, and our future financial results. We assume no obligation to update these statements. Please refer to our annual report on form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations.

We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in written materials posted in the Investor Relations section of our website. With that, I'll turn the call over to David.

Thanks, Ivan. Afternoon, and thank you for joining Sandisk Corporation'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 towards 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 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 and 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 Five high-performance TLC drives at a second hyperscaler and are on track to complete qualification at additional hyperscalers over the coming quarters, with Bix Eight TLC solutions soon thereafter. This product is driving significant revenue growth across our data center portfolio, which was up 64% sequentially. Our BICS Eight QLC storage class product, code-named Stargate, continues advancing 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, 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 like 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 product. 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'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 Eight 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.

Thank you, David. Before diving into the financials, I would provide a brief market overview. We believe that the NAND market is going through 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 center 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 December, 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 the demand for our customers this quarter. We're 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 Eight 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're committed to supplying our three end markets as we believe that diversification maximizes value creation. We plan to continue to build strategic relationships with our 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 mechanisms 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 results. Revenue for the second quarter was $3.025 billion, up 31% quarter over quarter and 61% year over year. This compares favorably to our guidance of $2.55 billion to $2.65 billion.

The revenue over-delivery came from higher prices across segments, which strengthened during the quarter. Bids were up 22% year over year and low up 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 billion, up 21% sequentially.

Consumer came in at $907 million, up 39% quarter over quarter. And data centers 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 improvements. In the second quarter, we incurred $24 million in startup costs. Excluding this cost, non-GAAP gross margin would have been 51.9%.

Non-GAAP operating expenses for the second quarter were $413 million and represented 13.7% of revenue. This compares favorably to our guidance range of $450 million to $475 million, reflecting a non-recurring 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. $93 million related to certain legal matters. Moving on to the balance sheet. We closed the quarter with $1.539 billion 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 billion from operations, partially offset by $176 million from net cash capital spending.

Our gross capital spending totaled $5.255 billion and represented 8.4% of revenue. Earlier today, we announced that we have reached an agreement with Kyoccia to extend the Yokaiichi joint venture through 12/31/2034. With this extension, the Yokaiichi 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 Corporation agreed to pay for the manufacturing services that Kyoccia will provide, enabling continued availability of product supply a total of $1.165 billion. This amount will be paid between calendar years 2026 and 2029. The cost will flow through the 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 bids to be down mid-single digits due to a lower than historical seasonality as we benefit from accelerating strength in data centers. Our forecast for non-GAAP gross margin for the third quarter is between 65-67%. 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 million and $30 million and non-GAAP tax expenses between $325 million and $375 million. We forecast non-GAAP EPS for the third quarter between $12 and $14, assuming a 157 million fully diluted shares. With that, let me turn the call back to David.

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—PCs, smartphones, tablets, the cloud, cars, gaming devices, robotics, and on and on—NAND is a critical technology enabling the development and proliferation of artificial intelligence. For the first time, data centers are expected to become the largest market for NAND in 2026. Driven by some of the world's largest and 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.

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.

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.

Extremely at unprecedented rates. I guess my question is going to Dave's comments at the beginning. How, you know, how are you thinking about long-term agreements? Obviously, there's pros and cons in long-term agreements, because long-term agreements lock in the prices.

When prices are going up so fast, you actually don't want so many long-term agreements, I guess. But I guess I'd just like to understand how you are 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, you know, in this very, very huge what seems to be quite a sharp undersupply situation at the moment, if there's any plans to be adding supply or how you're thinking about that would be also great. Thanks very much.

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 LTA. So there's a number of things happening in the dynamics of our business that are contributing to the results you're seeing.

So first of all, it starts with the portfolio and innovation. Our Bix Eight 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, you know, we extended the JV, which we're very happy about, with that's gonna continue for now another decade. That's enabling very strong enterprise SSD portfolio. You know, this is something we've been driving for a while.

I talked last quarter, we're gonna see 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. So that the third leg of kind of major business innovation is happening in the consumer business, quite frankly.

A lot of new product introduction. This extreme fit product that we announced this year is really a breakthrough product. It's allows our customers to very seamlessly and affordably increase capacity storage capacity of their devices. You know, 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 our the agreements we're doing with you know, people like FIFA, which could be the biggest event of this entire year. We have great Crayola branded products there.

We look at our consumer business, we saw 50% year over year growth in the consumer business. So really strong performance there. This improving portfolio innovation-driven excellence in the product is allowing us to just have a better portfolio mix. And if we look back over the last several quarters, we're literally able to trade out the lowest margin business for now the highest margin business, and that provides significant tailwind to the business as well.

Then, on top of all of that, you've got the supply demand dynamic, which is 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, you know, obviously, it's it's great to be in a a strong pricing environment.

