SanDisk Aktie

All right. Good afternoon, everybody. Thank you for joining us at the 2026 Mizuho Global Tech Conference. It's my distinct absolute pleasure to welcome back CEO, David Goeckeler, and CFO, Luis Felipe Visoso. I hope I got that right.

That was great. Thank you.

Perfect. Thank you for joining at the Mizuho Tech Conference. Again, what an year it's been, David.

It's been a great year. Thanks for having us back.

Last year stock was around $60 at this time.

Is that right?

It's $1800 now, 30x. And I think that's a mic-drop moment, I think the fireside is over. We should we going from here.

I kind of have to drop the mic [indiscernible].

Yes, yes. I think if there was a Times Magazine for the best of the company and best management right here, guys. And what can I say, I think -- thank you for joining us again. Welcome back. We really appreciate it. What did they say, AI is hungry for compute, but survives on storage.

Very nice, very nice.

There you 0go. We got -- my team did some good work on you guys. Trying to get these 1 liners done. So let me start off...

Hey, before we start, if you don't mind, just want to read this. We will be making forward-looking statements in today's discussions, including with respect to our technology, our products, our business plans and performance, market trends and opportunities and our future financial results. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially from expectations. Please refer to the risk factors outlined in our annual report on Forms 10-K and 10-Q and other filings with the SEC for more information. Thank you, Vijay.

Fantastic. I think we got all of it. So I just want to start off with a quick run through the numbers. Last year, fiscal '25 June, you guys are doing $7 billion. This year, fiscal '26 June, $20 billion. Next year, Street consensus is like $45 billion. What's happening here? Just kidding. But I mean, I think I wanted to take a step back and David maybe give us a little bit of the lay of the land. What are you seeing on the supply-demand side, NAND bit growth has been growing low 20s. And how do you see that going forward? Demand is obviously accelerating. But maybe you can take a step back and give us a peek into what you are seeing?

Yes. So your question, what's happening here is, like anything in market, this dynamic, a lot of things are happening at the same time. So it's fun to be here, by the way, to be here with you in a year on. This is also the same room where we actually launched the company. We did our...

Yes. Hopefully, next year when we come back, it's a 10x. So...

We did our Investor Day here. So it's good to be back here. And if you look back to then, we had the same level of conviction we have now. I mean we see a market with sustained mid- to high teens growth. And we always thought that the technology wasn't fully appreciated for the value that we were bringing. And I think over the last year, we've done a good job of figuring that out, right, and kind of understanding what the value of the technology is. Clearly, there's a lot of AI demand that's helping that equation. Data center has now become -- or is quickly becoming the largest market in NAND. And we've had many, many revisions of data center CapEx going up. I think, Luis, you were telling me earlier, it's like 14 revisions now...

14x.

14x, all going up. And a lot of that is as AI moves into inference, I think our customers are figuring out the architecture of how does -- the microphone got way. Our customers are working on what is the architecture for inference. And that's when NAND comes into. NAND becomes a big part of that equation. We've seen it with -- people talk about with KV Cache or REG. NAND has always been the most scalable semiconductor technology. So as you start to scale any architecture, I think it's naturally going to come towards NAND if you need storage. And I think that, that -- it's a very difficult question, I think our customers have, which is what is the right architecture for scaling inference on a global basis? And figuring out what's the right concentration of processing power, what's the right concentration of DRAM, HBM, what's the right concentration of NAND. It's very use case dependent, trying to figure out what the use case is several years in the future is an issue all of its own. And I think that as our customers go through that equation and figuring that out, I come to the conclusion that having longer-term relationships with suppliers of NAND is a very good idea. And I think that's what we're putting together with these business agreements. And it's kind of changing the trajectory of our business, I think, in a very positive way. And it's a very powerful relationship between us and our customers. And it's very much of a win-win conversation. So a lot has changed in the last year. But I really do think we're just getting started. I mean we are -- I think AI is -- there's been a lot said about AI, but extremely fundamental technology shift that we're clearly in the very early innings. I think the productivity that people are seeing out of this technology is nothing short of spectacular. And I think our technology is a big part of delivering that on a global basis.

Yes. I want to get to those LTAs and NBMs a little bit later, so we can get Luis involved in that. But I want to get back to the technology road map. Obviously, your enterprises SSD has grown massively. It's almost 25% of the revenues now. Used to be a much smaller number, might be mid-single digit last year, it's grown 7x year-on-year. How -- and it's just starting off because you guys are just starting to get qualified on enterprises SSD, QLC SSDs, et cetera. How do you see that as you -- if you were to roll this forward 12 months, how do you see that market growing? How do you see your wins? How sticky is this with the CSPs?

I mean so first of all, you're 100% correct, it all starts with the technology, right? If you don't have great products -- I mean we're a technology company. You have to have great products. That's -- let's take the basics. And we do have great products, all the way from the fundamental NAND, which we can talk about into the portfolio we have. And it's been no secret, we've been investing heavily in enterprise SSD. It's a part of the market where we've been underpenetrated. And it's about building the right portfolio to increase our mix in that part of the market. There's really two major categories of products there. There's a performance-based TLC NAND products, used a lot for KV Cache and a number of things. That's been the driver of the portfolio over the last few year. The second part of the portfolio is the storage-based product. It's called Star -- project Stargate. We talked about it again here back in February when we launched this company. This is the first quarter we'll recognize revenue on that product. So you're right, we're just getting started on that leg of the portfolio. So obviously, we've got one side of the portfolio in kind of full bloom and declared across multiple, multiple customers and driving the significant growth you mentioned earlier, and now we've got the second leg of that growth coming. So where is that going to lead to over the next year? I think you're going to see the mix of data center go higher. I'm not going to put a specific number on this because we -- what we like to have is a lot of optionality in our portfolio. Every quarter is different. It's changing a little bit now with the business models, and we'll get into that. But we believe that a robust portfolio where we can cover as much of the market as possible is the best for long-term profitability of our franchise. We're unique in the fact that we have a global consumer business that already gives us a great starting point. We have a great client business, and now we're building out that great enterprise SSD business. So I think it puts the portfolio -- it puts the company in just a fantastic position as far as what options we're going to have in the future to get the best financial return.

Yes, definitely. I think talking about optionality and trying to optimize the business to get the most profitability out of it, obviously, when you're looking at the enterprise SSD market, it gives you good visibility. You have massive orders coming in from the CSPs. On the other side, you have exposure to many of the conventional markets where you have much better pricing power. How do you decide where to allocate?

You want to take that, Luis?

Yes. So we like all our customers, right? And we want them all to be successful. And at the end of the day, we produce a wafer, and we have to make a decision of where we are located. We want to have a portfolio that's balanced across segments, right, because that's more sustainable over time. We don't want to maximize value just for this quarter but over time. But we're constantly making choices on where we allocate bids, and the new business models are a foundation for that.

Got it. So let me flip that question. You see pricing in conventional NAND going up. When you look at these SSD, LTA, so the contracts that you get on the CSP side, are those kind of tethered to where market pricing would be because you don't want to leave money on the table either, right? I mean it's not running on -- a charity, you're running a business model. So how does that -- how do those arguments work out?

Yes. So in general, there are fixed price components within these new business models, which I believe are important. And then there are parts of the agreement are with, let's call it, a floor and a ceiling of pricing. And the reason we did that is because none of us wanted to be unhappy, right? If prices go up, then we would be unhappy because we would not be capturing the upside, if prices go down, our customers would be uncompetitive because their peers would be paying lower prices. So we established this floor and ceiling concept for some of our contracts and for some of the [indiscernible] time within that. Now importantly, as we said in our earnings call, even in the low end -- prices, we like the margins, right? This is how we structure them and margins will be consistent with the margins that we guided in -- for the fourth quarter for our fiscal fourth quarter.

Got it.

So there's kind of a little implicit assumption, I think with your question, I just want to kind of touch on. We're not trading duration for price, right? That's not the value proposition. The value proposition is continuity of supply, and price is price, right? Price is whatever is fair for both of us. You can assume we have somewhat unique insights into price being in the market. I don't like to discuss price. But -- and then the other thing I'll say, look, there's 3 -- I think there's three things we're trying to do. And there's three things, I think, in any technology franchise will want to do. Number one, we want to get a fair price for our technology. We work very hard on it. People are professionals, we want to get a fair price. I think we've kind of gotten to that point, right? You can argue, could we get more? If we can get more, we'll get more. That's our job. We'll continue to have that conversation. Number two, we want to get rid of the volatility on the economics. And I think especially in our industry, this is an issue. There's been so much volatility. It'd be down, cyclicality. It's -- I've said this many times, it's just corrosive on the industry. It makes it difficult to invest in the industry. It makes all the decisions harder. So we want to work on that. And then the third thing we want to do is we want to grow, right? We're a business. We want to grow as a business. Well, I think one of the most interesting things about our technology franchise is we have a built-in growth lever of more volume every year. We're talking about mid- to high teens bit growth at more volume every year. I think that's fairly unusual in a large technology business, just like next year, we know we're going to have more volume. And we have a debate sometime about, well, should you be growing faster? And the issue is all three of these variables are related. If you start growing faster, you oversupply the market and then pricing comes down and volatility goes up. And so it's really about balancing all three of these. And that's really what we're trying to do as a management team. It's got all those three balance, to your point, not leaving anything on the table. But you -- the future is uncertain. So you could get to the future, and you find out it tips in the other direction. And so that's where the new business models are really getting at that second issue. How do we put -- that's why we call them new business model. That was Luis's name...

Very innovative.

How do we put a new business model around this? Our business with our customers in a way that we can achieve all of these things. And I think we're not done yet, but I think we're making good progress on that.

Got it. Going back to the cyclicality point that you just raised, that's -- it's a very interesting point because this industry has been plagued with that whole -- it's kind of a labeled very cyclical, and so it comes with a much lower multiple, I guess. How do you convince the investor base that this time it's different? You have better visibility. There is a technology road map here. The players are more rational, more disciplined. There is more of a focus on making profit than being cyclical supplied. So...

Yes. Well, there's nothing I can do about other players in the market or anything else. I only -- we only really manage our company. And what we can do is be transparent about what we're doing and explain what we're doing and why do we think that the way we're doing it is better than the way it's been done in the past. I think generally, that's what we do all the time, right? We're innovators. We invent things, we do things differently. We have the confidence that we can change things and get a better outcome in the future. We're not [indiscernible] to the past. And believe me, I've been told many, many times about the cyclicality in this industry. Whenever you bring up the word LTA, the first thing the [indiscernible] they won't work.

They start rolling their eyes.

Like there's so much scar tissue, and there's so much history. I get it, like how do I disprove something? It's very hard to disprove something except you just keep putting points on the board, that's what we do. We keep putting the numbers up. I mean, again, we were here back in February '25, and we stood on the stage in this very room, and we made the case for our company. And did people believe us? I don't know if they did or not. They gave us like a $6 billion or $7 billion valuation. Now they have a little more belief. So for the people that believed 1.5 years ago, it's turned out very, very well for them. Everybody has to make their own decisions. We've clearly made our decisions. I mean, I spend every day all day at the company, managing this company, and we're fully invested in it, and we have a lot of confidence in what the future is going to hold. And you're going to keep being transparent, and we're going to keep doing very -- what we think are very smart things. We're going to be open. We're going to keep coming to meeting. We had great meetings all day, where we hear feedback from the people that own our company. We factor that in, and we move forward and make the best decisions we can. And we think we have a tremendous franchise, and we're very focused on getting the most out of it as we can.

That's very great to hear. So I remember last -- since you brought it up, talking about things being done better. Last February, at the Analyst Day, I asked you a question, why did you move from WD to SanDisk. And you said because you saw much better innovation, a much more exciting road map at SanDisk. And I guess you proved it right. So -- but to that point, as you look at your whole TLC, SSDs and QLC SSDs and enterprise SSD side, you guys have lagged the market, but now you are catching up. What changed? What is the differentiation in your SSD road map today that is giving you that design win rate versus your peers that is not there last year?

So it really started more than last year. I mean, these are long design cycles. These are like 3 or 4 years, at least. Building an ASIC is not easy. And then getting qualified at a major customer can be a 2-year process. So this target years and years ago. And if I think of SanDisk and kind of just the big picture, there's all these different episodes of SanDisk, if you will. I mean it was just a tremendous consumer company, a tremendous IP, I think it went into Western Digital and inside of Western Digital, what you would have expected happened, it became a great client business. And it was like the rise of client. And why was that? I mean in my opinion, you were -- and I wasn't there. I didn't witness all of it, but I'm just looking at the history, NAND was replacing the hard drive and client. So you knew the customer, you knew the use case, you knew how to test it, you knew what all the features were, and you could build a tremendous portfolio there and a lot of innovations and systems work, the first DRAM-less client, all these innovations. And all of this expertise on building systems for consumer brought into building systems for clients. And then you had a new management team come in 6 years ago to have more of an enterprise background and started bringing an enterprise bent to this, like how do we get the right engineering teams, how do we get the right projects. And projects are very, very difficult. They go on for years, and it's the culmination of hundreds of decisions that happen every week that eventually lead you to having the right portfolio for the right market. And we've just run that play long enough now with an unbelievable internal team that has all of the expertise in how to build NAND controllers, applying all of that to the enterprise market. And when you do that for long enough, you end up with great products, and we're very, very happy with where we are.

Fantastic. Last one -- last question on the SSD side. And then we move on to something more exciting HBF. But first on the SSD side, as you look at KV Cache demand and some of the CMX racks that NVIDIA talks about, are you seeing that gain a lot of traction. You obviously have agentic AI and all that demand coming in as well, but that's supposedly going a different route. But from the KV Cache side itself, are you seeing a very big pull through from the CSPs?

Yes. I think undoubtedly, this is a very big backdrop in the industry. We're, as I said earlier, right, I think AI, there is just a huge focus in the early days, appropriately so on model training, right? You don't really have AI until you have a model. And so an enormous amount of focus on building out the systems for training models. And then I think we've all learned over the past several years that these models are extremely valuable, right, that they can -- you can do amazing things with them. I mean I'm an enterprise software guy for 30-plus years. The amount of change that's happening to the discipline of writing software is almost spectacular of what's happening with these models. You have pieces of software that people have worked on for decades and all of a sudden you can run a model against it and find defects that have been there for years and years. It's just -- as a professional, it's just kind of crazy the amount of productivity. So then once you get that, you have to scale it. You have to scale inference. And I think this is really -- there's been -- there's now a number of spectacular companies in the world that can scale technology globally in a way that's never happened before. Cloud-based computing is unbelievable. I mean it used to be -- to scale technology, you actually had to ship the technology to everything. I mean I'm old enough to understand this, right? You used to have to ship technology to every single person. Now you just point your device in a cloud that has the most sophisticated technology in the world, and you're up and running. So the friction of deploying technology in the world has just almost been completely removed. Except for the people that are doing that work, it's extraordinary work to build a global infrastructure to distribute technology. And I think those companies are very focused on how do I scale inference globally. And to do that, it's got to be -- you got to know the use case you're scaling for. It's got to be done in an economic way and you have to be able to do it in a predictable time frame. And I think as those conversations have been going -- people have been going through those conversations, they've been -- what is the right mix of compute, what's the right mix of DRAM, what's the right mix of HBM, what's the right mix of NAND? And that's a very dynamic question, that changes based on what use case you're assuming, what's the power of the model, how big is it? So this is a very dynamic equation that's kind of happening in real time. And I think the big picture answer to that question is, you need a lot more NAND because NAND is the most scalable semiconductor technology. And if you're going to scale something economically you're going to want to use as much of the most scalable technology that you possibly can. And I think that's led to this whole process of discovering what is the true value of this technology to the world.

It's the capacity versus cost question. How much capacity...

It's a capacity versus cost and -- yes, and NAND has been something where it's been almost always focused on density. And now it's focused more on high performance. It's a much more multidimensional equation.

Talking about high performance, I want to go to this HBF. There's obviously a lot of excitement around it, high-bandwidth flash, which is similar to HBM in the sense that you stack 16 layers of NAND, you have a logic-based CMOS bonded array at the bottom. Maybe you can talk to how you see that technology evolving because it starts to deliver the bandwidth of DRAM at a cost that's 1/10 of DRAM. But it has its challenges, whether it's [ right ] or endurance speed, endurance cetera. So maybe you can talk to where you see your road map. I know you guys have talked about HBF in the second half of '26 and might be a controller hardware in the first half of '27. But maybe you can give us some more color on that.

Yes. So I think the original -- the whole original idea from HBF came out of the conversation we just had, except it happened like years ago by a bunch of very, very smart people inside the company that we're basically -- if you're a designer, for your whole life, you've been told, give me more density, like more density, more density, more density. That was kind of the whole idea of designing new NAND nodes. But now you have this -- I think they saw this -- well, I don't think they know, they saw this like inference use case coming. We have these very large models. And so I need a lot of storage. But for NAND to be -- to work in that inference use case, you had to solve some other problems, like you had to make the -- the one thing about inference is a very deterministic equation, like you know what the model is. It's not like training where you're building model, you know what the model is. You just need -- you need to load it into a CPU as fast as you can. So the team started thinking about how do I re-architect NAND for higher bandwidth, higher right bandwidth. How do I get to some of the endurance questions, right? And an enormous amount of intellectual property was developed over the years. Obviously, we don't talk about that. That's our intellectual property that basically said, "Hey, at some point, the world is going to need more storage inference". And can we design a NAND dye to solve that problem. And that's what's kind of, I think, the genesis of HBF. We are working on it for quite a long time before we launched the company last year. We thought that was the right time to start talking about it because we were launching the company. And I think one of the most satisfying things that happened over the last 1.5 years since we launched the company as I think there was a lot of skepticism when we first started talking about it. And I think that there's a lot less now, right. I think it's like people can see, hey, like it inferences is a memory bound problem as much as [indiscernible] by GPU bound. So how can we bring more memory, more storage inference? And that's what HBF is all about. And so we're in the -- now the challenging side of it is, it's not just a plug compatible replacement for something in the current AI inference architecture. It's a system play. You have to change other parts of the system to get the whole thing to work. And that's the process we're in now is talking to customers about how they're going to design inference, whether it's on a device or whether it's in the cloud and how does our technology plug into that, and that's an iterative process, right? They're trying to figure out what the use case is, what they want to build. We're telling them what the capabilities are and then you're constantly changing both sides of that equation. In the meantime, we're off building the dye, right, which we expect to have later this year. And then we're building the controller that actually controls the dye and actually delivers the product, and we'll have that available sometime next year. And we're going through that process, and we're iterating on that process with our customers to get it to lock in to a specific use case, which then we can commercialize. And so we're in that process, right now.

Got it. So when you're thinking about working with the customers, is that you're getting a lot of interest on the CPSs, enterprise to have customers...

No. We haven't really [indiscernible] customers, and we don't want to talk about that, just so we think it plays across the device all the way to the cloud. I think that's what's really good about the technology. And so as models get bigger, as [indiscernible] links get bigger, as agentic coms mixture of experts models. All of these things are tailwinds for that kind of technology and becoming more relevant.

And this would be more of like an on-dye HBF similar to again like an HPM. Is that fair or that's not the same?

[indiscernible] be a NAND dye, it's like a BiCS8 product, it's a new dye type for that that's optimized for this use case.

Got it. The one other pushback we hear is the bandwidth seems to -- you seem to have solved the bandwidth problem. Might be bandwidth is 1.6 terabit or higher versus similar to an HBM, but it has latency. What's your thoughts around that? The latency is higher than typical NAND?

We need to get into a very technical conversation very quickly...

And that's the last question, we will go on to easier one.

You're in a deterministic read here. So it's the pipeline like you know that you're going to -- the latency is only at the beginning, once you get going, you're going. That's a very high level, very, very simplistic.

Okay. I won't be live with it.

We understand that issue, and that's part of the issue of why we work with them as a system level, right? you're not just going to plug it in for something else that was in the system. Everybody needs to change a little bit to get a much better answer.

Yes. What's technology without the challenge, right?

Well, I mean, that's -- I mean, that's where the value is. If anybody can do it, if you could just like wake up and build this stuff because it takes a long time and a lot of very smart people, and it's very, very valuable. That's why, that's why all these people here want to invest in our company before. We're doing stuff...

Maybe with the next 10x, I guess.

It is -- I just say we can -- it's not just there's an economic benefit for us. That's like the second order issue. The first order issue is it provides to our customers a very, very, very compelling value proposition. That allows them to build a more economic business or allows them to build -- to deliver a better service to their customers. That's the first step. And they have spectacular businesses. That's one you asked me why -- you said earlier about why did I come to the NAND business. I Mean, NAND business is incredible. It's like every device in the world uses NAND at some level. And our customers are just like a who's who of every single spectacular technology company in the world. Those are all the people we get to work with every single day and figure out how we can innovate so they can deliver an incredible product.

Yes. I think it's the satisfaction of solving problem and hoping the next...

That's what you do in business.

Absolutely. I want to quickly pivot to Luis here. I think Luis here eagerly waiting to answer the question. Might be on the NBM side. You obviously announced one -- a couple of engagements there. How do you see that pipeline growing on the NBM side? Maybe give us some broad strokes on how these are structured. I mean, obviously, supply is tight. Everybody is trying to get on the NBM sort of this LTA thing. But maybe you can tell us how do you see that mix of proportional revenues going out as you...

Probably when we closed the quarter, we said we had signed 5 deals, right, and we're very happy about that. And we talked about the financial profile of those deals. And as I just mentioned, it's a win-win relationship with our customers. They are great. They're coming back, and we're in constant negotiations with them. As I also mentioned last quarter, there are several conversations going on, and they are progressing well. And we're talking to customers across all segments, right, from data centers to edge customers, really the consumer -- our consumer business is more transactional so it doesn't really apply there. But we're talking to all other customers. And as long as we're willing to operate in this new business model, we're open for business.

Got it. I want to ask you a slightly tougher question. You have BICS10 coming, it's 300-layer plus, right? it's what's out there. Things are tight now, right? But at some point, you're adding -- you have to add CapEx. You'll add CapEx, industry adds CapEx. How do you decide on that CapEx road map, your partner Kioxia, you have other peers in the industry. How do you think through that dynamic of how you add capacity, how much do you add capacity?

Yes. I would start by saying we're adding capacity all the time. We're growing capacity in the mid- to high teens, right? That's what we said. So we're investing. You see that in our financials. We've also said that we made the most cost efficient transition of the BICS8 transition so far. Next year, we're going to be continuing that transition to BICS8, and then we're going to start building some capacity for BICS10. It will be a little bit more expensive per bit, right? So same growth but a little bit more cost -- higher cost, but it would still be lower percentage of revenue, obviously, as our prices have continued to go up. What we do is we take a long-term view of the market. We talk to our customers. We understand what that growth is and that's where we're planning to. We can't react to one quarter of what's happening today, right? It takes 110 days to produce a wafer. So we really take a long-term view, and we want to make sure that we're there to source profitable and sustainable bits.

Got it. One last question, I got a minute here. So your earnings for next year, consensus is close to $200 earnings per share. That's a massive cash flow. What are you going to do with all that cash?

Yes. I think it's just an easy question. We've been very consistent on that. Number one, we need to invest in the business. The CapEx that's required, we need to continue to fund the business. And we've made some strategic investments to strengthen our supply chain. We invested in NAND here to get more access to DRAM, which is very important to us, particularly as we expand into data center, which consumes more DRAM. We extended the JV agreement for another few years. So that's A great investments in the business. We said we wanted to pay down our debt. So we started with $2 billion. That's all gone. And the third thing to do, which is really the role of our company is to return cash to our shareholders. We announced a $6 billion share buyback program with earnings. As you can imagine, we should be executing on that. We will give you an update at the end of the quarter and then what's next.

Right. What a fantastic story. Any last questions? Any one last question. No? Done, gone, gone. Done. That's it. Fantastic. Appreciate it.

Hi. Good afternoon, everyone. I'm Mark Newman, Bernstein's U.S. IT hardware analyst. And great pleasure today to welcome back again, David Goeckeler, Chairman and CEO of SanDisk, who was also previously CEO of Western Digital, during the spin-off orchestrated the spinoff of SanDisk. Thank you very much David, for coming back again today.

It's wonderful to be here, Mark. Thank you for having us.

Thanks.

Can I get started with safe harbor -- it's like it has to be done.

Sure, go ahead.

I'm the only one that can do it appear I will be making forward-looking statements in today's discussion based on management's current assumptions and including with respect to our technology and product portfolio, our business plans and performance, our capital allocation priorities, market trends and opportunities and our future financial results.

These forward-looking statements are subject to risks and uncertainties. We assume no obligation to update these statements. Please refer to our annual report on Form 10-K, our quarterly reports on Form 10-Q 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 be making references to non-GAAP financials and a reconciliation of our GAAP and non-GAAP results can be found in the Investor Relations section of our website.

Thanks very much. Okay. Now we've got that out of the way. I'll start with the I've got a bunch of questions I'm going to ask. And just remind everyone, you should have a pigeon hole link for free to put your own question in there. I've got an iPad up here. I'll look at the questions coming in. I'll try to ask a few audience questions. want to get through some of my own, if that's okay.

So I think I'd like to start off with demand. If we could talk a bit about demand and then we'll talk about some of the other items. But first of all, on demand, can you frame this demand environment you're seeing today, given what's going on with but also looking at other areas, mobile and consumer, like how are you seeing demand changing versus last time we talked about demand, particularly in AI.

I'll say first, like this is one of the reasons I really like this market, and I really like this franchise is there is a lot of demand drivers. I mean NAND is used in like every interesting technology there is in the world. Smart -- the traditional markets, smartphones, PCs, data center, which is obviously now growing significantly, but moving on to IoT devices, auto, robotics.

It just kind of goes on and on. It's a very, very diverse market with a lot of demand drivers. Those demand drivers move at different rates. And I think it really makes it a very, very fun place to build a franchise like we have. So what's going on right now? I don't think it's a mystery to anybody. Data center is really really, really growing aggressively.

We came in to -- if you go back maybe 3 forecast cycles, we were thinking data center this year would grow mid-20s. We upped that to mid-40s. We upped that to mid-60s. And now we've upped that even a little bit for that. If you look at like what data center is going to grow on an exabyte basis in calendar year '26.

So that's happening. It's obviously a big driver of the market, a lot of stuff that's happening. But the other markets are -- there's still a robust market across robust demand across all markets, whether it's PC, smartphones, we're still having great conversations with all those customers, across auto sectors, IoT sectors, I think it's just a very -- it's a very robust demand environment.

I guess, I mean, given how strong AI is, data center growing 60% plus, you have other parts of the market getting slightly crowded out though. That's part of what we're potentially seeing. How do you frame that?

Look, I mean it's a market, right? And I think markets always rationalize supply and demand. They're kind of always in balance. And clearly, there's ways that those clear through price -- and there's just an enormous amount of very, very attractive demand environment being created in this market. That's a very, very exciting thing.

That's always going to have impact on other parts of the market that maybe aren't as attractive from an economic perspective. And that's something that happens in any market at any given time. We happen to be -- it's a big market. It's a very liquid market. We know what the price is all the time.

In fact, it's a market that is kind of used to trading price constantly, even in the contracted part of the market has traditionally been set price every quarter. Right, which is really a lot of volatility. That's one of the things we're trying to move away from, quite frankly, I think this is the dynamic you're going to have in any market where there's always a significant amount of new attractive TAM being created.

And look, we are talking about a little bit about this on the way in. It wasn't that long ago that I was back here in New York, launching the company when we did the separation, and I got on stage and I said, we're going to invest for mid- to high-teens bit growth.

And we think that we had a view that this was early '25. We had a view by the end of '25, the market pricing was going to inflect higher. And the predominant view to the end of last summer was that was the wrong point of view.

And I was reading reports as late as, let's say, late summer that said, Oh, SanDisk is going to miss their numbers in December because pricing is going to be down. So it didn't quite work out that way. I don't think anybody could have anticipated the real intensity at which data center has come on.

But we believe that this has been -- this is a great market. We've been investing for growth in this market. We have to make investment decisions many, many, many years in advance of when the actual supply shows up. We're investing heavily billions of dollars in CapEx, hundreds of millions of dollars in R&D productivity, which, by the way, that's a whole -- there's a whole theme there about R&D productivity and NAND.

It it's very spectacular. We can grow a lot with additional productivity, which each node we deliver. But we've been very comfortable for a long time with this idea that we can grow the market, and we're committing to grow the market a mid- to high teens growth rate.

And just going back to demand specifically. Beyond the headline numbers, what are you looking at for leading indicators, such as order book depth customer forecast revisions, qualification activity? What kind of -- what things are you looking at to give you most confidence in the durability of this demand cycle right now?

Because clearly, demand is far exceeding supply given where pricing is going.

Yes. And what we're looking at is what is that environment going to be for the next I mean again, we're we just -- for example, we just invested $1 billion a number of months back to get -- extend our agreement with Kioxia which is a fantastic agreement from 2030 to 2034. So we're obviously looking very far in the future on what demand is going to be.

So there's many, many different ways we go about that to answer your question. So first of all, we do a lot of bottoms-up work -- so we talk to our customers. We know what they're built. And for example, smartphones, PCs, all these kinds of markets. We have deep relationships with our customers. We know what devices they want to launch in the future.

We have a view of what the mix is going to be. We have all kinds of bottoms-up analysis on the big markets of what kind of bit growth that's going to drive. We're obviously looking at CapEx spending. I mean that's what's driving the data center number up, every earnings cycle. The CapEx number goes up.

We know we have a decent idea of how that relates growth in our part of the technology world. So those are kind of long-range things we're looking at on the demand side. And then we're in the market every single day. I mean we are having conversations with our customers. They're calling us and talking about what they need for the -- currently and in the future, we're obviously having discussions about pricing continuously.

And so it's a culmination of all those things that give us insights into where the market is going to.

And specifically within AI, we have these different stages of AI training, early chatbot influence, more advanced influence and now we're moving into this Agentic era. How do you see those impacting NAND demand over time going as we go from the earlier stage to the more later stages of AI.

So we've always believed that inference is really going to be where it's at on NAND. And so we had to get there. And I would say for the first 2 or 3 years of AI, I would constantly get these questions is development and deployment of AI going to impact the NAND business? And it was always, yes, it's going to, but we got to get there, right?

You got to get the models built, you got to get them deployed, you got to get them rolled out, you got to get users using the technology. There's got to be valuable use cases that drive consumption I think we're past all that. Now we're rapidly moving through all of that. And you're starting to see the impact over the last year.

This has really been the story. You're starting to see the impact of NAND on the inference architectures. And I think as our customers start to build out these architectures and you're trying to figure out how do I scale inference globally right?

Training, you don't really have to scale globally. You're training a lot of very smart people, a lot of infrastructure driving training. But inference you want to drive to the masses, if you will. Billions of people are going to be using inference in some way.

And so when you're going to go through that process and you're going to scale something like that on a global basis, it's got to be economic. Right? Early in any kind of technology, you're naturally going to want to -- when you're a technologist and you're doing things for the first time or you're building markets, you're kind of you're kind of overwhelming your architecture with all the resources you possibly could need.

Give me all the compute, give me all the memory, give me all the power, give me all the networking, give me everything I need and then I'm going to build a system but then as you go to scale that system, you need to really kind of drill in what exactly am I going to scale, and that's got to be economic.

Because if it's not economic, it's going to be -- obviously, it's going to be too expensive. That means you're going to have to charge more for it. It means you're going to open yourself up to somebody else coming in and doing it more economic and putting you out of business. So these are like really, really big, very, very hard decisions.

And I think what's been happening over the last year is the people that are responsible for doing this, like spectacular technology companies that have an enormous amount of expertise of scaling technology on a global basis. I think this is really the story of the last 20 years.

I mean the distribution of technology has become almost completely frictionless, right? You just point your device to a URL and you have the most spectacular technology in the world. It didn't used to be like that 10 or 20 years ago, we had to ship us something or you had to upgrade your software, like there was all this friction in the system.

All that friction has been removed, which means we can deploy technology at scale very rapidly which is spectacular, right? And we're witnessing that happen right now. But the people that do that have a very, very difficult job because it's very expensive, and you need to do it in the most economic way.

So those people have been going through that process of how do I build that architecture. And that's where NAND is becoming more and more into the picture. Why? NAND is very scalable. It's the most scalable semiconductor technology in the world. We can produce the supply, right? And so as models get bigger, as context lengths get bigger.

All these kinds of things are driving you to you have to use more scalable technology if you're going to do this in an economic way? Or if you're just even going to do it, there's just not enough of other things in the world, right? DRAM is spectacular technology. HBM is spectacular technology. It has unbelievable characteristics.

It doesn't have the scale to solve a global inference issue. So I think companies have been figuring out what is this architecture and starting to scale it and how we're going to scale it. That's what's been driving this kind of behind the scenes more demand for NAND, more demand for NAND.

I find as I work on that architecture, and I dial in exactly what I'm building to, then I need more or less manned, and you're coming out with the answer, we need more. And so that's what's driving the market, and that's what's driving those customers to come to us and say, hey, look, we're doing planning for years into the future, that's our business.

We want to understand your plan for supplying us this critical technology years into the future. We don't want to just show up every quarter and try and negotiate the price and figure out if there's enough. We need to know now. Can you supply me in 28? Can you supply me in '29? And this is what's leading to kind of this whole transformation we're going through.

I appreciate that. That's phenomenal demand we're seeing right now. [ Jenson Wang ] earlier this year at CES laid out this KV cash vision. It's something like an incremental 17 terabytes per GPU. Are you seeing that? Is this in your demand numbers? Do you think that's going to have a big impact in an incremental additional impact for NAND demand?

Yes. I mean this is exactly the process I was just talking about, where people are designing systems and they're configuring systems. The KV cash is moving into NAND because it's got to scale. I need scalable storage technology, that's NAND. And so depending on what use case you're building for, like I know people want a real clear, hey, if I do so much of this, I get so much of that. But it's not that simple.

Like you need to figure out what use case you're building for in the future and what you're going to scale to, once you know that, then you can design an architecture to do it. And when you go through that process, there's like a whole bunch of variables in there.

How big is the model you're using, how many tokens, what's the KV cash size? Or you have a cash somewhere. What's the hit rate on that cash? You go through this very complicated equation, and we've done some work on this that we've shared. And out of the bottom comes how much NAND you're going and then you kind of come to us or you come to some of our peers, and you say, how do I go acquire this much NAND over the next -- so we believe very much in that vision.

And I say it's much more than a vision. It's what's happening in reality, and it's been happening in reality for quite some time now as companies need to take this brilliant AI technology, and they need to scale it so we can all can use that?

Yes. I think -- I mean you're saying it's about the density, right? The density of the NAND flag versus DRAM and it's just in terms of how many gigabytes you can get per dollar and how many gigabytes you get per square area, just as much more. It's just -- we can deliver more -- we can just deliver more capacity, yes, more density.

That's exactly right. It's a different technology. It solves a different use case. It's not a substitute and it's not -- doesn't mean one's good, one's bad. That's not the issue at all. You need both.

And you're going to have to use this very scalable storage technology as part of that architecture, and that's why these data center numbers keep going up is because as people iterate through this process, of how to figure out what that architecture is I need to scale, the number keeps going up, and that drives the demand that drives the demand higher.

So just pivoting a bit to pricing, ASPs, not LTAs, but just looking at the pricing environment in the industry. For those that haven't been following SanDisk closely, the ASP last quarter per gigabyte went up approximately 140% Q-on-Q for SanDisk.

But that's my estimates. I don't think you've actually given that exact number, but it's pretty much around that, which is just absolutely phenomenal. My question is how do you characterize the pricing environment right now? I mean, clearly, you can't get 100% Q-on-Q continue, which is not sustainable.

But amongst the different segments, are you seeing strength still continuing, pricing still trend up? Or how do you see it?

Look, I mean, we have a forecast for what we forecast. I'm not going to get in to talk about what future pricing is. Look, I mean, we build -- the most important thing in our business is to build very valuable technology. It starts with the technology. It's always about the technology.

And if you find that you build great products that solve real needs, then we're on this journey of figuring out what the value of that technology is. And that's our job is to do that, and we'll continue to do that.

Got it. Okay. So price too strong. Okay. Got it. Historically, NAND pricing has been quite cyclical, and we're going to talk a bit about LTAs in a minute, what gives you confidence that this is going to be sustainable at this level of pricing right now besides the LTOs because we're going to get into the LGs next.

I mean I think this is really part of -- I mean, this is very much how I think about my job is to make this sustainable. I think the cyclicality has just incredibly -- I mean where I've used a number of times, it's just incredibly corrosive. It's we're either in a situation -- it seems like we're either in a situation where on the supply side, we're like scrambling to survive.

I was in that position in '23 a year ago, we launched the company and everybody gave us a valuation that was -- I thought was incredibly low, turned out that turned out to be true. And we're in a situation where we're having the previous conversation, you just asked me where everybody doesn't get what they want.

And to me, that's a thing where our incentives are not aligned. Our business models are not aligned. And so I think what I'm trying to do and what our team is trying to do is I think if there's kind of 3 big things we need to do is in this technology franchise and really any technology franchise.

And what I'm constantly trying to balance. And number one is always get a fair return for your -- what you built, right? We're very proud of our technology. Very difficult to do. Not only do we invest in all the IP to build NAND. We invest in all the IP to build systems -- we don't have one R&D team. We have 2 R&D teams. We have a team that builds the NAND, and we have the teams that build the SSDs and all the products, manufacturing, Oh, we do that too.

We have to invest all the CapEx to do the manufacturing. Oh, back end, yes, we do that, too. We have a captive back in. So we do everything. The whole process. Obviously, we have a lot of brilliant suppliers that provide a lot of important technology for us to be able to do that. But the #1 thing is get a fair return for that investment that we've made. And we've been making that investment for a very, very long time.

And so that's the first thing. And I would say we're doing okay on that now. For a long time, we didn't do very well on that. quite frankly. I mean, again, you only have to go back a year ago and people were basically telling us you're not doing a very good job on that because we don't want to invest in your company.

And so that's the first thing you have to do -- the second thing that we -- that I'm really focused on is we need to do something about the cyclicality, right? It's just corrosive because it's either -- everybody is just waiting for when the downturn is going to come. You have a good quarter. Oh, you're just one quarter closer to a bad quarter, kind of a crazy psychology. Either people aren't getting what they need or they have too much -- it just is not helpful from my perspective at all.

And so we want to do that, and we're doing that through business practices. That's why we call these things new business models. How can we change the way we the way we engage with our customers. And then the third thing you need to do in any technology franchise, you need to grow, right?

You got the right economics. You get the cyclicality out of it or you deal with the cyclicality differently and then you have to grow. And in every technology franchise I've managed in my career, the third one is the hard one. It's hard to grow, right? I mean it's -- especially large profitable businesses are hard to grow.