Moving on to LTAs, I'll talk a little bit about this and then I know Luis will have some great comments about this as well. So as we reach points where, you know, we believe we're getting a more fair return for our technology, and customers, quite frankly, are looking for more supply assurance. I mean, I think one thing to note on the market right now, this is a completely demand-driven, you know, phenomenon, what's going on in the market. We've been very transparent for well over a year what our supply plans are.

We're we're investing heavily in this market. We're investing hundreds of millions of dollars of R&D to push the roadmap forward. We're investing billions of dollars of 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. And what's happening is we're just not getting enough visibility into what the demand side really is.

I mean, if we look at data centers we've had three forecast cycles now. Last quarter, we went from mid-20s to mid-40s growth in that market. Now we're looking at high 60% exabyte growth in that market for 2026. I think our customers realize this, especially in the data center market. Their numbers are big, what they're gonna need in 2026, 2027, 2028. We're even talking to some of them about 2029 and 2030. You know, they're doing their own planning.

The amount of exabytes they're gonna need are substantial. And 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 behind where the long-term sustained demand is to your point at attractive financials. Let me turn it over to Luis with that.

Yeah. I mean, David covered most of it. What I would say, Mark, is we're seeing customers across end markets reach out to us across geographies. So this is not just a few.

We're really seeing a broad base, which is it's very interesting for us. And 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, that 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.

On how do 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 accretive and not the opposite.

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

No. I mean, Mark, we've got our supply plans. We've been 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 at that supply level and understanding how we allocate that. And then, as we said, it's about you know, all of us picking up our head and looking a little further out on the horizon. As to what demand is really gonna be in this market, and what sustained demand is going to be. And, you know, 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.

I mean, we 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, that just makes it very, very difficult to increase any kind of spending because we just don't have visibility to the economics of it. And again, especially as the market transitions to data centers, I think the data center customers are more willing Luis said, it's across all of them. I think the data center customers, given their demand profiles and how 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 do we come up with what are the business practices we can put around that? And, you know, that that's a as I said in the prepared remarks, that when I say we're early in this transition, that's where the early part is. I think the business practices are gonna change and I think that's all for the good. We've got to get through those conversations over the next couple of quarters.

Thanks very much. Congrats again, guys.

Thanks, Mark. We appreciate it.

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

At the Consumer Electronics Show, Jensen talked about this key value cache and, you know, 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?

Yeah, Joe. We're working through that right now. You know, 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 gonna 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 about 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, you know, that's you know, roughly maybe 75 to 100 additional exabytes. And then a year after, that you can you can double that. So it is a significant amount of demand, and I think it is again, just another example of you know, NAND is just front and center in the AI architecture that's very, very clear.

At this point, if it wasn't before. The AI architecture is changing. Right? And that's not a surprise.

Any 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. You know, NAND is just gonna be a big part of that architecture. It's the most scalable storage tech semiconductor storage technology, or maybe the most scalable semiconductor technology at all.

And, you know, 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.

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?

You know, I think we're roughly tracking the market right now. It's predominantly TLC. I would say it's tilted towards TLC, especially for us. And then, you know, we haven't launched our Stargate product yet for the storage-based 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 to our data center portfolio. And that will that will up the mix of QLC. But at this point, I think the overall market in our portfolio is tilted towards TLC.

Great. Thank you. Great numbers.

Thanks, Joe. Appreciate it.

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

Yeah. Good afternoon. Thanks for taking the question. I guess 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 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, you know, looking out 2026, 2027, 2028?

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 two cycles ago, were looking at you know, call it mid twenties exabyte growth in 2026 for data center. 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 60% exabyte growth in data centers are 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 all that is driven by AI obviously.

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. You know, how should we think about, you know, capital return, particularly around share repurchases over the coming quarters?

Yeah. We feel very proud of the progress we've made 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 a prudent cash resource.

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.

Thank you.

Thanks, CJ.

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

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 Yokaiichi and Kitakami and kind of where things stand now? I'm assuming utilizations 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 JV factory network over, say, the next 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?

So, first of all, you know, we have as you said, we have two major sites, Yokaiichi and Kitakame. I think a big step forward this quarter is what we announced in extending the JV agreements around Yokaiichi to coincide with the agreements in Kitakami so they now all run through 2034. So that gives us really good supply assurance for the next nine years. And we'll keep talking about what happens after that. But this has just been an unbelievable relationship with Kyoccia for decades now, and it's gonna go on, you know, quite some time into the future.

So we feel like we're in a really good position there. Look. We haven't had any under-utilization in the fab for a couple quarters now. Yeah.

You know, we got past that a couple quarters ago. There may be a little bit of some of the costs flowing through. I guess those were all last quarter. We're done.