But that's one we have taken care of, right? We say we're going to grow mid- to high teens and people say, well, can't you grow faster? I'm like, let me get the first 2 taken care of, and then we'll start talking about that. And so balancing this equation is extremely difficult.

And if you start change -- you can always talk about 1 of the but you have to talk about all 3 of them together because if you start messing with 1 of them, a different 1 goes in an opposite direction. So it's kind of that whole equation is what we're constantly trying to balance -- and we're focused on all 3.

And I would argue that the more difficult 1 to solve the growth one, it's a huge advantage for us, right? People want to debate, should you be growing faster? Like, well, maybe we could be growing faster, but at the expense of the economics, that's not a very good trade-off from a valuation perspective.

Should we get more economic, et more of this and live with more cyclicality, that doesn't seem like a very good trade-off. So you have to do all 3. And we're constantly -- and that's the way we think about it. At least that's the way I think about it. And that's what we're trying to balance. And that's a lot of fun.

I think we're seeing very significant change in the franchise in this environment to really get after those first 2 issues.

That's really helpful. And then just drilling down on the second point, the long-term agreements, what you call new business models. Can you just talk about what you can today for how these agreements look in terms of durability, in terms of volume commitments in terms of pricing structure.

If you could explain what you can like how you think about those agreements, where you are today.

And I know you've said on the last call, over 1/3 of volume in these long-term agreements on new business models, as you call them. Where do you expect that to get to would also be helpful.

Yes. So let's talk about -- you said a little bit earlier, and I think everybody understands it's been traditionally a very volatile business, right? I mean, literally, pricing changes every quarter. That's a hard business to plan, hard business to forecast.

And traditionally, agreements, there's been -- and by the way, we have spectacular customers. I mean we're -- this is one of the things, again, that's so attractive about this franchise. I mean [indiscernible] our customers are the most enviable companies in the world. I mean, they're just -- they do spectacular work whether it's PC, smartphone, data center, whatever it happens to be across the board, it's just incredible what our customers do.

But the traditional view of a long-term agreement was I'll commit volume, then we'll discuss price later. Like, okay, well, that's better than nothing, right? So at least we understand if we agree on price, we understand how much volume we're going to allocate to everybody.

But we want to get out of this volatility. And so how do we think about this differently. So that's why we -- this idea of long -- there's a lot of terms that have been thrown around in the industry, long-term agreement, NCRs, take-or-pay, there's like all these different things.

And when you bring up 1 of those terms, in my experience in the last 2 years, as soon as you bring up one of those terms, the person across the table from you starts telling you all the reasons they won't work. And so we studied that very deeply.

And we said, look, what we want to do is we want our -- we want to get our business model aligned with our customers' business model. right? And more and more, we have customers coming to us saying, especially as we got through these data center qualifications.

So you think about the data center business we've been developing, we build an enterprise SSD. That takes like years to do -- it's a very arduous process. Then you start engaging with a customer and that can take 2 years, understanding what you're building, giving them samples, putting thousands of units in a lab, letting them run for a year to qualify, this is a very, very difficult process.

And so at the end of that process, you get to the point where the customer is, okay, like you've built a great product, right? We've invested a lot in this. We built a great product. I want to buy it. Great, right? And I want to buy it for a long time. I want to buy it for the next 5 years because my -- go back to the first thing where we started. I'm doing all this work, I'm building this new technology.

I have a lot of demand for your product. I don't just want to buy something this quarter. I want you to tell me that you can supply me for the next 5 years. And so, okay, well, show me what your demand is. and then we start the conversation. And this is kind of new, right? Because usually, it's like I'm going to tell you what my demand is for the next 12 months, and we'll talk about price 4 times a year.

Now it's like No, no, no, no. I don't want to talk about just the 12 months. I need to know 2, 3 years from now, 4 years from now, can I get from you what I need? Because when I'm building, what they're building is spectacular, again, incredible technology. So then we get into a conversation, which is how do we align our business models, right? You want to consume NAND, I want to produce NAND.

Now the way I produce NAND happens to be a business model that is probably quite different than yours, right? I have to invest 10 years ahead of time. I have to build this huge fab. -- like you see the thing from space. It's like enormous. And I have to plan years in advance for my capacity.

And the good news is I've done all that. We have the fabs. We have the R&D. We know what our technology is roadmaps going to be for years in the future. But now I've done all that, and I turned the fab on, right. Now I'm investing for growth, right? I'm going to grow mid- to high teens. So now my fab is running and there's more wafers tomorrow than they were yesterday. And that's true every single day. And every day, the wafers come out of the fab.

And I've got to sell them. Can't put them in inventory, you can't let them fall on the floor, somebody's got to take them. That's like kind of an unnatural business model for a typical consumer. They have big businesses that are growing, too, but guys, do I have to buy something every single month, right? Do I have to buy more than last month? And the answer is yes.

So how do we align -- you're going to need this supply? I'm going to produce that supply -- how do we align our business model so that I have confidence that you're going to -- you're going to be a strategic partner of mine, and you have confidence I'm going to deliver to you.

And how do we put a contract around that? And that's where we came up with these new business models. So how did we think about that? Number one, we need partners that are going to consume a significant amount of product, right? Because this is going to be a big contractual arrangement. Number two, we need you to grow your demand as fast or faster, hopefully, faster than our supply.

So if I'm investing for mid- to high teens growth bit growth rate you come to a it the same amount for 4 years in a row, that really doesn't help me, right? You need to consume faster than supplying than your big strategic partner to me.

Now the next thing you need to do is you need to consume predictably. Remember, the fab runs every single day. The wafers are coming out. If you're my strategic partner, you need to consume every week, every -- well, let's say, every month, every quarter, you've got to be predictable in your demand.

And the more insight you can give me to what that demand is, the better off, what's your mix going to be how much of this product, how much of that product, we got to get all that figured out. And then we have to put an incentive structure in place because, look, you're a public company, I'm a public company. Something may happen where you have to exit this contract.

I understand that, right? Stuff happens. The Black Swan event happen the whole economy goes up and down. Let's say we have a global pandemic. Let's just imagine an event that may impact the whole world. So at that moment, I need an incentive structure where you're incented to stay into the contract.

And if you don't stay in the contract, that I get a benefit, all right? So I'm going to ask you to put an amount of money aside upfront. And we're going to let a third-party hold that for us, right? We're not going to -- I'm not going -- we're not going to argue. I'm not going to sue you. That's never going to happen, right?

That's you don't see your customers, we're partners, right? Something happens, you have to exit the contract. So ahead of time, let's have a third party hold an amount of money that you have -- you can use that word if you want. But some third party is going to hold an amount of money. But the easiest thing was you just give me all the money upfront.

That's kind of impractical, right? I mean this is a 5-year relationship, you're not -- that's a big check for anybody. That's not realistic from all -- for all kinds of reasons. So we had to come up with something different. So let's have a third party hold that money and they'll have the contract, and they'll be able to say, you walked away from the contract or you didn't walk away from the contract. And if that happens, that third party is going to release the money to me. It shows up on my balance sheet, and we part friends.

At that moment, the contract is over. I keep everything from that point on, you keep everything you paid for and we all go about life, right? And so we think that aligns our incentive system. You're now incented to stay into the contract. You may think, oh my gosh, I need to exit this contract. Do you really want to exit this contract.

There's going to be some amount of money, you're going to have to forgo billions. And so you better be sure. And if you do, if that has to happen, then I get a bit of a soft landing. I get a bunch -- I get some cash, which helps if it's a black swan event or something, it's let's say, it's -- I want to get rid of the 6 guy, let's say it's a huge down cycle, what do you need to down cycle, you need cash.

Then we've insulated ourselves and we're both -- we both move on down the road, and we're both fine and we can do business again at some point in the future. So that's a rough idea of the contract structure we've put in place is that the $12 billion financial commitment.

Yes. So let's decompose the numbers. So we talked about this. We have RPOs now. that's something you would think about. I've run a lot of software businesses, right? So that's a metric from there. But that's really an accounting metric, right? We didn't like wake up and say, oh, we need to use this metric, like that's what the industry does when you have contracts and they have future obligation.

So we signed 3 contracts for the end of the quarter. So the number we had, the $40 billion, whatever billion, $42 billion number was the remaining purchase obligation is the minimum amount of purchasing obligations on those 3 contracts for the life of those contracts.

And then there was another number we talked about, which was a little bit of -- it was a little different, so it was a little complicated. We signed 2 contracts after the end of the quarter, so they're not in our numbers. But of the 5 contracts we signed, that amount of money that's been set aside in case people walk away was in aggregate $11 billion -- so those are how the 2 numbers kind of all tied together.

Got it. Got it. But honestly, we don't ever expect to see that money. I don't ever want to see that money. I think we have great partners. I think these contracts are going to run to the end I think that our interests are aligned and everything is going to be great.

But we live in the real world. There's got to be some incentive system, and I think we've aligned those incentives. And I think our we have willing partners that are willing to go -- that are -- that want to go down with that path with us because they value the commitment of supply.

And customers, those all hyperscalers or No, we haven't said that. We're not going to say that. What we want it was very smooth. I mean, look, we want a diversity of customers, right?

We want to is the same thing we do about -- I've talked a lot about portfolio.

We want a diverse portfolio with a lot of optionality across our products we sell. Where I started this. Why do I love the NAND mark? Lots of reasons I love the NAND market, a very diverse market. A lot of great customers, a lot of places you can sell your product. But you have to have technology to do that. You don't just sell them raw wafers, you got to build products. If you're selling into the consumer market, you got to have a team of people building that.

You got to have a back end that's creating all that stuff. So you want a diverse the portfolio as possible, and that gives you the most optionality possible. The same thing is true for these new business models. We want a variety of term links, right?

You don't want them all to end on the same day. So you want some that are a year, some that are 3 years, some that are 5 years, and then you want a diversity of customers that ideally will cover as much of your portfolio as possible because that's what keeps the portfolio alive and keep that optionality going so we've made the first step right?

And that's what we announced on our earnings call. Again, go back to the 3 things I talked about, get a fair return, deal with the cyclicality and grow. Fair return. I think we're okay. We can do better, but we're pretty good. We've got -- now got 5 in the middle column of starting to address that. More than 1/3 of the portfolio visibility instead of visibility being 3 months at a time or maybe 12 months at a time.

Now we're talking about visibility 3 -- 2 years, 3 years, 5 years, wildly different. And the growth piece, remember, the grow was always there. That box has always checked. -- right? That's always the one that's like that's what's so great about this market. It's going to grow.

So we got the growth box checked. We got the first box. We're in a good spot. Now we need to keep it. That's the second part.

And that's why we call new business models because it is a different business model of how to do this.

That 33% do you hope that to get to 50% to 70% or? Well, that's unrealistic.

No, that's not unrealized. It's TBD, right? Again, this is -- we're not done yet. We took the first step we took this -- maybe we took the first 5 steps, maybe that's the way to say it. But we're still having more discussions, and it depends on this portfolio thing I said earlier.

Look, there's plenty of -- like I said, we have spectacular customers. just spectacular customers. They're great companies, great people. They build unbelievable technology. Some of them like the business model we have before. They like the quarterly, Hey, we're just -- let's just do a core. Great. Fine. We're good with that.

We're absolutely fine with that. We know how to do that. If that's what they want to do, we're all in for that. So we'll see how --

Are those customers are going to get enough supply, though, if they don't sign up for. I can't run their business. They have to run their business, right?

I'm not the only supplier in the market. But what I want to do is get a portfolio of these agreements that give me the diversity across -- give me the diversity I talked about can cover a fairly wide swath of my portfolio. I don't have to be all of it. It will never be 100% because there's a whole bunch of customers out there that just aren't big enough that are great customers and great business to engage in.

So we'll see -- I think it's a bit TBD, maybe a bit unsatisfying for you right now. But it's a little bit TBD what the final landing point is. But I think if we have the opportunity, we will continue to drive it higher. That's correct. I mean that's a lot of clarity, much more clarity than we've got from your competitors so far in long-term agreements. So I really appreciate that.

I love my -- those are all great companies. They really are. Just pivoting to supply and capacity, just given how strong pricing is and how strong demand is. A lot of your competitors, Samsung, Hynix, Micron, these companies, they don't have space to add capacity because they've given all their fab space to DRAM, which has also been tight.

But Sandisk Kioxia together, you're one of the only ones that actually has some space that you could added capacity. I'm not encouraging you to do that. I'm just asking. I was just asking.

You're asking for a friend.

Like how do you think about that I'm asking how do you think about that considering that you have the potential to add capacity pretty much no 1 else is, except for possibly YMTC in China. Could you add more capacity? Or are you just really trying to optimize pricing at the moment.

Okay. So probably a more complicated and than you think. So first of all, we're always adding capacity. I think that's where we need to start. We are always adding -- remember, we're growing mid- to high teens. This is a very big market, growing volume mid- to high teens.

That's amazing, first of all, right? Number two. So it's normal course to be adding capacity. Just is. That's what we -- that's the business we decided to enter. Number two, we have to make decisions far in advance. Like what demand is next quarter has no impact on my capacity decision.

I had to make that decision 3 years ago. We have a fab plan that's years into the future. It's very complicated to move tools around what nodal -- you're not just running one node in the fab, you're running many, many, many different nodes at the same time, you're transitioning really sophisticated.

So you've got to make those decisions far in advance and also, again, I don't want to get harp on this too much, but reflect back, it was only like 12 months ago when everybody told me that we were investing too much. right? And we were saying, No, no, no. We think mid- to high teens growth rate is the right number and people are saying, well, price that's not the right number.

Less than 12 months.

Yes, less than 12 months ago, right? So we can't whipsaw that much. So how do I think about that? What I think about is we're investing from mid- to high teens growth rate. And we have a great partner in Kioxia. It's a great relationship.

It's gone on for a very long time, for a very good reason because very productive and it's very valuable. And we're good at planning. We're good at planning and making sure that we have what we need at the right time to continue to grow the business.

Now one thing I will say that's very important to understand, very important to understand. We can grow through nodal transition. So what I'll call, R&D productivity. The number of bits per wafer continues to go up faster at a compounded rate faster than the mid- to 1-teens rate I'm talking about.

So if we just -- if we just went from node to node with the same number of wafers, we would oversupply the market. So we are constantly adjusting this equation. Now remember, each node requires more clean room space. Each node, more complicated, more steps, more tools, more clean room space.

But this dynamic is extremely important, right, that we are -- if you look at our CapEx as a percent of revenue, it continues to go down as revenue goes up. because we still have all this R&D productivity. So for all of you that are here that are investors, this is very, very important.

Like what it says is I can get the growth without an enormous amount of incremental CapEx and when you get -- again, go back to the model I had, right economics, get rid of cyclicality and grow what you find at the end of the day, what are we in business to do, we're in the business to generate free cash flow.

And what you'll find is this franchise is very good at that, because we're very efficient with the CapEx we spend, we're very efficient of getting incremental output from that.

So I've got a few questions from the audience. Just one more from me, if I can, before I go to the audience questions. HBF, high-bandwidth flash. Any updates on that, that you can touch on?

We've been very excited about this technology from -- again, when we announced it when we launched the company in February of last year. We've believed for a very long time, that once we got to inference, that NAND was going to be a very important technology.

Like you don't need to convince us that the memory architecture needs to change for inference to scale. That's essentially a little bit around what HBF is about. It doesn't mean HBF is going to take over her enterprise SSD. It doesn't mean that HBF is going to be a substitute for DRAM, any of those kinds of things.

What it says is there's an enormous opportunity for innovation as inference scales. And people that have new ideas, like when I see AI right now and the amount of huge scaling going on, I see a giant green light for innovation. If you got new ideas, bring them, right?

Because the world is trying to figure out how to scale this spectacular technology. And the faster we can do it, what I said earlier, now we can scale technology in a completely frictionless way.

It's amazing how fast technology can be made available to everyone if you get the economics right. And so HBF is a strategy for how we can deliver a lot of density to inference, which is predominantly a read-based activity and a deterministic read-based activity. So we're very excited about the technology. It's new. We're building the NAND die now.

We expect to have that by the end of the year. Sometime next year, we'll have the system. We're building the controller on top of it. We've got a lot of work to do. We're working with customers on how they would integrate that into their architecture, right? Because it's not plug and play.

This is not -- we take our component and plug it in, you take something else out. You got to -- it's got a -- it's a system play. So you got to get your customers to adopt it into what they're building, and we're going through that process. So we'll continue to update as we go.

Okay. That sounds great. So questions from the audience. And first one, will the shift to edge or on device compute, be a benefit or wish to send is growth projections?

No, I think -- I mean, anywhere that you're shifting -- you say the AI, basically, AI and edge meaning in your device, in your smartphone in your this is just more of the same theme that NAND is everywhere. And as you start to scale technology, you're going to bring -- you need more capacity, and we have the scalable technology.

And so we see this as a very -- this is -- this is why we're committed to that mid- to high-teens growth rate than we were even last year is because there's like this evergreen nature to this market.

Like the world is just constantly innovating and thinking of new ways to use our technology, and that's a wonderful thing. I've got a great question here from the audience that says, can I ask all just to put your hands up if you own [indiscernible] could I ask you to put your hands up if you own SanDisk stock?

Okay. All right. Thank you.

We're working very hard on your behalf.

Next question here from the audience, can you expand on lessons learned from prior boom bust, how have management incentives evolved across the industry, similar to oil and gas or not to avoid repeating history.

I don't know about oil and gas. But I mean, I've learned -- look, I've been in the technology business now for probably longer than I should admit, like 40 years, building global technology. I started at [ Bell Labs ] a long time ago. And I managed a lot of different technology franchises, a lot of different technology franchises, hardware, software, SaaS, at very large scale.

I was somewhat surprised when I really took -- came in as CEO of this industry about just the way it works. It's just kind of really this whole idea of, like you said, boom bust I've said it many times, I just think it's corrosive like there's somebody that always feels like they're not getting what they want, either the suppliers are like doing what I was doing in '23 where I'm scrambling to survive. Or we're in a situation where people are saying, I can't get everything I need. And it's -- I think it's because of the way we go about this. Now there's some reasons for that, I said earlier, right?

We have to make a long investment cycle we increased supply as more of a step function, demand is more of a curve. So getting these things aligned is not easy. I don't think it's something we should just give up on I don't think it's something that is like it's our fate or something like that.

And I think that just because it's been this way for a long time, it doesn't mean it needs to be that way in the future. I mean maybe I'm arrogant, but that's what we do. We're innovators. That's what -- I mean we invent new things, and that can apply to business models as well.

That's essentially what we get paid to do, and I think the world is very good at it. And I think if we think about this business model, yes, what do we learn from the boom and bust -- let's not do that again. that would be -- it would be really good if we don't do that again.

And so how do we not do that again? The bust part of it. And how do we get to a point where we get a fair return for our technology that we build. And again, it's very difficult -- it's very difficult technology. It's not easy. It's 3D semiconductor technology, people dedicate their lives to doing this.

It's very expensive to do. It requires an enormous amount of CapEx fabs are very difficult things to build and run. Let's get a fair return for that, and let's put a business model in place where we can smooth this out. And I think that's very possible. And I think we've made a couple of steps down that path and we're going to keep going.

Great. Well, with that, we are out of time. Thanks very much, David. Thank you.

Thank you, everyone.

All right. Good morning, and welcome again to JPMorgan's 54th Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Dave Goeckeler, Chief Executive Officer and Chairman; Luis Visoso, Executive Vice President and Chief Financial Officer of Sandisk here with us this morning.