So they're running at, you know, 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 we've just JV you know, led by Kyoccia on this part of it has just 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. Know, as far as the rest of the industry, You know, it's as you know, it's a long lead time. You know, we see some announcements recently.

I would consider those kind of normal course. We're all constantly building clean room space. You know, as we as I talked earlier, this is a market on the supply side where we've been very consistent. We're gonna grow bits.

You know, in the mid to high teens rate. We're gonna do that through innovation. We're gonna do that through you know, that innovation is gonna 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 that's out of the ordinary. And, you know, I think as all of us know, if you wanna 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 of this is factored into our numbers when we talk about supply and demand.

Thank you. And then maybe as a follow-up, could you maybe address clearly you mentioned the qualification with another enterprise SSD 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.

Yeah. We're not gonna put an exact number around that just yet, but I would say just stay tuned. I think we said this our business is gonna continue to grow in this market. You know, we we've seen 29% sequential growth, followed by 64% sequential growth without getting into too much detail.

I think you're gonna see a substantial step-up next quarter as well. So feel really good about where the portfolio is. Like I said, the reception from customers and not just hyperscalers across the entire ecosystem of people that are 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 BICS A QLC product start shipping for revenue here in the next couple of quarters, which is gonna be another tailwind for growth.

And as we've talked about, the PIX 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 gonna allocate our supply into that part of the market. But we're excited about where we're at and where we're headed.

Thank you.

Thanks, Jim.

The next question will come from Mehdi Hosseini with SIG. Please go ahead.

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.

Yeah. So the mix impacts that we have are less related to changes in our end market and more related to the customers. Right, 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 margin 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.

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?

Yeah. We will provide that to you when we report next quarter. I don't have anything to share with you at this point on the guide, Mehdi.

Okay. Great. And and one question for David. Look.

We're sitting here, and there is an increased shortage. It's intensifying. You and your peers are involved in discussions 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 your customer's customer aren't 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.

And it is it's gonna wait till the second half of this year, that means the shortage is gonna intensify unless the SSD exabyte growth of 60% maybe just a short list. How can I reconcile it to?

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. Alright? I mean, you're talking about a market that's operated the way it's operated for 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 get it wrong. And when you get it wrong, the economics just completely crater. So we're trying to navigate out of that world.

There's a lot of reasons why we're navigating out of that world. There's a lot of technology reasons and all kinds of stuff we talked about in the past. We could talk a lot about. But like, the change behavior on something you've been doing for a decade and just wake up and within a quarter decide to completely change the business practices of an industry is almost like really hard to do.

So 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 on the data center. I don't think this can be underestimated, this idea that now data center is the largest market in NAND. I mean, is a market that's been dominated by or not dominated, but where the primary customers are then smartphones, PCs.

I kind of view that as what traditionally been 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 kinda way on the other side of you know, I just need the same product and I can plug in any one 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.

Again, I'm actually quite optimistic that this is happening pretty quickly. And 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, talking $150 billion maybe this year. 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.

Got it. Thank you for the details.

Sure thing. Thanks, Mehdi.

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.

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 HBF and data center expansion? And as well as any capital return plans or M&A plans? Thank you.

Yeah. So let me try to unpack the the OpEx question because I thought somebody was gonna 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 cost.

And this is the non-recurring element, which is a gain of one a one-time gain as we move from period cost into inventories as we're now selling this qualification unit. Does that make sense?

Yes. That's clear.

Good. So we're gonna get an ongoing saving as we charge our customers for this qualification unit, and there is a one-time benefit as we do the transition and we go through inventory. On the capital allocation question, now as I said earlier, you know, 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 still 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 Eight transition. We're funding our OpEx. We feel that we're properly funding the business itself.

Are there any underutilization charges in the guide?

No. Not on the guide and not on actuals either.

Alright. Thank you so much.

The next question will come from Vijay Rakesh with Mizuho. Please go ahead.

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, but 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.

Yeah. So the bit growth that we're seeing across 2026, 2027, and 2028 is consistent with what we talked, you know, at the very February. We're still talking about mid to high teens bit growth every single year. And unless we we we we see that demand is the area sustainable and profitable, we're not gonna change our assumptions.

So still, our planning is our plan of record is that kind of high-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 centers, they do have an impact in other markets, to give you an example. Right?

So that's what we're seeing across markets. Prices go up. Pretty much across the board.

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

Hi. Thank you for taking my question, and congratulations on the very good quarter. I'm going 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. So can you update us with your production roadmap to meet these new requirements? Like, I think they are high IOPS SSDs and you have engagements with on the HEF.

So how do those new products look like?

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 centers, kind of what I was referring to before. So you're right. You know, what we call the compute focus, the TLC high-performance drive is what's driving the portfolio at this point.