As we're all witnessing, storage technology is a critical part of unlocking the full potential of AI, right, especially as the frontier model builders are now focused on monetization, therefore, significant unlock of inferencing-based workloads, which are definitely more memory and storage intensive, right? But in the edge and client devices and consumer applications, more and more intelligence, real-time responsiveness, also translates into more storage demand as well. Sandisk is at the forefront of delivering these high-performance flash-based storage solutions to all of these markets.

And so Dave is going to kick us off with some opening comments, a quick review of the March quarter results, June quarter guidance, and then we'll kick off the Q&A. But gentlemen, thank you for joining us this morning. And Dave, let me turn it over to you.

All right, Harlan, thank you. It's -- we're very happy to be here. I think Luis is going to get us kicked off with a few statements, and we'll go from there.

Thank you for being here. We will be making forward-looking statements in today's discussions based on management's current assumptions and expectations, including with respect to our technology and product portfolio, our business plans and performance our capital allocation priorities, market trends and opportunities and our future financial results.

These forward-looking statements are subject to risks and uncertainties. We assume no obligation to update these statements, please refer to our annual report on Form 10-K, our quarterly reports on Form 10-Q 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 be making references to non-GAAP financials and a reconciliation of GAAP to non-GAAP results can be found on the Investor Relations section of our website.

Thanks, Luis. Harlan, again, it's great to be here. Just a few opening comments, look, it's a very dynamic time in the business.

Absolutely.

A lot of fun stuff going on. Look, we're a technology business. I think it always starts with the technology. The portfolio is just in great shape. BICS8 is an unbelievable technology node. We've talked a lot about that in the past.

I think everybody knows we've been very focused on our data center business. We have a great consumer business, great edge business. We've been focused on really driving product strategy and data center. I think this quarter, we saw over 200% sequential growth in our data center business, 25% of our mix.

So I think we're getting -- we still expect that to grow going forward, but I think we're getting a really, really solid balanced portfolio across the board at this point. Obviously, the demand situation is very dynamic. And I think one of the most interesting thing that's going on in the business right now is it gives us the opportunity to change the business model. I think this is a business that's been a very transactional business in the past.

That's led to a lot of dynamics, a volatile business. But we're at a point now where we can start to change those practices with our customers. I think everybody is a winner in that process, and it's a lot of fun to go through it. We made some very big strides in the last quarter that I'm sure we'll talk about here today.

Yes, absolutely. And that's a great segue into my first question because you talked about all of the transformational dynamics that are happening in the flash memory segment of the market. But it reminds me interestingly enough of another segment of the storage market.

And obviously, Dave, you were a part of that as well, right? And I'm going to rewind back a couple of years, because it was under your leadership at Western Digital, powerhouse and hard disk drive-based storage, flash-based storage, which is now the Sandisk franchise as we know it today, right?

But the dynamics that the team was seeing in its HDD franchise, '24, '25 time period is exactly what Sandisk has been seeing over the past 12 months, right? Back then, you were seeing an HDD market that was becoming more dominated by data center and AI compute customers that appreciated the technology and performance leadership in nearline drives and a strong exabyte demand profile, right, 20%, 30% per year type CAGR.

That was accelerating within a structurally constrained supply environment, right? Under your tenure, I mean, you drove the build-to-order model with your HDD customers. You then drove the initial multi-quarter customer agreements, which then more formalized under multiyear agreements, which looks very similar to the agreements you're locking in with your customers today with your flash-based customers.

Your customers get multiyear predictability and assurance of supply and return. Sandisk gets predictability on the demand curve and financials. But is much of what Sandisk and the team is architecting today via your new business model, NBM, multiyear agreements. Was that a page taken out of the HDD playbook, which has proven to be so successful in the HDD industry today and was kind of spearheaded by you and the team back a couple of years ago.

I think we're taking some pages out of a lot of playbooks, right? And I think it's really about really understanding your business, what the value drivers are, how your customers use your technology and really getting business models aligned where it's best for sustained investments, sustained value delivery and customers get -- they get the sustained benefit of your products on an ongoing basis.

And so the markets are similar in the fact that really being focused on how you supply those markets and being careful about really understanding supply dynamics and don't oversupply the market is going to lead to better economics and better kind of consistent business. But the agreement -- the NAND business is a little bit different than the HDD business. HDD business is a great business. I like those years I think the changes we made, I think the companies are doing great.

Absolutely.

I think it's there very well-managed companies with tremendous technology and great futures.

It starts with that like the technology is extraordinarily important, right? I think we build a technology that is extraordinarily important for the world. I think the NAND industry, that is a very broad set of customers across devices, across consumer, across the cloud -- these are all -- like there's a lot of diversity in our customer base, a lot of demand drivers, I think that makes it a really great business.

I think the technology is spectacular. I think in the NAND business, we have this huge advantage in that our technology is extraordinarily scalable. We can deliver enormous amounts of incremental supply through R&D and productivity gains. It's not just adding more capacity all the time.

And so what this is really about is one, getting a fair return for that technology and that investment. And again, it's a big investment. We don't just invest in the IP side of it of building the NAND nodes. We also invest in the CapEx side of it of having the production. We really have everything from defining the NAND itself, the fundamental node to manufacturing that, to then have the systems teams, that are building the SSDs, having the back end, all of it. Like as a franchise, we own all of that and we've built that over the last 20, 25 years.

And so -- in the current environment, it's about -- we're always thinking about how do we align our business model with our customers' business model. And how do we get those aligned, because that's going to lead to better economics for both of us. In the NAND industry, what I'd argue that these models have not been very well aligned.

Our business model, Luis and I constantly are making decisions on investing on like a 10-year time horizon. When you build a fab, you need to get a return from it for a very long time. The market has been traditionally a market where the economics are determined on a quarterly basis, right, a lot of volatility.

And that leads to there's -- somebody is always feels like they're not getting what they deserve in that equation. Either the economics aren't really attractive enough to drive this long-term investments or there's people feel like there's not enough product for me to do everything I want to do to run my business. So we think very deeply about that, like how do we get these business models aligned. And that's really what these new business models are all about. That's why we call them NBM agreements. Is about how do we get our business model, which is an unnatural thing, I think, for our customers.

We invest for the long term. We're investing for growth, right? We're investing for mid- to high teens growth. That means we run a fab, every single day, there's more wafers than the day before. Like there's more wafers tomorrow. There's more bits tomorrow than there was yesterday. And that's true every single day. So we have to sell those every single day. You build this huge asset, you turn it on and the idea is you don't want to turn it off. It's very expensive to turn it off.

That's not necessarily our customers' business model. They don't really think about, "Hey, how do I consume on a very predictable basis? How do I consume where I grow all the time"? How do I -- it's just in the way the market has worked that out in the past to say, well, every quarter, we'll just decide what the price is. And then we'll have this clearing price and then you get all this volatility and then you get all the cyclicality. So what we're trying to do is really three things. I think running a technology franchise. Number one, we're trying to get a fair return for our products, right?

That's like always the #1 thing when you run a technology business, you want to get a fair return for what you've built. Last quarter, we drove 78.4% gross margin. We guided for slightly higher than that. I think we can say we're in an attractive neighborhood as my friend, Luis would say. So that's attractive return.

Number two, we want to get rid of the cyclicality or at least dampen the cyclicality -- or at least when the cyclicality comes have different techniques to deal with it than we have in the past. The traditional way to deal with the cyclicality is I've got to turn my inventory into cash because I need cash to run my business.

We want to get out of that model. So what are we doing? We're strengthening our balance sheet. We're building cash reserves. We're putting contracts in place where when that moment happens, if it happens, there's a financial benefit to us and it's not just we're like wondering what to do in that moment.

So get a fair return for your product deal with the cyclicality. And then the third thing in any scale technology franchise, you need to grow, right? I think all of you here, that's what you want. You want to invest in growing businesses, those are fun. And I think one of the big advantages of our technology -- our business is it's going to grow, right? That's not the debate. The debate is how fast it's going to grow.

Well, the issue is, depending on how fast you grow it, the other two get all out of whack, right? So it's how do you balance these three things. And that's what we're doing with these new business models. So it's a little different than other markets. We take pages out of those markets, right? Both Luis and I have run a lot of software businesses, quite frankly, we run a lot of high-scale recurring revenue software business.

We take lessons out of those. Those are very attractive models, right? They get a slightly different multiple than we do today. So we're taking pages out of all of those in constructing a business model for our business with the technology franchise we have. That technology franchise is spectacular. It's important to almost every other technology that's built in the world. It's very scalable. It's difficult to do. We have a lot of expertise -- and we're putting a business model around that, that aligns better with our customers, so we can get those two things aligned.

And we have more visibility to not just demand but economics of those demand and that demand is growing. And we're doing that in a way where we can balance that equation. We get the right economics, we deal with the cyclicality, which has traditionally been extremely corrosive to the industry, in my perspective. I won't speak for the industry, I'll speak for our business, but extremely corrosive to our business, and then we want to grow.

We want to do all three of those things, and we're balancing that equation. And I think these business models that we're putting in place do exactly that. And it's extremely exciting because I think the place we're going to and we're kind of -- we're on that journey. We haven't been on it for very long, but it's rapidly changing, and that's a lot of fun.

We're in a business that's been around for a very long time. It's a very big business, and we're able to change the business model in a way where our customers are very happy with these agreements, right, because they want predictability of supply. And we're very happy because we want to supply. That's the business we're in. They want to buy NAND and it turns out we want to produce NAND. And so that's a great marriage. And the issue is how do we get the business model in place that allows us both to do that and both to be happy.

And so I think we have a very willing partner that's going down that path with us and defining those models.

That's perfect. And we'll discuss more about the new business model transformation. But I want to rewind back last year to your February Analyst Day. The team, the industry was still in the midst of a somewhat oversupplied environment in NAND. I clearly remember this, you put a stake in the ground at the Analyst Day and articulated a demand profile that would rise above supply, the inflection would happen.

You said the inflection is going to happen in the second half of '25 and continue to be undersupplied through 2026 and kudos to you and the team and the crystal ball for nailing this supply-demand inflection, right? Your team always does a great job of understanding the demand drivers and the industry supply dynamics, integrating some of the new business model, constructs that you just talked about, but putting on that same cap, putting on the crystal ball, leveraging your your team, I mean, how does the team seem to see the supply-demand environment as we move through 2027?

So first of all, thank you for the kind remarks. I mean we do a tremendous amount of work. Like we're in the market every day. Like there's a lot of people that observe this market, and I have a lot of respect for people that are trying to observe this market and draw conclusions. I can say it's very hard to do. But we're in the market. So we think we have unique insights and we talk to our customers and we understand the dynamics, and we build our own supply-demand models.

And you're right. In February, when we got on stage and launched the company, we had a very clear point of view that the market was going to inflect in the second half of the year. You could say there might have been some skepticism of that afterwards, but that was fine. We had our conviction and we went off and executed it. And we still have the same level of conviction. We see this market undersupplied for a long period of time.

It's a very dynamic market now. At that point, we said through the end of '26 because frankly, that's the visibility we had. I mean, at that point, it was February of '25 through the end of '26 was a long time away in this market, but we had conviction through that. And I think we can say through the end of '27, we have that same level of conviction now.

And that, what we're going to do is use that period to, one, produce tremendous products they focused on delivering tremendous products. That's always the #1 thing we need to do. If you don't do that, then you can't do any of the rest of it, but also use that period to kind of get this business models aligned with our customers so that we can predictably drive this business forward for our mutual benefit for a long period of time.

The new business model, multiyear agreements with customers. Clearly, the centerpiece are a strong part of the strategic transformation of the company since spinning out. You've signed five multiyear supply partnerships with what you've described as committed supply for customers, committed financials for the Sandisk team, backed by firm financial guarantees the longest contract is five years.

More importantly, you've said over 1/3 of fiscal '27 bits are now under these -- covered under these firm customer commitments. So first, -- can you just walk us through the conversation that you have that unfolds, right? The practical mechanics, how do these NBM conversations unfold? What's the typical customer journey from first conversation to sign contracts. And typically, like how long does it take to wrap something like this up?

Yes. So the conversations have been very a win-win kind of relationship with our customers. Most cases, our customers are approaching us. And the single first thing they say is, how can you ensure there will be supply. It's not a price. It's first of all, can you give us -- can you guarantee supply? And those conversations, they take time, right, because you're not buying something for a quarter for -- there is a huge amount of money involved.

So we go through a lengthy conversation to really understand their needs and the conversations start with how many years of commitment are you willing to make. Some customers are more comfortable committing to three years, some are more comfortable going to five. Some have less visibility and willing to start small.

Now most of these conversations are, "Hey, we want to go longer. We just don't have that visibility at this point in time." The second conversation is how many bits are you willing to buy? And normally, what we see is the procurement teams are being a little bit more cautious than what they are hearing from their engineering teams. And we go through these negotiations and an important feature we want is we want to bet with strategic and winning customers. And we define that by customers that are growing faster than the bits that we're producing.

So faster than the mid-teens, and therefore, they will be taking a higher percentage of our business. And then the conversation is about price. And we're not talking about current prices. We're talking about what is the price that we think makes sense for us and what price makes sense for them. And as we've talked in the shorter term, we define those prices mostly fixed.

And as you go out into the future, there are some variable components. Think about mostly kind of a floor and ceiling concept in which this floor is attractive for us and the ceiling obviously would be even more attractive. And the reason we do that is because prices will fluctuate. We don't know in which direction they will be in five years. And we know one of us is going to be unhappy if we fix the price. If the price goes higher, we would be unhappy because we would have left money on the table. If the prices go low, our customers would be unhappy.

So we want to make sure that each of us can capture some of that volatility, not all of it because we're signing a contract, and we don't want that 100% volatility. But we are getting -- we can capture some of that value. And the last component is we need to make sure that if the customer, for some reason, walks away, there is a financial guarantee where we are in a very good position.

So we've been negotiating a financial instruments through which it's very clearly defined that if they walk away, the funds will flow through us. The funds are either with us or with a third-party financial institution. And the criteria has been predetermined. Think about as a clean-up, although I hate that concept. But just an easy way to understand it. It just said at the very beginning, law lawsuits, no discussions. It's just very simple procedure.

That makes a lot of sense. Now I appreciate the framework and how the team sort of thinks about it. As of the earnings call in late April, you had 5 NBMs committed to the first 3 that you signed in the March quarter have a total lifetime contracted value, $42 billion. Has the team signed more NBM since earnings? And of the total or cumulative NBMs that you've now signed, what is the total lifetime contracted value and/or percentage of bits that are covered as you think about your shipment profile in fiscal '27.

Yes. We'll give you an update in a few weeks when we report or 1.5 months when we report our earnings. It's a little bit premature at this point. We just had our earnings call. But as we mentioned, we're in active negotiations with additional customers, and we're in conversations across different end markets, and we will give you an update soon.

So if you look across your NBM engagements signed or in discussions, right? And are you seeing an interest level across your data center edge/client business, consumer customers. In other words, breadth of customers by end market. Is that there?

And when you're not signing an NBM with customer who comes to the table? What's the typical reason? And is there any concern that those customers reduced their relationship with Sandisk over time as you preferentially allocate to your NBM partners.

Yes. So if you think about the three end markets, this new business model really does not apply to consumer, to what we call, right? So that's a different type of business. We love that business. We're committed to it. We'll continue to drive it. But these new business models really don't apply there. But we are in active conversations across the other two end markets, and we believe that's the case. Now you're asking me a very difficult question, which is what are the causes where a new business model has failed?

Correct.

And I'll tell you that hasn't been the case. No, we are either -- we closed the deals we've closed, and we're in active conversations in all the conversations we started, and we'll give you an update when we have more news to share.

Let me make a few comments on that. So we think it's very important. We think long-term value creation in this franchise, diversity is a big part, so optionality. So we're not going to exit any markets to favor other markets. So we want customers across our whole portfolio, right? We have a great consumer business. We've talked about that. We have a great edge business, device business, right?

Very large share there. We have tremendous innovation over the years. So we want demand in those markets to keep those products world-class. And we've talked a lot about data center, our products. We now have world-class products and demand is driven for those. So across these agreements, our desire would be to have different time frames because you don't want everything ending at the same time. You want diversity, portfolio theory. You want different end markets because that keeps the engine running inside the company.

And we're going to construct that portfolio, right? And then we'll go back to those customers and extend them or whatever we need to do. Now there are a set of customers that are not ready to opt into this model. That's fine. We have stunning customers. All of our customers are incredible companies. They all do amazing things. They build incredible products, and it's a privilege to work with all of them. If they're not ready for this model or they don't think it's right for them, that's fine.

We're still going to have a percentage of our business that we engage in the typical -- there are some customers just aren't big enough, right? There's a long tail of customers that don't -- they're not driving this much demand that are wonderful customers and they're great businesses to be in.

So as we get there, we'll talk more about it about where we land and what percentage of our business is covered under these agreements. But clearly, the amount of our supply that's left available for this quarterly negotiation is going to go down. And that's a good thing, right? We want -- again, it's just more part of this diversity. We want a broad diversity of how we do business. But what we really want is a major part of the portfolio where we understand the economics years into the future, because that -- again, go back to these three things we're trying to sell.

We want great economics. We want to deal with the cyclicality in a very different way than we've dealt with it in the past, which is just episodic where it's like, "Oh my God", like all of a sudden, we have all these situations where we've got to turn inventory into cash and we've got to do all these kinds of things. We're leaving that world behind, right?

It doesn't mean that the world is still going to have recessions. Things are still going to change. Stuff is going to go up and down. The issue is how we respond to it. We're going to be in a very, very different position in our ability to respond to that and make it as short as possible, way more flexibility -- and then we want to grow. And like I said, we got the growth lever taken care of. Again, to me, as a long-time technology manager, like that's the hardest one is to grow, right?

Because usually, when you get to highly profitable businesses that are large, you run out of market and you stop growing and then you got to go do a whole bunch of other stuff to grow. But we got that one taken care of. I think the debate is, well, could you grow faster? Maybe we could grow faster. But we want to do all three of these things at the same time. So we think that's kind of the way we want to structure the portfolio.

And it's extremely exciting because we think that's within our grasp. And the customers that we need to do that with are coming down that path willingly. They're pulling us down that, right? We're just trying to -- we have to innovate around, again, back to this, how do we get our business model, which is an unnatural thing, right? You build a fab, you turn it on, wafers just come out, you better sell them. With their business model, how do we get those two things aligned in a way it works for both of us. We've made, I think, really good progress on that, and we're continuing to having more discussions.

And as you rightly pointed out, growth is a paramount sort of focus issue -- the great thing about these NBMs, in general, whether customers sign or not, you're getting them to the table. You're having them unveiled what they think is their outlook for storage demand for the next sort of several years, right? As you aggregate all of this, I mean, has this changed your views? And then you have a segment of the market data center, which wasn't that big of a driver a few years ago, which is clearly going to become a very significant driver of the franchise going forward.

But whether it's bringing all these customers to the table, you've got this new demand driver from data center. As you aggregate all of this, has this changed your views on driving mid- to high teens type bit supply growth profile over the next few years?

Yes. I'm going to go back to kind of the way I've been framing it. So there's always a debate -- the debate always seems to be around, could you grow faster or should you grow faster? And what we're trying to do is balance all three of these things. And traditionally, the issue in this market is if you start growing faster, then you -- the other two get messed up very quickly.

And so we're very conscious of that, and it's about getting more visibility. So as we get more visibility into the portfolio, I think the answer to these questions will be easier. But right now, we -- again, we got on stage -- it was only February of last year where you started this question. We got on stage and we said the market is going to grow mid- to high teens, and we think pricing is going to inflect up in the second half.

And everybody told us we were wrong, right? And they gave our company a $7 billion valuation. That was only a little over a year ago. And now it's like, well, you should grow faster and you should do it all this stuff. It's like, "Hey, look, we have a model, and we believe in that model and that we believe that mid- to high teens bit growth is sustainable over time." As our customers come to us and they're willing to make longer commitments, that will give us more visibility into what the future looks like. And that's a good thing for everybody.

And on the economic front, on the economic profile front, given the strong pricing environment and margin expansion as a result of the rather tight supply environment, there hasn't been as much focus on cost downs by the market as it relates to Sandisk's execution. However, as you negotiate these NBMs, I mean, the economic framework is important. And so there are certain assumptions, Luis, that I assume that you're baking in from a cost down perspective, right, as you think about the overall economics to Sandisk, but you have laid out a cost profile -- cost per bit cost down profile of low teens type of annualized rate?

So first of all, is the low teens annualized rate kind of still the way to think about how you're driving your cost per bit profile? And then maybe if you can just level set us year-to-date, like what has been your cost per bit decline trajectory and your outlook for this fiscal year?

Yes. So first of all, we will always focus on cost, right? That's our job, and we'll continue to drive that. The cost downs are less than they used to be. And frankly, it's not where we want to focus the conversations with our customers, right? It's about the value we create, the value they create with our products. And we'll always keep on working on.

But it's a part of the economic -- I mean, your customers don't focus on it. But as you think about your economics, you obviously have to factor that in, right?

Right. When we told you that the deals we signed will be consistent with the gross margins we guided, -- all of that is taking into account the current cost structure or everything we see and that -- so that's factored in, but we don't talk about costs.

Harlan, this is, I think, one of the most interesting things for me in the last 1.5 years. So when we launched the company, I remember, we got on stage and I just said, I'm going to stop talking about cost down. Like every earnings call, what's your cost down this quarter, what's it going to be next quarter, we're going to stop talking about this, right? I've never seen an industry where people tell you what their costs are. Like it's -- the business was managed from the cost side of it. Oh, if we drive our cost down, the economics are work. We're just going to stop talking about that. It's been kind of interesting over the last year. People stopped asking about it. It's been great.

They've stopped asking about it partially because pricing has done well. But from my perspective, cost is important, because it's a reflection of the team's execution. It's a part of the reason why Sandisk is -- has the best-in-class manufacturing technology, right? And that's part of the reason why I'm asking that question.

You're 100% correct. I appreciate the question, and I appreciate the comments. Like, look, one of the things I said at the beginning, one of the things I'm so excited about this business we have an enormous amount of R&D productivity in the TAM, right? We know what the BICS road map is going to be years into the future. And you're right, we can increase productivity. We can drive more bits. We don't need to do -- we don't need to build a whole bunch of greenfield and all this kind of stuff because we get the productivity through R&D. And the consequence of those additional supply is they are at a lower cost, right?

So that is true. It's just not -- that's our side of the equation to keep -- and as Luis said, every business drives more productivity. Every business drives more productivity. That's our job. We have -- to your point of your question, we have a big lever that a lot of people don't have of driving productivity, which also drives growth.

Exactly.

It's an amazing thing for the financial model of this franchise. It's incredible. To Luis' point, we're still very focused on it. It's just not the way we run the business anymore, which it used to be the way we run the business, which is was, "Hey, there's infinite elasticity if we just lower the cost, everybody will make money." It turns out that was never really true. I don't think it was ever -- maybe it was true in the 2D era, but never really true in the 3D era. And now we're getting to a different way of running the business, which is the value -- the intrinsic value of the technology being recognized, supply discipline, matching supply to attractive demand, not just, "Hey, we can drive the cost down, we should supply more into the market." It doesn't mean that it's not still there. It is still there.

Absolutely.

We just don't -- it's not something where we're not really highlighting that number at this point.

Let's focus on the area of performance and differentiation. You've said it many times, Dave. But your customers' willingness to enter into these NBMs, these multiyear agreements is, first and foremost, driven by differentiation, right, performance differentiation.

And I think one of the areas where the team has done an outstanding job relative to the last 20 years plus that I've covered, Sandisk stand-alone, Sandisk is a part of WD, Sandisk stand-alone, again, is the team has made significant improvements in your data center enterprise SSD portfolio, right?

And success in data center solutions, as you guys know, is not just based on having the best-in-class well performance like base NAND manufacturing technology, right? Success in enterprise SSD is also that plus I have to have a great silicon controller technology. And then even more importantly, in some cases, I've got to have the right software and firmware, right? And so with this dramatic growth in your enterprise SSD business, along with share gains, I mean, what has the team done to architect a better controller chip design? What has the team done to enhance the firmware, software, which are all key determinants and very strong success factors for your customers?

So again, I appreciate the kind words. I mean, one of the things I've always appreciated about this business, whether it was part of WD or now as a separate business is the R&D team. We just have incredible R&D capability, incredible existing IP portfolio. And in a world where you have AI now, which is like the most exciting technologies, when you have this unbelievable R&D team, they're going to come up with new ideas and be able to innovate.

And that's leading to all kinds of other projects we probably won't have time to talk about like HBF. But -- so why the progress on enterprise SSD all of a sudden, right? So if you look at -- I kind of look at Sandisk, maybe a couple of very big arcs of Sandisk. Sandisk was a great consumer business. The WD era was really about the client, and that's not surprising because the SSD was controlling the HDD, you knew the customers, you knew the use case, you knew the requirements.

And so that was kind of the rise of that portfolio. And then towards the end of that era, new management team came in with more of an enterprise background, obviously, the rise of the cloud in both franchises, all that technology expertise that had first like done all this incredible controller work in consumer and then done all this incredible controller work in client.

That team was moved on to enterprise over the last three to four years. You run that process for three or four years with focus of people that understand how to be in these markets and you end up with great products. And so we haven't forgotten how to do the other one. So it's an accumulating thing. And now we're at a point where we've got, first of all, great underlying NAND technology.

That's the JV story, right? That's the foundation of that. We just signed another contract. We're through 34, we're partners with Kioxia, we're super happy about that. That gives us unbelievable NAND. So the wafer comes out of the fab, what are you going to do with it? Now we have this unbelievable team. They built a great portfolio in consumer. That team then built a great portfolio in client.

Now that team has built a great portfolio in enterprise. And we got exactly the right products at exactly the right time. Market is exploding, a lot of demand from data center. We've got incredible NAND technology, to your point, it's differentiated, wafer bonding, better performance, all these kinds of issues. And we've built clean sheet architectures that we're just starting to ship of new enterprise -- new class of enterprise SSD right at the moment when that market is really pulling on those products.

That's the story of what's happening right now, and we're wrapping a whole new business model around it so that this franchise looks very different going forward than it looks going backwards from a financial model perspective.

I appreciate the insights, Dave, Luis, thank you very much. Looking forward to continuing to monitor the execution of the team as the year unfolds.

Thanks Harlan. I appreciate being here.

Thank you.

Good afternoon, and welcome to Sandisk's Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Note this event is being recorded. I would now like to turn the conference over to Ivan Donaldson, Vice President 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, including expectations for our technology and product portfolio, our business plans and performance, our capital allocation priorities, 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 the written materials posted in the Investor Relations section of our website.

With that, I'll turn the call over to David.

Thanks, Ivan. Good afternoon, and thank you for joining Sandisk's fiscal third quarter earnings call. We delivered another strong quarter with excellent performance across all key metrics, reflecting the strength of the Sandisk franchise. Before turning to our end markets, I'd like to provide an update on a priority we previously outlined. Last quarter, we were engaged in discussions with customers on multiyear supply partnerships. What we refer to as new business models or NBMs. I am pleased to share that we have successfully advanced those conversations with 5 multiyear partnerships signed so far. These partnerships are structured to lock in committed supply for our customers and committed financials for Sandisk.

Our customers' commitments are backed by firm financial guarantees. These partnerships support durable structurally higher earnings and a significantly more predictable and less cyclical business for Sandisk. We believe this marks a fundamental evolution of our business, which is centered on deeper customer alignment, enhanced visibility and long-term value creation. These MBMs reflect the strategic value of our world-class NAND technology, which is built on decades of innovation. The investment we've made in R&D and manufacturing, including tens of billions of dollars in cumulative CapEx and IP have built the foundation for a powerful new business model in which we manage the full stack from front-end manufacturing through chip and system level design to final back-end assembly and test. Both the extension of our joint venture with Kioxia and the supply agreement for DRAM following our investment in Nanya, further strengthen our supply chain resiliency. This leverage is enabling us to drive stronger customer engagement, allowing long-term conversations with partners who value technology performance and long-term supply assurance. With increased engagement in the optionality across the portfolio, we can optimize our end market mix more effectively. Together, these transformations have resulted in a step change in what we believe to be sustainable gross margins, free cash flow generation and earnings power in a market that we expect to grow in the double digits for the foreseeable future.

Data center is a clear example of this strategy in action with revenue growing 233% sequentially. This milestone reflects years of preparation and our deliberate shift toward what is now the most strategic and fastest-growing end market. While we have made substantial progress, there is significant growth opportunities ahead driven by the fundamental shift in underlying infrastructure requirements of artificial intelligence.

We are witnessing extraordinary growth, not just in model size, but in resulting token generation, the duration and complexity of model runs in the increasing importance of context. As AI models scale from billions to trillions of parameters and deployments advance from simple inference to deep reasoning, and increasingly autonomous agentic systems, NAND has become a critical component of the underlying infrastructure. Inference optimizations such as KV cache, along with workloads like RAG, require substantial high-performance, low-latency flash to deliver real-time responsiveness and quality of user experience. These workloads expand the amount of data that now needs to be stored on low-latency flash, which is well beyond the model itself as systems must retain context, intermediate data and large external data sets. As a result, NAND flash is emerging as the only economically viable solution to deliver that capacity, performance and efficiency required to keep models accessible for real-time inference at scale.

This shift in understanding the critical nature of our technology comes at a time when our product differentiation is strongest. Anchored in what has been recognized as an industry gold standard for NAND technology with BiCS8 and a broad leading portfolio with TLC and QLC offerings. We are confident that our world-class product portfolio and technology leadership will continue to drive data center customers to see Sandisk as a partner of choice over the long term, and we are already seeing that preference translate into results.

Our fiscal third quarter revenue was enhanced by strong demand for our TLC-based enterprise SSD portfolio, which powers performance-intensive compute workloads where speed and latency are paramount. Looking ahead to the fiscal fourth quarter, we expect to begin shipping our QLC Stargate solutions for revenue, adding another layer of revenue growth. Together, TLC and QLC serve distinct but complementary roles, reflecting how we are deliberately architecting our portfolio to meet evolving customer needs with our broad portfolio of AI-focused data center products.

In edge, we are seeing a continued shift towards premium devices across both PC and smartphone markets. These platforms are increasingly incorporating on-device capabilities, which are driving higher storage requirements and greater demand for high-performance solution. As a result, our mix continues to shift to high-value configuration and customers that assign the appropriate value to our technology. Consumer saw a strong year-over-year revenue growth across all key storage categories and regions despite evolving consumer industry dynamics. This performance was supported by our strong brand recognition and channel presence as we focused on the most financially attractive demand. In February, we unveiled our next-generation portable SSD portfolio, designed to support faster, more demanding workflows and AI-enabled content creation. This launch reinforced our innovation and leadership in the SSD category generating meaningful external visibility with coverage across multiple global media outlets.

We also continue to strengthen global consumer engagement through new brand-led go-to-market activities, such as our Space to Hold More campaign, which is driving deeper customer connection by localizing global narratives and engaging diverse communities worldwide. Together, these efforts reflect our focus on our end markets and commitment to driving demand through brand recognition, product innovation, and strong go-to-market execution as we shift our portfolio toward higher-value opportunities and transition away from legacy upsell models. Our broad end market exposure sets us apart and we remain committed to serving customers across these markets. With that, I'll turn the call over to Luis to dive deeper into our financial performance and guidance.

Thank you, David. I will begin with an update on our new business models, or NBMs, which are designed to provide us with demand certainty and provide our customers with supply assurance. We signed 3 agreements in the third quarter an additional 2 so far in the fourth quarter, and we're currently in active negotiations with several other customers. These agreements are tailored to meet the needs of our customers and in aggregate, provide us with demand certainty and financials that we expect will be consistent with our fiscal fourth quarter guidance. The duration of this agreement varies, with the longest contract extending to 5 years. In aggregate, volume commitments increased during the life of the contracts with quarterly commitments and a combination of fixed and variable pricing. This agreement with variable pricing allow us to capture upside if prices rise while allowing our customers some upside if prices decline over time.

As you will see in our 10-Q, the 3 contracts signed during the quarter provide minimum contractual revenue of approximately $42 billion. We will update you as we make more progress. Each contract is secured with financial guarantees that protect us if the purchase obligations are not fully performed by our customers. In aggregate, the 5 agreements signed so far include financial guarantees that exceed $11 billion and include prepayments and other financial instruments, managed by third-party financial institutions. Out of these agreements, $0.4 billion in prepayments are included in our Q3 balance sheet. These 5 new business models account for over 1/3 of our BiCS in fiscal year 2027, which we expect to increase as we conclude additional agreements over the next few months.

We expect these new business models to reshape the historical cyclicality of our business, improving visibility and results in pricing and margins that reflect the value of our technology and investments, ultimately delivering higher, more consistent and durable returns for shareholders.

Moving on to our results for the quarter. Revenue for the third quarter was $5,950 million, up 97% sequentially and up 251% year-over-year. This compares favorably to our guidance of $4,400 million to $4,800 million and was driven by both a mix shift towards higher value customers and higher pricing. Our BiCS shipments were flat year-over-year and down high teens sequentially as we build higher inventory levels, primarily to support strong BiCS8 QLC demand in the fourth quarter Stargate ramp and to prepare for our recently signed new business models. In line with our mid- to high teens growth model, BiCS shipments increased 18% fiscal year-to-date.

Moving on to the end markets. Sequentially, data center revenue grew 233% to $1,467 million. Edge grew 118% to $3,663 million. And Consumer came in at $820 million, down 10%, in line with our historical seasonality. Our portfolio planning strategy focuses on delivering attractive long-term economics with diversification remaining a core strength. We remain committed to serving all 3 end markets to maximize long-term value creation.

Our non-GAAP gross margin for the third quarter was 78.4%, up from 51.1% in the prior quarter. This compares favorably to our guidance of 65% to 67% and was driven by our shift towards higher value mix and the overall pricing environment. Non-GAAP operating expenses for the third quarter were $448 million, and represents 7.5% of revenue as compared to 13.7% of revenue in the prior quarter as we generate additional leverage. This compares favorably to our guidance range of $450 million to $470 million. As a result, non-GAAP operating margin were 70.9%, up from 37.5% in the prior quarter. Non-GAAP EPS was $23.41, up from $6.20 in the prior quarter. This compares favorably to our guidance range of $12 to $14.

Key GAAP to non-GAAP reconciliation items include $20 million in stock-based compensation, net of taxes which represents 0.3% of revenue and $46 million related to the write-off of unamortized issuance fees as a result of our repayment of the remaining $650 million balance in our TLB. We closed the quarter with $3,735 million in cash and cash equivalents on our balance sheet.

Moving on to free cash flow. During the quarter, we generated $2,955 million in adjusted free cash flow, which represents a 49.7% margin. Cash flow from operations came in at $3,038 million, partially offset by $83 million from net cash capital spending. Gross capital expenditures totaled $240 million and represented 4% of revenue. Our capital plan is designed to balance growth opportunities and generate attractive returns while supporting our ongoing BiCS8 transition. We remain highly disciplined in how we evaluate such investments to protect long-term sustainability of our business financials.

Moving on to guidance. For the fourth quarter, we forecast revenue between $7,750 million to $8,250 million from both BiCS growth and higher pricing. Our forecast for non-GAAP gross margin is between 79% and 81%. We expect non-GAAP operating expenses between $480 million and $500 million as we continue to invest in innovation and R&D. We expect non-GAAP interest and other income between $10 million and $30 million and non-GAAP tax expenses between $775 million and $875 million. We forecast non-GAAP EPS between $30 and $33, assuming $158 million fully diluted shares.

Moving to capital allocation. The priorities we outlined in February of last year were to invest in the business, achieve a net cash position and then return cash to shareholders. In line with these priorities, we have taken steps over the last 2 quarters to solidify our supply chain, including extending our JV with Kioxia through December 2034, and investing approximately $1 billion in Nanya to secure long-term DRAM supply. We have also taken actions that put us in a strong net cash position by paying off the remaining balance of our TLB.

Given the strong progress Today, we're announcing that our Board of Directors have authorized a $6 billion share buyback program of outstanding shares of common stock. The repurchase authorization is affecting immediately with no expiration date. With that, I'll turn the call back to David for closing remarks.

Thank you, Luis. In summary, we continue to execute with conviction at a critical inflection point for this business. NAND has always been a foundational technology, empowering the world's best-in-class semiconductor storage solutions required to drive the largest technological movements, including PC, mobile, cloud and now artificial intelligence.

Data center has become our fastest-growing market, and the workloads driving that demand, including inference, reasoning and agentic systems represent a structural and durable shift in how the world's most consequential technology is built and deployed. Our new business models reflect this shift. 5 signed agreements to date, over $11 billion in financial guarantees and over 1/3 of our BiCS in fiscal year 2027 under firm customer commitments represent a fundamental reshaping of our business, providing visibility, pricing protection and more consistent durable returns.

Our technology and product portfolio are intersecting this extraordinary demand at exactly the right moment. Equipped with a complete portfolio that now includes a scaled and rapidly growing enterprise SSD business, we are allocating supply to the highest value opportunities in establishing a new pillar of growth for Sandisk.

This progress has converged in a single moment. We believe our margins are sustainable. We've achieved our net cash target. And we've announced plans to return capital to shareholders through buybacks, all while reinforcing our operational foundation. Combined with our multiyear NBMs and the acceleration in the data center end market, this gives us both financial strength and structural resilience.

The result is a durable growth model, a valuable franchise and a business built to generate substantial sustained cash flow. With that, Ivan, let's see if there's any questions.

[Operator Instructions] The first question comes from Mark Newman with Bernstein.

Congrats on another great quarter. A couple of just quick questions here. So the EPS guidance you've given, $30 to $33, I mean these are all fantastic numbers. It does imply that the raise of price increase is slowing a bit into the the current quarter. And I just wondered if that is either being conservative on your side because obviously, we're still quite early in the quarter? Or is that related to some of these very, very long-term agreements that you've signed. And with regards to the long-term agreements, I believe you mentioned about 1/3 of BiCS for FY '27 in some kind of long-term agreement. I'd like to ask to what degree is price fixed in the coming quarters, just so I can get a kind of sense for that.