As I said, we just saw 64% sequential growth, so we continue to see, you know, 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 Eight. But there's a whole bunch of new innovation going on, as you said. There's, you know, I think the the innovation engine is alive and well across the whole industry, which is how are we gonna satisfy the demands for the storage of AI.

Models get bigger, more tokens get generated, caches get bigger. You know, this is naturally a thing where you start to think about NAND, and its tremendous scaling properties. And you're right. There's a lot of innovation there.

There's the high IOPS enterprise SSD, which of course, something you could imagine we're working on. You know, we we had our own ideas about this. Two years ago, and we talked about it at our Investor Day that we believe that there was a chance to rearchitect 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 you know, there's now lots of folks working on that and 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. But you know, I think this is just an example of there is tremendous opportunity for innovation as the AI architecture continues to scale.

And you know, it's just incredibly exciting that we're just in the very early innings of driving this technology and scaling it around the globe. And we have, you know, the industry, you know, the technology industry at large is incredibly well-positioned to do that. There's some of the most, largest most capable technology companies in history. They're obviously putting an enormous amount of resources into how they drive this technology and scale it around the world at a very rapid pace.

And and I think that is incredibly exciting. I think this is gonna go on. I think we're super early in this, and I think this is going to go on for a very long time.

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

Hi, guys. Thank you. This is Michael Sadloff 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 been a part of any finalized agreements, or is that something that we should expect moving forward? I know you kind of alluded to it.

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.

The next question will come from Asiya Merchant with Citigroup. Please go ahead.

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's on allocation, talks 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 the 2026 and into 2027. And if I can squeeze one in for Luis as well, you know, structurally, NAND is going through this dynamic where, you know, obviously, it's a highly strategic product. How are you thinking about your true cycle margins, gross margins seems like that was quite a long time ago when you were hitting those levels. But how are you thinking about gross margins here structurally? Thank you.

Okay. Thanks, Asiya. So look, couple of thoughts on this. So, first of all, on the consumer market, I'm like, I think we're 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, you know, 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.

So, you know, we think that's a great business. And we'll continue to be and we'll continue to invest in it. You know, in some of the other markets, like, I think this is one of the thing. Yeah.

I look at, I was looking at the numbers. Obviously, as we were preparing, you look just look at 2026, we've got PCs at 285 million 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 2026, or we're in 2026 now, we're gonna see some base effect of that, of some declines in units. You know, I think we're still getting very strong signals from our customers in those markets and wanting supply.

I mean, very strong signals on a continuous basis. We're working with them as closely as we can. I think in this period of the market, it's extremely important to stay close to our customers and we're doing that. But you're gonna get some base effects there on units.

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 gonna change as components change. And we quite frankly saw it in 2023 You know, all of a sudden, the component mix went way up because prices went way down.

And all of a sudden, a one-terabyte drive became quite and all of a sudden started showing up everywhere. And as the market goes a little bit in the other direction, you're gonna see that change. I think that's a natural way this market works. I don't think it's something to be overly concerned about.

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 we'll continue that.

And, you know, 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 we touch it or sell NAND into it. And now with you know, 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 been 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 so that we can manufacture all this front-end and back-end.

And 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.

Yeah. And I think the way I would answer your question about, you know, through cycle margins is similar to what where David left it, which is in a high CapEx, high R&D industry or company, frankly, 35 is is not is not where we would like to be. Right? So we're not gonna 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, midpoint of 66. So we're making progress and and we're getting to a place where we believe we can justify the CapEx. We can justify justify the investments in R&D that the business requires.

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

Hi. This is Matthew Pan 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?

I don't think we said that. But it's in that high teens range. Yeah.

The next question will come from Blayne Curtis with Jefferies.

Hey, guys. Congrats on the and thanks for squeezing me in. I just wanna talk about the model. Obviously, I mean, doubling sales over two quarters, I wanna just make sure I understand how you're gonna handle OpEx.

You know, I think the percentage of revenue is now in half. Right? So, are you gonna accelerate the way you look at investing in R&D? And then, you know, 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?

Yeah. So in terms of OpEx, the first thing you should know is about 75% of our OpEx is R&D. Right? So that's where we're putting our money.

And why do we do that? Because this is a technology company where life innovation is our lifeblood. 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 that, as I mentioned earlier, it has a nonrecurring benefit.

If you wanna quantify that number, that number is around $35 million. So you can you can you can use that number for your modeling. We think OpEx should not go significantly higher from where we are 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's no waste in the system. A 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, accumulated in Malaysia, which we consume very quickly. You know, that's what happens when you start generating profits. So I think you should see our tax rate to hover around a little bit above where it is today, maybe in the fourteen, fifteen kind of percent on an ongoing basis.

That's what I would, I would model for now.

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

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

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