Mark, it's good to hear from you, and thanks for the comments. So first on next quarter in pricing, so we don't really guide pricing. But I think you saw in FQ3 rather extraordinary pricing acceleration across the business. So we're very happy about that. And you're right, it's early in the quarter, and it's an extremely dynamic market. So it pays to be a bit conservative when you're going down that path. But we're very confident in the numbers. The second part on the agreements, I'll make a few comments and Luis will have something to say as well. I think you were asking about pricing being fixed. So these agreements are really tailored to individual customers. So they have different elements depending on the customer, it depends on the length of the agreement that really gives us some assurance on consistency of demand, which is really what we need. And again, a lot of this is -- I've talked about this in the past, we need to get our customers' business model and our business model aligned. We run a fab. We have very consistent output. We need very consistent consumption. And I think the primary -- one of the major attributes of these agreements is they give us that. And our customers have -- they understand the dynamic very clearly when we talk it through. It's one of the reasons why these agreements don't just happen overnight. It's not just about prepaying for a couple of quarters' worth of supply. This is about establishing up to a 5-year agreement on supply that's very consistent quarter-over-quarter. And as we said, there's financial instruments in place that if that consumption does not happen on that very predictable timeframe, then there's financial commitments that come to us immediately. So they are backed up and they're very, very strong. The pricing, like I said, it's set up where there's fixed elements, there's variable elements. Maybe I'll let Luis talk about it in a little more detail.

I just want to reinforce what David was saying. These models are here to deliver durable more predictable, more attractive, more consistent financial results. So they're very good. And frankly, it's a win-win for us and for our customers. We provide supply, they provide demand and we have visibility for many years all the way to 5 years. So we're very happy about that. I guess you've never heard about us talk about RPO, or remaining performance obligations in this business, and we started to talk about that, and you will see it in our 10-Q, as we mentioned, about $42 billion of RPO in this business. So we're very happy about that. The pricing, as we mentioned, it's a combination of fixed and variable to address your question directly. The shorter time you are in within the contract, the more fixed it is, the longer out you go out, there would be more components of variable. So you could assume that most of the pricing that we're seeing in the very short term is mostly fixed. And then as you go out, there is a little bit more variable for us to capture upside and for our customers to capture some upside if prices were to go down.

The next question comes from Joe Moore with Morgan Stanley.

Wondering if you could talk about the growth in enterprise SSD that you saw pretty impressive. How much of that is the market? How much of that is you guys kind of put in the product portfolio in a better place?

Yes. Like a lot of things, when you see 233% sequential growth, Joe, there's a lot of elements of that, to your point. So it starts with the portfolio, right? I mean the portfolio is in great shape. Our TLC -- this is almost exclusively our TLC product. We're going to start shipping our Stargate project -- our product for revenue next quarter. So really, really strong performance; very, very strong product; a broadening of qualifications. It takes a little while to get into all these accounts. So a large number of accounts at this point. And then there is a strong market pull. There's no doubt about it. There's a lot of demand in the market for these high performance enterprise SSDs. We got the right product at the right time. And we're really happy to see this part of the portfolio now expand and getting to the levels where we expect it to be. It was 25% of the portfolio this quarter, and we expect that to increase as we go forward.

And my follow-up, I mean, where do you see that in a few years? It seems like hyperscalers everything you can make and then some just how much of the business could be enterprise in the long term?

It could be a significant amount. I mean, I think, Joe, you've known for a long time, we value a balance portfolio. So we're going to -- and we want to mix in the way that gets the best financial return for us, and that changes quarter-over-quarter. But I think the key point is we're in a position where we can mix into this -- into data center in a way that we've never been able to do before. So I expect that number to keep rising over the next several quarters and the next several years, to your point.

The next question comes from Ben Reitzes with Melius Research.

It's great to be on board here. I almost feel like I'm on a software call here. So it's great to be speaking with you. Dave, I wanted to talk about the -- you said 1/3 of BiCS growth next year is contracted. Where do you see this going to based on your conversations? Should we expect that every year, you're getting -- it's 1/3 next year, but like every year, can this be above 50% when you know how much is kind of done going into the year? And then I have a follow-up.

Yes. So first of all, welcome. We're glad you're here. It's good to hear your voice again. So Look, I would say a couple of things to this. One is we're just -- we're still in a lot of conversations about how we're changing this business. And it takes a little bit of a while -- it takes a while, depending on the customers. Some customers are come into the conversation really concerned about multiyear supply agreements. And so it's an easier conversation. Other customers come into the conversation, very used to the way the market has worked in the past, where they commit volume and want to negotiate price every quarter. That's not the kind of agreement we're interested in. We're interested in agreements that give us certainty of economics. And a key point of what Luis said in the script, I want to make sure it's understood. There are fixed and variable elements of these agreements, but we're targeting the 5 agreements we've signed, we're targeting financials that are in line with what we just forecasted to. So this is a very, very attractive business. Now then we're still in active conversations for our supply going forward. That includes next year all the way through the next 5 years. So I expect the number that we said at least 1/3. So we're over 1/3, and I expect that number to go up over the next several quarters. Where can it get to? I definitely think it can get above 50%. And -- but we'll see. And I think we can drive it actually quite high, and we have a desire to drive it quite high.

Great. And then just with regard to margins, Dave. I mean do you feel like with -- when you do these kind of agreements that you can lock in margins. I mean, your stock is not trading as if you're going to stay at 80% anyway. But when you do these kind of things, is there a target margin? And will you be willing to kind of share what range at least it's in. You could argue the stock is trading like your margin is going to go back into the 40s or something or something like that. So do you have a target margin that is in a range that you're comfortable talking about?

Yes. I don't think we're there yet to talk about that, Ben. I mean, when we get a little further along in this, we'll wrap this all up in a new model for everybody. But we're very proud of our technology. Let's put it that way. I think we're finally for the first time in decades in this business, getting to the point where the value of our technology is getting recognized, at least for us. I mean, quite frankly, the value of our technology has been recognized in the market. It's just other people have been collecting that value, and it hasn't been the producers. And I think that now we're getting a more even distribution of those -- of that value. So we're not necessarily interested in trading away that value for certainty. We're interested in getting that value and getting certainty as well. And to your point, look, we understand how the franchise is valued, and we're very, very focused on getting the cyclicality out of this business. It's corrosive. It's corrosive to the way we invest our CapEx. It's corrosive to our customers' ability to get a sufficient amount of product to drive their spectacular businesses. And I think we've taken some very meaningful steps down this path now. We've got very significant commitments from very significant customers. And I think as we can continue to proceed down this path, we will move this entire business to a very different spot to everybody's benefit. Our benefit, our investors benefit, our customers benefit and their customers benefit because they're building just spectacular technology and we're a key part of that. So I think we're on that journey. I think it was very questionable if we could even make that progress. I've had a lot of people tell me in the last year, it's never going to happen. It's happening. But we're still in the early stages. And as we make continued progress, we'll continue to give everybody updates on that progress.

The next question comes from CJ Muse with Cantor Fitzgerald.

I'm just curious to get your thoughts around supply/demand going forward for NAND. It's fairly interesting in the sense that we're getting only limited greenfield, mostly layer count driving growth, where new greenfield is really being prioritized for DRAM. So within that kind of construct as well as the agentic AI kind of incremental growth, how are you thinking about when the industry might get into balance?

Yes. So I think, CJ, you know my point of view on this is the industry is always in balance, right? Markets always balance supply and demand. I think the question is -- implicit in your question of what I hear is if you lower the price, will you meet more demand. And I mean that's just -- we're kind of working around that whole environment. Look, let me start on -- make a couple of points. On the demand side, we continue to see data center accelerate. Before what we saw this week, we would raise even our calendar year '26 data center growth number to the mid-70s from where we were in the 60s just 3 months ago, which is up from the 40s 3 months before that and the 20s 3 months before that. So we continue to see very, very strong growth in the data center. Outside the data center, we're seeing some contraction in the market just because of unit decline. That's to be expected, although we expect to see that bounce back in '27. Now on the supply side, I think this is a major, major benefit of this franchise is that we can increase supply through nodal transitions right? We have a very, very productive R&D pipeline. This is something we've invested in for a very, very long time with our JV partner and the BiCS road map. And so we can continue to drive the BiCS growth we're talking about mid- to high teens through nodal transitions. We don't need -- we need to add some clean room space because each node has more steps and more steps is more tools. So there is some additional CapEx. But it's not like other markets that you referenced, where you actually have to add capacity because you're not getting that much from the nodal transition. So quite frankly, I think this is what makes this franchise such a spectacular cash generator is because the amount of CapEx we need to invest, especially CapEx as a percent of revenue is continuing to go down substantially. The absolute CapEx is still there. I'm just saying that relative to our revenue generation. And we've made all the investments in the nodal transition. So we have years of runway into what our nodes are going to be and what the BiCS growth is going to be from those. And we will continue to invest in those and drive those nodal transitions to grow the market in that mid- to high-teens rate. And that's basically what we see what we see across the NAND players, quite frankly.

Very helpful. And I guess just real quickly in terms of capital structure, you're now no debt, $3.7 billion cash. What do you think you need to retain given your view today and given kind of the new contracts that you're signing? And then how should we think about kind of buybacks from here?

Yes. So we did announce a share buyback program with this call, right? We just announced a $6 billion buyback and we'll keep on tracking our cash flow. We're generating good cash. And as things change and as we execute the share buyback program, we'll keep you updated, C.J.

The next question comes from Jim Schneider with Goldman Sachs.

One more question on the new business models, if I could. Can you maybe talk about whether any of the 5 largest U.S. hyperscalers are included in those contracts thus far? And related to this on a go-forward basis, do you plan on providing any sort of ACV or in your confirmed contract value as part of your normal disclosures?

Yes, we're not going to disclose the names of our customers. But what we have, as David said at the beginning, we have some very meaningful customers who are joining and some more that we're working with, but we can't disclose the name of our customers. I think to your second part of your question, James, we will provide you this RPO metric, which I think is very interesting, which is how much of the business is already contracted. And that's based on minimal prices, right? So we'll continue to give that information every quarter, and you have that visibility as we make progress quarter-over-quarter.

And then maybe as a quick follow-up. Can you maybe talk about given these new business models and your visibility on customer demand, what is the state of your discussions with Kioxia in terms of potentially increasing BiCS supply? And are you contemplating anything above the sort of 20% range of growth that you've outlined previously?

No. We still have the same plans and conversations with Kioxia are always very robust and very ongoing, and the teams are working on this every single day. But we have our BiCS8 transition plan that we've aligned on, and we're executing to it, and it's going extremely well.

The next question comes from Aaron Rakers with Wells Fargo.

This is Jake on for Aaron. Congrats on the great results, guys. Just to start off, looking at Stargate starting to ship for revenue in 4Q. Can you just give maybe some color on how meaningful that ramp could be over the next few quarters?

I mean, look, we have a whole another -- there are two major products in the data center space. I think we've talked about this a lot. There's the compute -- what we consider kind of compute focused enterprise SSD, lower capacities, much higher speeds and then their interface speeds and then there's much, much higher densities. Stargate is -- and the progress we've seen so far in the portfolio is coming off of that compute focused TLC drive. And now we're going to bring the whole QLC product to market, which has been under qualification with some major players for well over a year. So we're not going to forecast a specific market segment, but we're very proud of that product, and we think it's going to do quite well in the market.

Okay. And then maybe as a follow-on with some of the more powerful LLMs released over the past few weeks. I guess, how are you thinking about the KV cache opportunity as we see, Agentic AI grow? Has that meaningfully changed over the last few quarters and maybe how customer discussions have changed there?

Yes. I think that we've advanced our understanding of that a lot over the last quarter or 2, since it became a major part of the conversation. I even think the team did a webinar on that, which would be happy to repeat if folks are interested. And I think when you really start to drill into that opportunity and you try and size it. It obviously gets very complicated very quickly. What are the number of concurrent sessions that are going to be run? What's the average input tokens, what's cash hit ratios, storage durations, so there's a lot of elements to that. And I think what it says is kind of where you were going, which is we need to stay very close to our customers because they are the ones that are going to have all the detail on the infrastructure they're building, the ones that are doing infrastructure at scale are going to have the great insight into how are all those variables put together against the use cases they believe they're building to. And I think this just reinforces this business model question as our customers go through those calculations and understand the significance of NAND that, that could drive that is a good foundation for the conversation about striking deals 2 years, 3 years, 5 years in length that are very, very substantial in the amount of demand. I mean we're talking about 5 deals and more than 1/3 of our portfolio. So it's an extremely, extremely dynamic situation. I think these are all the things that go into kind of understanding where this market is right now and how fast it's moving. It's literally moving every single day. And even for those of us on the inside of the market that see the data points literally hour over hour, it is moving very, very rapidly as people start to -- our customers really start to understand the dynamics of the infrastructure they're building. And I think I feel very good about we've been able to stay very close to them. They're obviously very close to our technology and our products. They're responding very positively to those products. They understand that they're willing to commit years of purchasing with financial model around that, that is very attractive for us, and it gives them a very attractive attribute, which is guaranteed supply. And then quite frankly, they're willing to put a very large financial commitment that basically guarantees that ongoing demand. And I think that's a very big part of what we're talking about. I mean, I think that -- we've talked about these agreements a lot. We've gotten a lot of feedback from a whole lot of people. There's a lot of sometimes talk in the market that they won't hold. They won't have teeth, all these kinds of things. And I can tell you, nothing can be further from the truth. We have customers that are literally putting up billions of dollars of collateral through various financial instruments, that will survive for the life of these contracts. And if they don't meet their obligations on consistent purchasing every quarter, then that financial commitment immediately comes to us as a compensation for that contract not being concluded. So I actually don't probably never expect to collect those because I think our customers are extremely serious about needing this product. And I can tell you the normal case is we signed an agreement. And within weeks, we're having a conversation about how we increase the amount of product we can get to them over that time frame. So a very dynamic market. Things are changing very quickly. It does make it difficult to forecast in the things you see. I mean you see the results we're able to put up, and they're significantly better than we thought they were 3 months before, and that's because the market is just moving very, very quickly. And the pieces change literally day by day. And what we're doing is we want to solve a whole bunch of issues for our business in this. We know we have great technology. We've made enormously substantial investments in intellectual property. I mean we've been building the BiCS road map for decades. We have enormous investments in fabs, some of the largest fab complexes in the world with our JV partner. And we want to leverage all of that, get a fair return for our products and get the cyclicality out of the business. Because like I said, I think it's -- I think, quite frankly, it's corrosive for everybody that's in this industry. And -- well, I shouldn't say that. I can't speak for everybody. But I think what's happening is there are now customer sets that very substantial customers that don't want to play the quarter-by-quarter price game. They have spectacular businesses, and they understand that we provide a very important components to their spectacular business, and they want to make sure that they have the best products, which we believe we provide. We know we provide those, and they want them on a very consistent basis so they can continue to plan their own business. That is opening this opportunity I think to fundamentally change the way this business has worked over the last several decades. And quite frankly, that's a lot of fun for us to do that because customers are very happy with those agreements. We're very happy with them. And like I said, I think everybody wins. I'm trying to figure out who doesn't win in this equation. And so far, every agreement we've signed, the customers have been thrilled to get to the point of actually getting it signed. So anyway, probably maybe Jake a little longer answer than you were looking for, but we feel we're very, very good about where we're at. And we think that we're now starting down a path that is as Ben said, quite frankly, there's lots of other technology industries that understand how to do this. This is not. We're not reinventing the wheel. We're just using techniques that people associate with other businesses that are recurring revenue models. But certainly, everybody that -- well, not everybody, if you run a whole bunch of technology business, you understand how recurring revenue works, and it's a very, very powerful financial model. And we think we can bring it to our franchise.

The next question comes from Asiya Merchant with Citigroup.

A great set of numbers here. David, I think I heard you say some client demand, maybe with PCs or smartphones related snapping back. You sounded optimistic on that into next year. Wonder if you're seeing anything, whether it's edge AI on edge devices that underpins your optimism here. And in that same context, I mean, given that the demand/supply seems more tilted towards meeting hyperscaler demand, the data center demand. What gives you confidence that you can meet some of that client demand if it snaps back? And if I can squeeze one in more for Luis as well. CapEx, at one point, there used to be obviously mid-teens as a percentage of revenues. Obviously, your revenues are exploding here, so we don't expect that same ratio. How should we think about that going forward?

Okay. Let me unpack that a little bit and see if I can help. So when we look at '27, we see definitely PC phones units are down in both now, as you would expect. And we see those flattening out to up slightly in '27 as kind of our internal view of the world. And quite frankly, I think that that's just a reflection of market's ability to adapt, right? I mean, I think that's -- if you're in business. And I think especially the device business, those are spectacular companies, very, very smart people that run them, and they understand how to change their portfolio mix and what they need to do, given the environment they're in to drive their spectacular business forward. And I think there's no doubt there's an adjustment process right now, and it's happening. And I think we'll get through that. And I think we'll get back to a point where we're still going to see content per device increase this year at least on phones, PCs, we've got it flat. And we'll see both of those start to inflect up next year while units are flat to up slightly.

So now what will we supply. So that's an interesting question. So we're going to supply the customers that we have agreements with. That's the way we're starting to look at the market. I think this is the change that we've been talking about. We're not going to wait until next year and see what the market gives us. We're talking to edge customers as well about these new business models. Agreements, they are multiyear agreements with all the characteristics we've talked about in the past. Committed growing demand, the same kind of structure we talked about for these first 5. So those customers understand their businesses extremely well. We're engaged in those kind of conversations. We'll see if we reach the finish line on some of those, I'm sure we will. And that's how we'll have great insight into what their demand is, is because they will have told us and they will put a financial commitment behind it, which will allow us to plan a lot better what demand we're going to serve. So we're kind of navigating out of this market where we just show up and kind of see what demand is and see what the price is and then adjust our mix very rapidly. We know how to do that, but where we rather go is the path we're down, which is customers commit to us what their demand is and they committed in a way that we can really count on it. And quite frankly, they can really count on us.

I think to your -- last question on CapEx. I mean, David just talked about our philosophy. We continue to invest towards kind of a mid-teens capacity growth over time. What this translates to into dollars, obviously, you shouldn't think about it as a percent of revenue, but more in dollars, it's a little bit of an increase into the next several quarters as we did the easier conversions first, and they are the next conversions will be a little bit more expensive on a dollar basis to deliver that same kind of growth. Nothing dramatic, but just as you're modeling things, I would put in a few -- a little bit more higher CapEx per -- as we transition, but not a change in our philosophy, as David mentioned earlier.

The next question comes from Vijay Rakesh with Mizuho.

David and Luis, phenomenal set of results here. Just a quick question on the -- the RPO and the financial guarantees that I see your data center is already at $1.5 billion. So that's like an annualized $6 billion run rate on the data center side. Is all the $11 billion and $42 billion RPO mostly all in data center, is that a fair assumption? And on to the pricing question on these guarantees is probably mark to market, you would assume, right, as you look out 2, 3 years, there has to be some benchmark into the market. Is that fair? I have a follow-up.

Yes. So we're not disclosing the customers. So I'll leave it at that. But if you look at the $42 billion, a lot of companies would be able to do that. So that's our RPO and that's the minimum contractual revenue that you would expect from the 3 deals that we signed before the end of the quarter, right? So if you include the other 5, that would be a larger number, and you will see that number in our next quarter, but it's not part of the $42 billion. If you think about the $11 billion, which I think is the second part of your question. There are different financial instruments that we're using to protect us. There is a portion that is in prepayments. And as I mentioned in my prepared remarks, you will see that in the 10-Q that's somewhere around $400 million that you will see in our balance sheet. And there are other financial instruments. And that's probably as far as I can go, which are managed by third-party financial institutions that are triggered if there is a breach in the contract that doesn't go all the way to the end. So that's kind of how it works, Vijay.

David, on the -- as you look at your NAND SSD roadmap, you have a pretty disruptive technology coming down the pipe in terms of high bandwidth flash. Any thoughts on how that's progressing, how that's going? If you can give us some color.

Yes. We're happy with how it's going. It's kind of steady as she goes. We're having conversations with customers on how they would deploy it or building the technology, the NAND die itself, the controller. So we're still on the time line we talked about earlier of having actual the NAND late this year and look for more of a system with the controller early mid next year.

Next question comes from Blayne Curtis with Jefferies.

Great results. Maybe just following on that, I had a question about you're hearing a lot more discussion about different memory tierings, maybe accelerators using more DRAM. I'm just kind of curious if you had any perspective, has a previous question on KV cache. I think everybody just assume there'll be a lot more hard SSDs to serve that. But I'm just kind of curious, as you look at that future roadmap, in different memory tiering, high bandwidth flash fits into that. I'm just kind of curious if there's any change over the last quarter or so on just the thoughts of where that storage will be?

I don't -- not really -- I mean, I think the kind of tiering architecture that came out maybe a quarter ago is what's being deployed. High bandwidth flash is, again, it's not a necessarily a substitute for an enterprise SSD or something like that, it's a way to bring a lot more density to inference in a little different way. We have to follow up on that with a little more detail. But look, we're seeing -- you can see it in our numbers. We're just seeing an enormous amount of pull on that portfolio of high-performance enterprise SSDs as these architectures get deployed and inference starts to get deployed at scale. As we said in the prepared remarks, I mean NAND is just a big part of that architecture now given the size of models, the size of KV cache, the context length, all these things is NAND is the most scalable semiconductor technology in the world. It's now front and center -- well, it's now a critical component of that architecture. And we're seeing that be pulled through. And I still expect this will be refined as we go forward. Again, this is why -- again, why we're staying very close to our customers. Our customers are the ones that know -- the big customers that are deploying this at scale. There -- I suspect they have -- well, I know they have very, very detailed insight into how they're going to scale this across a global franchise. And so understanding what that is and what that means for demand on our products, I think that there is an enormous amount of work going on there. And again, that's what's driving the demand signals that are years into the future for us and allowing us to align our business model around that demand.

The next question comes from Amit Daryanani with Evercore ISI.

This is Victor Santiago on for Amit. I wanted to ask about the Nanya investment and supply agreement last month. Could you help us better understand the strategic rationale for it? Is that primarily the secure DRAM or access to HBF or memory products going forward?

Yes. As you have seen, our data center business is doing pretty well, and we just posted very interesting growth, and that's just with our TLC product and a lot more to come as we continue to expand our business now with QLC and as we drive growth through our new business models. And one of the key things that we need to have access is DRAM, the partnership with Nanya provides an investment into the company and gives us a preferential treatment of access to DRAM as well. So that's the rationale.

Got it. And as a follow-up, I believe you provided the duration on the longest contract that you signed, but could you give us any idea on what the average duration might be across the 5 deals you signed so far?

Yes. Frankly, we're not -- we cannot get into that level of detail. We're giving -- I think you know the minimums we signed before were more shorter, but we're not giving an average. I apologize for that, Victor.

I think, Victor, one thing, we want a portfolio of deals like 1 year, 2 year, 3 year, 5 year, so that they don't all end at the same time and all those kinds of things, and we don't face cliffs. I mean we have every expectation we'll renew some of these. Some of the deals are for a certain number of years with options for more years. So it's still a little bit early. But we're going about this where it's not just -- there's not a fixed template, right? It depends on the customer. Every deal is kind of customized to specific customers. And as we get a little deeper into this, maybe we can have some of the conversations and some of the numbers you're asking for. But right now, it's a little bit early for that.

The next question comes from Wamsi Mohan with Bank of America.

It's Ruplu filling in for Wamsi. I just had two quick ones, one for Luis. On the long-term agreements, is there any restriction on when you can raise prices? Is it allowing for annual price increases? Or are there certain conditions when you can raise prices? And then one for Dave. How do you see the interest in QLC flash trending? And how do you see the mix of TLC versus QLC trending over the next couple of quarters?

Yes. So sorry, I'm going to frustrate you a little bit. We can't go into pricing indeed for each of the contracts. As I said at the beginning, there are some fixed price components and some variable pricing components, and it is very different depending on each of the agreements that we have. So there is no kind of an overall answer overall on pricing.

So TLC, QLC. I mean, if you look across the whole portfolio, roughly 2/3 TLC, 1/3 QLC. If you looked at data center, obviously, for us, it's predominantly TLC and we'll be launching major QLC products next quarter. But there's a lot of demand for TLC, given these performance -- especially in the enterprise SSD space. Given the inference architectures and some of the comments earlier around KV cache and how important it is and quite frankly, how it can scale dramatically based on your assumptions of the use case you're serving. There's a very, very strong demand on TLC. But that said, we expect our QLC products to do very well.

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

Yes. I just want to say thank you, everyone, for joining the call today. Thank you for your support, and we look forward to speaking with you throughout the quarter.

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

Well, excellent. Good afternoon. My name is C.J. Muse. I cover semiconductor, semiconductor equipment with Cantor Fitzgerald. Very pleased to have the team from Sandisk, David Goeckeler, CEO; and Luis Visoso, CFO. Welcome. Good to have you both here.

C.J., great to be here. Thanks for having us.

I think, Luis, you have something you'd like to read.

Yes. Hi, everyone. We'll be making forward-looking statements in today's discussions based on management's current assumptions and expectations, including with respect to our technology and product portfolio, our business plans and performance, market trends and opportunities and our future financial results.

These forward-looking statements are subject to risks and uncertainties. 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 be making reference to non-GAAP financials and a reconciliation of our GAAP to non-GAAP financials can be found on our website.

Perfect.

Thank you.

So Dave, congrats on a 1-year plus anniversary.

Thank you.

The world has seismically shifted for NAND in the last 8 months. And so essentially...

Changing, yes.

Inflecting since August of '25. What has changed?

Look, I mean, I think there's a lot that's changed. And I think what you see and there's a lot of discussion of pricing and all that. But what you see is, I think, kind of a second order of a major change that's going on in the industry, and that is a couple of big things. One is, this year, data centers will be the biggest buyers of NAND, brings kind of a new set of buyers with a new use case, a new way they use the technology, a new kind of financial model of the way they're deploying the technology or what it's supporting.

And their use cases, I think, are the furthest thing from a commodity, if you will. People want to kind of put that tag on us and customers want 3 options, 4 options that they can swap in and out. But when you're playing in the data center, you're talking like a year-long qualification cycle. So this is a very, very different product, very, very different use case.

And I think that's driving just a fundamental change in the industry over a short period of time. And I think we thought a year ago, when we were launching the company, we said we thought the market was going to be undersupplied through the end of '26. We heard a lot of feedback on that. I think as late as last summer, people were end of the summer, there was a lot of talk that December pricing would be down and all this kind of stuff, and it didn't quite play out that way.

So -- and to me, that's really a follow-on of what happened in '23. And '23 wasn't just a downturn, if you will. In my book, '23 showed that the way you manage these franchises just have to change. This idea that when the economics get stressed, you can release a new node that lowers your cost, the market is infinitely elastic, it can absorb that supply. I think that way of managing these franchises just ended spectacularly in that really, really kind of meltdown of the industry.

And out of that now has arisen an industry -- I'll just talk about our company. The way we've come back from that is just very different. The way we think about managing the business, we're much more proactive on managing supply. We're much more willing to pull back supply, if we don't see the demand for our products or the economics don't hold up. You put that on top of the buyer has fundamentally changed. The economics of that buyer is very different. The way the product is used is very different.

You add all this up, and that amount of change is being compressed in a couple of quarters. And it looks like this huge, huge transformation or all this turmoil, but it's really the product of all of these structural changes in the industry from the supply side and the demand side kind of all coming together at once.

Yes. I think there are certain investors surprised that NAND is the slowest growing semi equipment industry this year, but I think they neglect to think about the fact that we just went through a 7-year downturn. And so I think the hope was that NAND would consolidate. But given that backdrop of the multiyear downturn plus, as you highlighted, a changing kind of buyer landscape, how, I guess, do you see -- and maybe this is a broader comment beyond Sandisk, the overall industry acting?

I like to spend most of my time talking about our company as opposed to the industry. I'm not -- I only run one company or the 2 of us. But look, I don't think I've ever believed this theory that you have to drive consolidation to get the economics right. I think that it helps certainly. But -- and also in any kind of fixed cost industry like we are, it also -- scale always matters. We get that through the JV, which we think gives us a lot of advantages. But I think there's never been a doubt in my mind that the quality of the product we deliver and the value of the product we deliver is extremely high.

Consumers pay $0.40 to $0.80 a gigabyte for NAND continuously when they buy devices. That's kind of the going price. And so the value has always been there. The question is, can you get the business model right. And I think we're seeing that all happen right now. And it's not -- consolidation is not the answer to that. I mean it maybe it helps in some regard, but what really matters is just running the business in a way, where you get a fair return for the amount of intellectual capital we put into this, enormous amount of intellectual capital, intellectual IP. And on top of that, an enormous amount of CapEx to manufacture. We do both.

I mean there's very few industries where you have the level of intellectual intensity that we have, R&D intensity, 75% of our OpEx is R&D. And on top of that, we're investing billions of dollars to produce. So we're doing all of that in one place. And I think the market is now recognizing -- I think it's fairly clear that what that -- the output of that is very valuable to the world.

Makes sense. I guess maybe moving to customer engagement and how that is evolving given today's shortage environment, how are you seeing your customer engagement changing? Is it evolving particularly just data center? Or are you seeing in other end markets?

Yes. We're talking to customers across all our end segments, and they're very interested in NAND, and we happen to have NAND. So that's a great place to be. We're trying to shift from the old business model to a new business model. And this new business model is one where our customers are secured supply and where we are secure structurally sound financials. It's particularly coming from our data center customers because their willingness and ability to pay is much higher than what we've seen from other customers. We're open to business with anyone.

And I think you've -- I don't know if you've called it a 3-month circus or 3-month auction.

I'm didn't call it a circus. I called it a bizarre. All the world's NAND is auctioned every quarter. I mean that's the business model. It's kind of -- I've never look, I come to this from running a lot of different technology franchises. I come to this one. And it's like, wow, this is an interesting way to do this. But that's what we do. And so we know how to run that business model. It just -- it leads to this kind of like somebody is unhappy, like either the suppliers don't have very good economics, which people remind -- a year ago, when I took this job, everybody reminded me about like what a bad decision that was.

Or on the other side, you have the situation you have now where everybody is saying, well, we can't get what we need. And it's like this is not a hard problem to solve. I mean we know like businesses solve this problem all the time. And the question is just are people willing to do that? And to Luis' point, and why I said earlier, we have a new buyer that's now more than half the market.

I think that buyer is less interested in that business model. right? They're more interested in what Luis said, I want supply. I look down the road, here's what I need not next quarter or this year. Here's what I need in '27, '28, '29, '30 and coming to us and saying, can you step up to deliver this to me?

And we basically say, of course, we can because we have this huge fab in Japan, and we have all this wonderful technology. But if you want us to assure that you're going to get that supply, we need to come up with a different business model about how we do business together. And I think they say, fine, let's have a conversation. And we're having those conversations.

And I know it's early, but what does that framework look like to you?

Yes. As you said, it's early. We signed one of these new business models, and there are several in process. And the way we think about it is there are 4 dimensions, right? Time, are you looking for a 1-, 2-, 3-, 5-year deal. And that's very important to us because then we have certainty of financials and they have this certainty of supply. What is the amount of exabytes that you are willing to consume? And we're betting on customers that are winning customers that need more demand every single year because that's better for us because our fab is very, very efficient, and we produce more wafers every single day.

The third element is the price, right? And we want a price that is attractive for us in any scenario in good times, in bad times. That could be a combination of fixed pricing and variable pricing, where we can capture more upside if prices go up and our customers can be protected if prices go down. But in any scenario, we are protected for strong financials.

And the last thing, which is an element we are not talking too much about, but we're working on, which is how do we ensure that our customers would be there until the end of the contract, right? So we're making a commitment, right, on both sides, and we have to live until the very end of that contract.

I wish you luck with those negotiations.

It's fun.

You need someone in the room. I'd...

We'll let you know.

I appreciate it.

Maybe moving to your data center business. I know you're very excited about the traction you're making here. I would love to hear what's the time line to hit that kind of 20% goal?

So look, we focus on like just improving quarter-over-quarter, and we're very much on the right track at this point. This is a tough market to crack. What I said earlier, you don't just show up with a product. You got to go through a very long process to get into very big customers. We're making very significant progress. First quarter, I think we had 29% sequential growth in data center. Last quarter, it was mid-60s sequential growth in data center, and we said we think we'll see that accelerate throughout the year.

So I think this year is going to be the year, where we really, really establish our position in this market in a very serious way. I'm not going to pick a particular number out there because I don't want to like hairpin us around that. We'll see where we go. But I will say it really is the progress in the data center market that's catalyzing this conversation that we talked about earlier, where it's when we get through that qualification with a big customer and they come and say, okay, we love your product. It's a great product. Here's what we need for the next 3 or 5 years. And we look at those numbers and go, as I said, that's a big number.

Like if you just want to show up every quarter and get that supply, my personal view is that's fairly low likelihood that's going to happen. And as we've talked about in the past, I think we're finding that customers prefer supply assurance over price. It's not that nobody is going to play an infinite price, but that supply assurance is very valuable to our customers. And it's these products that are world-class products.

Again, it's a combination of what we have with BiCS8, right, gold standard in the industry right now, wafer bonding, performance, power efficiency, QLC performance, really, really strong, 2-terabit die on top of that, right? That makes -- you can obviously -- you need half as many die as a 1 terabit die to build a high-capacity enterprise SSD. And then the controller on top of that, you wrap that all up, it's a fantastic product.

And the market is responding to that, and it really is unlocking these conversations about, "hey, we're going to base our data center on this product. We need to make sure we can get it for a long period of time." So we feel very, very good about where we're at. But again, we'll see over the next several quarters as the numbers come out.

Makes sense. I know we're early in kind of the life cycle for KV cache, but obviously, Jensen put out a very bullish presentation at GTC Washington. And this morning, we had an equipment company that gave their best guess on KV cache, which was for every 2 million of accelerator units, it would drive 1 point growth in NAND bit demand. I know you haven't put out a number there. I'm not kind of asking you. But I guess, as you've done your initial work, what are your thoughts on how that might change the demand curve and how that might change the industry perhaps having to add incrementally more supply?

I think -- look, I think everybody -- AI is an incredible thing. I mean I don't need to tell anybody hear that, right? And I think that we're now moving into this massive scaling stage of this technology. And when you're going to scale something, you got to really think about the economics and kind of how this is all going to work. Models are getting bigger, caches are getting bigger, context lengths are getting bigger. And we believe this for a long time that at some point, this architecture is going to have to include the most scalable semiconductor technology, and that's NAND.

If you need to store big things, you need to store a lot of it, you have to eventually get the NAND. And that's nothing against what's going on with HBM. I think it's brilliant technology. I think it's incredible innovation. And we're not a replacement for that at any stretch of the imagination, but there's only so much capacity there. And I think customers are trying to figure this out. I think that culminated in what you talked about at what NVIDIA had to say. And there's no doubt that depending on how this plays out, this will be a major driver in the next several years of NAND.

It's not in our numbers yet. Our initial assessment of this was potentially 75 to 100 exabytes next year. I've seen several people trying to triangulate on it. I haven't heard this one yet from this morning. But all these numbers are kind of coming out the same, but it depends on how the customers are going to go deploy this. But we see this, obviously, is very positive. We kind of said it a little different way last year. We talked about HBF, which is not the same issue, but we -- it was the same kind of strategic statement.

NAND is going to come into this architecture because of the density we can deliver. And it's good to see that being recognized. If I had to pick one -- there's a lot has happened in the first year of our company, right? A lot of things have happened. But the -- where we've gone on HBF from where we were a year ago, when we first even introduced the term to where we are today is a huge progression in I think, the acceptance that this type of technology is required in this architecture. And we're very excited about that.

So maybe sticking with HBF, high-bandwidth flash for the inference market. Could you maybe talk a little bit more about where you are in terms of technologically development and your thoughts around commercialization?

Yes. So this -- a little bit of history. This came out of some -- we have a lot of very clever people in the company. As I said earlier, we're a high R&D intensity company. 75% of our OpEx goes into R&D. Those people -- those individuals in the company have been building NAND for 20, 25 years. It's their life's work. And if you're a NAND designer for your whole life, you've basically been focused on how do you increase density, give me more bits. That's what I'm trying to do. You went 2D, 3D, keep going, change memory hole density, all these kinds of things that people just go on and on, and it's been spectacularly successful.

And I think it was very clever a number -- many years ago now, our R&D team said, well, what if we focused on bandwidth instead of density? Like what if -- because that's not what we're -- we've been told our whole life was give me more density. Now it's like, okay, we got density, good, got that, continue to do that. But now think about could you get more bandwidth out of this technology? Could you get more endurance out of this technology?

And it turns out, you get a bunch of very smart people that have done a lot of seminal work in NAND design. They come up with good ideas to this, and that's kind of where HBF was born. And so we're on the time line that we talked about last year. We expect to have a die, the die itself later this year. And maybe a year from now, we'll have what we would call the device, which is the die plus the controller that we can put in customers' hands and they can play around with it and see how it fits in their architecture.

But the real trick is here is this is not a plug-compatible replacement for anything else in the architecture. This is a new architectural element. So it's got to fit into the architecture. It can't -- we got to work with partners on how they're going to build their -- either their device, can go on a device, can go in the cloud. We got to work with them on how are they going to architect it, how are they going to scale inference in their cloud?

How could this technology integrate with what they're building. Essentially, it's 2 gears, you got to get the mesh. Those conversations have been happening for quite some time, and we're making progress on it. We feel good about it. And we think it's going to be a very important technology in the future.

Maybe sticking with your technology road map. I know you're very excited about BiCS8. What are some of the advances inside there, such as CBA that's driving leadership and confidence you have vis-a-vis the competition?

The JV is really a spectacular partnership. And what it allows us to do, it allows us to -- essentially, a lot of people in the JV, they focus on manufacturing side of it, which is very important. Don't get me wrong. I mean if you go to Yokkaichi or Kitakami, they're like incredible places, and it's a huge amount of work to run that.

We also work together on R&D. So our 2 teams are like 1 team. And you put our 2 teams together, and we're the largest or tied for the largest producer in the market. So that means we can invest more engineers than anybody else. And that's a very important -- when you build products for a living, which is kind of what I've made my whole life doing, it's like when you can invest more people in this, especially over a long period of time, you end up with this accumulation of R&D that is really, really strong.

And that's kind of where we've ended up after 25 years. And that spans a whole bunch of different things, the actual cell we have that actually stores the bit, how that is scaled in the XY dimension, how it's scaled in the -- how it's layered, the memory hole density, materials, all different kinds of things, right? So BiCS8, what does BiCS8 add to all of this?

Well, now it was this whole concept of wafer bonding, which is it used to be -- you build the CMOS and then you start building the NAND stack on top of it. And by the time you were done, you had degraded the CMOS somewhat, right? Because you have different kind of processes, maybe different temperatures, things that are probably beyond my technical acumen.

But at this point now, the team decided -- when they first came to me and told me what they were doing like 4 years ago or 5 years ago, I'm like, are you sure this is going to work? I mean it's like we're going to take -- we're going to build the NAND stack on one wafer. We're going to build the CMOS and then we're going to flip one over and we're going to bond them together. And it turns out, when you do that, the CMOS is like pristine. It's like -- so you get like really fast interfaces.

And you couple that with all this accumulated R&D on QLC performance and then you put on top of it our system-level ability to kind of reach into the NAND and do what we need to do to optimize things, hardware accelerators, you end up with an awesome product. And we're now ramping into that. So back to the data center, I'll tie this back to what you asked earlier, our data center position, why we feel so good about this is like we have all these things arriving at the same time.

We've got this world-class NAND node that gives you really, really strong performance, gives you really strong QLC performance, really great power efficiency, right when the market for data center is exploding for people that -- in a use case that find those things very, very attractive, right? And so -- and then on top of that, we've got kind of this clean sheet architecture for controller. And I think it positions us extremely well.

Maybe, Luis, a couple of financial questions. And I know you're not going to answer this one, but -- I've got you hitting 70%, 75% gross margins in the next handful of quarters. And so if I go back to the earlier part of our conversation, you're spending on R&D and you're spending on CapEx. So you're double stacking cost where fabless foundry. Obviously, they only do one part each. And so what is kind of a normalized kind of gross margin for Sandisk?

Yes. We're targeting to get to an attractive gross margin. And there is no ceiling. We believe that our products are very valuable to our customers, and they're paying a fair price for what they're getting, and we continue to price for them. But we think we need to get an attractive gross margin for them.

How attractive is attractive? and then maybe capital returns. Remarkably, you exited December with nearly $1 billion in net cash. You're going to generate significant free cash flow in the quarters ahead. What kind of is the framework in your mind in terms of sort of the net cash you'd like to have on the balance sheet? And then how do you think about capital returns thereafter?

Yes. At a high level, what you've seen us do and we'll continue to do is to invest in the business. Last quarter, we announced the expansion of our JV contract, which requires some cash or will require some cash over time, which we're very happy with, and we'll continue to strengthen our supply chain that is important to us. And other than that, we'll build good, healthy reserves that are prudent given the industry -- the history of the industry. We don't think we're going to go back to the history, but we want to be very prudent and build some reserves. You saw our TLB come down. We closed last quarter with $650 million from $2 billion that we started.

And as you can assume that we'll continue to reduce that over time. And then the obvious thing to do is we'll consider returning some cash to our shareholders. When and how exactly we'll announce at a future date, but we know that, that would be a natural next steps with the cash we're generating.

So maybe CapEx and supply. $12 billion is a lot of money, as you highlighted to me last night for WFE in 2026.

I don't know, $1 billion, is a lot of money.

However, it is a much smaller growth than every other kind of end market in equipment. And we clearly are in undersupply. So curious what kind of gets the industry to push ahead. And I think everyone is adding layer counts, but obviously, that reduces kind of wafer output given the greater complexity. When do you think the industry will start thinking about meaningful greenfield?

Okay. So first of all, I'm not going to speak for the industry. I'm just saying this, but I think this is a super interesting conversation. Remember, it was only a year ago, right? It was only a year ago, we got on stage and we said we're going to launch this company, and we're going to invest for mid- to high teens bit growth. And everybody told us too much, right? Pricing is going to go down, right? That was the prevailing wisdom until the end of last summer.

In fact, maybe until October. And we think of -- like we just invested an extra $1.1 billion for fab space from 2030 to 2035. So it gives you the idea that we're thinking about investing and being in this business in the long term. So now here we are first week of March and the question is, when are you going to invest more? And it's like, look, I think that we just we are going to invest for mid- to high-teens bit growth, and we are going to stay very close to our customers.

As Luis said earlier, customers want to buy NAND. We want to produce NAND. And we're going to produce NAND and we're going to produce more NAND tomorrow than we did yesterday. And what we need to do is get the alignment of that intention to buy that NAND with the actual production of it. And that's not a trivial thing. It's going back to these -- how are we going to get this business model right with our customers. It's not a natural thing for them to think the way we do, right?

If you want to consume something for 3, 4, 5 years, you can't take 2 quarters off in the middle, like we can't just turn the fab all. So we got to figure out a business model. So when we produce, we know it's going to be consumed. And as we get that figured out, I think the smoke will clear on and all the issues about where is the attractive demand in the market, not where is any demand? Like again, I will debate your term undersupplied. There's a market. Supply and demand are always in balance for that market. If you lower the price of any product, you will increase demand. We all learn that and you don't have to be an economics professor to know that.

So the question is, what is the sustained demand for the attractive markets we want to play in. And we're going to figure that out over the next -- I think we'll figure that out over the next several quarters, and then we can come back and revisit this conversation. But the idea that we're going to put more capital in the business, hoping that people show up every quarter to buy it, -- that's -- again, that's not a model that we're very interested in investing behind that model. We're putting billions of dollars behind that model. We're putting hundreds of millions of dollars of R&D behind that model.

Now we got to just get aligned with the demand side and get that economic model kind of a little more solid for a longer period of time and not -- when I have these meetings today, like everybody, when is it going to end? When is it going to end? That's the predominant question. When is it going to end? It's the cycle. When is the cycle going to end? When does the next shoe drop? Why are you trading at a 6 multiple or something? It's because people don't believe in the sustainability of the model.

And it's very difficult to say we're already putting billions of dollars into this market. We should put more money into this market, when the people investing in our company don't believe in the sustainability of it, now we believe in the sustainability of it, but we need to prove it, and that's what we intend to do. And as we do that, we'll continue this conversation.

So my takeaway is maintain mid- to high teens and make sure you have the appropriate economic model before you would entertain believing in perhaps a sustainably higher growth market?

Yes. I mean that's one way to say it. I mean I think the other way to say it is if somebody wants to buy NAND and they're willing to make a commitment to buy it, hey, we're good at that, right? We know how to do that. We know how to produce. There's no issue there. We've got the R&D lined up. We've got new BiCS nodes we're working on well beyond BiCS8. We can increase the productivity of NAND -- that's not the issue. The issue is not our willingness or ability to produce NAND. The issue is the economics of increasing investment in a market where the business practices don't support it.

Well, I think we've run out of time. Thank you both very much. Appreciate it.

Thank you. Appreciate it, C.J. Thanks for having us.

Thank you.

All right. Welcome back. I'm Joe Moore, Morgan Stanley semiconductor research team. Very happy to have with us the executive team from Sandisk, CEO, Dave Goeckeler; and EVP, CFO, Luis Visoso, Thank you, guys.

Joe, thanks for having us. We appreciate it.

Thank you. And I think, Luis, you want to read a safe harbor first.

Yes. We will be making forward-looking statements in today's discussion based on management's current assumptions and expectations including with respect to our technology and product portfolio, our business plans and performance, market trends and opportunities and our future financial results. These forward-looking statements are subject to risks and uncertainties. We assume no obligation to update these statements. Please refer to our annual report on Form 10-K and 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 be making reference to non-GAAP financials and reconciliations to GAAP to non-GAAP financials can be found on our website.

Great. So you guys saw this coming, right?

Well, I mean, we saw [indiscernible].

I mean really, I'll give you credit. You said this time last year that we would have a stronger second half. You are right in a pretty big way. And I guess, just maybe kind of walk us through what did people miss? How did you guys -- you saw some of this improvement coming. Obviously, AI surpassed all of our expectations.

Yes. I mean we've had conviction for a while that the market I think we've been saying for quite some time that we thought the market would be undersupplied through the end of '26, and that was as far as we were doing modeling time. And we were pretty clear about that last year when we launched the company.

How do we come to that position? I mean we do, obviously, a lot of bottoms-up research ourselves. We have a lot of insights into the market because we play in them all the time. So we do models on demand on all the big 3 markets on smartphones, PCs, data center. We obviously do a lot of modeling of supply. Again, we have some unique insights. We have some people on our team that happen to know a lot about how you design NAND and what different people's road maps may look like and what supply is going to look like. And we would just consistently look at that picture internally, and we would just see that we thought coming out of the '23, which was kind of an industry-defining event that this market was going to get to a very different place.

We have a lot of conviction that the way you have to manage the business is different. You can't just release new nodes because they're available and think they're going to drive your cross-sell and the market will just absorb all that supply. We thought that playbook has completely changed. And that turned out to be true.

And then as we move through the second half of last year, we saw the data center keep raising CapEx spend, I think, which was very well understood. And again, we have our own models of how we translate that into calendar year '26 exabyte demand. And so it's just we went through 3 -- 2 forecast cycles. We went into -- let's say, this time last year late last year, we thought data center would grow mid-20s. Next forecast cycle, we thought it was going to grow mid-40s, and then we came out last -- our last earnings call, we talked about, now we see it growing mid- to high 60s. So yes, I mean, again, we just -- we do a lot of modeling bottoms up on both sides of the equation and take a clear eye to look at it and see where we think the market is going to go.

I mean the data center storage market has been really surprising. I guess we saw huge orders in the fourth quarter for immediate delivery. How much of that do you think is because of hard drives? And I guess, I don't feel like it's a hardware replacement because I think it maybe accelerated some of the solid state that might have happened later, but the overall storage, how does that? What role does that play?

Yes, I'm not a believer in the hard drive substitution question. I mean it's not lost on me that 2 years ago...

You now a little bit about the hard drive.

Well, a little bit. 2.5 years ago, I was answering all these questions. no hard drives are going to be sold in 5 years, right? And we've pivoted 2 years later to 1 million questions about there's not enough hard drives in the world. So I think as a NAND industry, we just need to leave hard drives behind. NAND is a different market. Our drive is great. I love that business too. I know a little bit about it. Great business. Great technology, NAND is the same way, great business, great technology.

I think I've said this very consistently for the last 6 years. These are complementary technologies in the data center. In the device, they're substitutes. But in the data center, they're complementary, and NAND is -- they're both going to grow. NAND is going to grow faster than hard drives. And I think that is borne out to be true. And I think with AI, NAND is now being fully integrated into the AI architecture. That's something that we thought was going to happen years ago. We didn't think it was going to happen years ago, but we were looking at the technology, NAND is the most scalable semiconductor technology out there. When you have an architecture that's scaling like AI is, NAND is going to come into the architecture at some point. That is happening. And that, of course, is accelerating the data center growth rate.

And then on consumer, you've seen shortages as well, and that surprised me a little bit. Is that just because there's demand coming from the enterprise side? Is it just -- what's driving that thing?

Yes. I mean I think shortage is an interesting term. I mean we just have a market, a market result -- markets have supply and they meet every day, right? And that's rationalized through pricing. And as that gets rationalized, if your business model is dependent on buying NAND from 1 supplier and turning it into something else, as your costs go up, it's going to make your business model less attractive. And I think it's natural, you're going to see business models that depend on readily available inexpensive NAND are going to be under pressure. And I think this is kind of the -- I think, still a somewhat misunderstood part of the NAND market. The NAND buyer is just fundamentally changing. This used to be a market that was more of a commodity market. The buyer wanted multiple suppliers for every point in their deployment. And that's being replaced by a buyer now that is the predominant part of the market. The largest part of the market is now a buyer that is not -- their business model is not dependent on the volume of NAND they buy. They're not reselling NAND in a different form factor. Their NAND is part of a much larger architecture that is very profitable. And their consumption continues to go up. And I think that is what's catalyzing a change in the business practices in the market. And I think that's really what's going on. And we're in the middle of that.

And when you're in the middle of something like that, it's sometimes confusing, and it's hard to figure out what that's actually going to happen, but I think it's just incredibly exciting. And it is this technology that we've been building for 25 years, it's extraordinarily important and the fundamental dynamics of the way the market works are changing. And it's going to be fun to see how it plays out.

Yes. It hasn't run so far for sure. From the standpoint of capital spending in NAND, we've actually seen NAND capital equipment sales dropped the last 2 quarters as the market's gotten really good. And I think some of that is just timing, kind of random timing stuff, but there's also a clean room space that people are allocating to DRAM that's maybe taking away? Like what do you think is the supply picture here? And what does it take for you guys to resume kind of a higher level of spending?

Well, I mean -- so first of all, I think it's important to realize we are spending more money all the time to increase supply. So we've been very transparent. We're going to grow supply mid- to high teens. We're putting billions of dollars behind that. We're putting hundreds of millions of dollars of R&D behind building the best NAND technology in the world. So we are going to grow the market and we grow the market every single day. And we think that, that is a good long-term growth rate for the market. And we're trying to sort out as this market changes, where is the attractive demand in that market. And I think that's happening every single day.

It would take a lot to get more conviction. We're not interested in what the growth rate of the market is next year or the year after. We're interested in the growth rate of the market a sustained basis for the next decade. I don't think it should be lost on anybody that we just spent -- we just invested over $1 billion to make sure we have supply from 2030 to 2035. That's the kind of time horizon that we're thinking about, and we continue to invest more in the business to make sure we can continue to grow this business.

I think as these business practices get worked out over the next year or so, maybe faster than that, we'll find out what the real growth rate is of the attractive demand in the market.

Okay. And I guess one of your push is really even predating the spin has been that customers need to give you more visibility into what their demand is, more transparency to the long-term view. This tightness in the market, does that help you achieve that? And I guess maybe we can go into some of the long-term agreements and things like that, that are giving you that visibility now.

I mean, certainly, that's what we need to get conviction behind. Again, we're investing to grow the market, and we've talked about that. We're investing billions of dollars in CapEx. We're investing hundreds of million dollars of R&D to build incredible technology. And clearly, our time horizon for those investments are quite long. I mean if you're going to build a fab, that's a pretty big place, and you need to get 10, 15 years of return out of that. And we're clearly looking for more visibility on demand.

I mean the way the market has traditionally worked is the world's NAND is kind of auctioned every quarter. That's kind of how it works. And so I think that business practice is going to change to giving more visibility and commitment to a longer time horizon of what demand is. I think this is the data center buyer coming in is more interested in certainty of supply, right? That's extremely important. And I think our interests are highly aligned. We're going to produce NAND, they need to consume NAND. The question is, how do we put a business model an incentive scheme around that where we both have confidence we can get what we need. And the industry hasn't done a very good job of that in the past, quite frankly.

Yes. So as a long-term memory analyst, you hear about long-term supply agreements and kind of triggers, memories of things that didn't work in the past and things like that. You've talked about the structure of these being different. You've talked about prepayments upfront, agreements that have teeth. You don't have to see your customers to collect down the road. How should we think about that? Are you seeing those commitments? Is that desire continuing to build?

I'll talk a little bit about this, and Luis can really -- he's very thoughtful on this as well. I mean, look, I mean, there's no shortage of people that can tell us all the stuff that does didn't work in the past, right? It's like everybody has got a lot of scar tissue. There's a lot of things that didn't work. We're very well informed in all of that.

I think the most important thing in all of this is we have a willing partner. Again, the customer we're talking to has significant amount of demand in the future. They're planning for '27, '28, '29 what their demand is going to look like, they're willing to share that with us. And that's very unusual, right? We usually don't get that much insight. And -- but the product is so important to them. They want that certainty of supply. They're thinking that far down the road. How am I going to be able to acquire the amount of NAND I need. And when we look at the numbers, quite frankly, they're kind of eye-popping numbers. They're like if you're going to count on showing up every quarter, you're probably not going to get that much. So then the question becomes -- so our interests are aligned. The question is, how do we align the incentives to make sure everybody can do what they need to do. And maybe you can talk some about that because you're like the tip of the spear on the [indiscernible].

I think one of the key things -- one of the first things we need to do is stop talking about LTAs and really talk about this as a business transformation because that's really what it is. And there are a few components with that. The first one is we don't want to be talking about the quarter. We're going to talk about 2 years, 3 years, 5 years, right? So the agreements are really longer term. We're both committed to it.

The second element is how do we ensure financials are good. And financials need to be good in good times and in bad times. And if they're good -- if we're in good times, there is upside for us and there is an ability for us to capture it. And if we're in bad times, we're protected so that the financials, our gross margins, our operating margins, our free cash flow generations are all good.

And then we won a business that's growing, right? We're selecting these customers where we believe that where we are making a commitment or they're making a commitment to us that the [indiscernible] are going to be growing at a rate faster than the market. So we're choosing very carefully so that we choose winning customers.

And the last component is what David was talking about, which is there has to be enough commitment from their side that they will go the way to the end of the contract. Exactly how that's going to work, we'll come back to you as we finish our negotiations. It's a little bit too early, but we feel very good about where the discussions are going.

But you said it's not an LTA and you sort of said take-or-pays become unenforceable beyond a certain time frame so there has to be some kind of cash repayment, right?

I think well, I wouldn't necessarily go look, we're not going to go into the details of what we're negotiating. But I think Luis said it extraordinarily well. This is not about just an agreement. This is about what are the business practices of the way we do business with our customers. And our customers are -- all of our customers are extremely enviable companies. They have incredible businesses, and we're very lucky to have deep relationships with them. And I think our interests are highly aligned here. As I said, they want to consume a lot of NAND, and we're going to produce a lot of NAND. The issue is how do we get a model around that where we both have more assurance of what that's going to be. And our customers -- we don't expect them to be experts in our business. Our business is a very interesting business. You build a fab, and it's very expensive and you turn it on and wafers come out. And they come out every single day. They don't stop. They just keep coming out and there's more tomorrow than there was yesterday. So getting -- that's not necessarily the way they run their business, but that's the way we run our business. And so we got to get those gears to mesh. And the way we do that is through having a conversation and figuring out how do we transform the business the way we're doing business with each other. And again, I think we have a set of customers that are very interested in having that conversation.

Will we get to the finish line? Stay tuned. right? What will it look like? Stay tuned. We'll say more about it when we get there. But I think there's a willingness to get this figured out.

And with those kinds of big customer deals, is there a trade-off between capturing the best near-term price and getting that long-term visibility? Do you have to give them lower prices near term to get that [indiscernible]

Again, you're getting into the details. I mean you keep...

Sorry. Just tell me everything you got. Just us.

I think you can have confidence that we have pretty good insights into what pricing is and things like that and where it's going. And we're trying to do multiple things at the same time. I mean, clearly, we're trying to build a business that has very enviable economics, right? But we're also trying to sustain that business, right? We want to get off the rollercoaster going up and down. And that's again, everybody wants to tell you all about this all the time. It was just a matter of time before this is going to change and everything is going to go in a different direction. We don't happen to believe that. We believe that if you have willing partners and willing customers and everybody has the same objectives. You can put a business model around that and business practices that significantly address those concerns. And I think everybody is a winner in that. There's not a loser. And so we'll see, like -- I think the environment is such that there's a possibility that this could get worked out, and it would be a significantly different business model than being backwards. And I think it's a big risk right now in our business for our company to basically just project the past on the future. That's the simplest thing to do. And again, like, oh, this is the way it's always worked? So this is the way it must always work. That's not true. It can change. And there are a lot of things changing in the environment.

The demand is changing, the technology is changing, the buyer is changing. Lots of things are changing in this whole mix of ingredients to come up with be able to transform this business to something different.

Okay. I'm sorry if I'm asking questions.

No, no keep asking away, keep asking away.

Maybe with shifts talk about the technology a little bit. How happy are you with your enterprise SSD portfolio? And how does [indiscernible] kind of help you going forward?

So we're happy with the portfolio. I think we've got the right portfolio at the right time. And that portfolio is more than just the enterprise SSD. It's the whole -- you get a whole bunch of things BiCS8 is a tremendous node, right? Bonding, all the technology that's there, the performance, the power efficiency. It's just a great fundamental technology. And in our business, if you don't have a great fundamental technology, you can't really make up for it when you build the controller, right? So having that great fundamental technology is very important.

We have a 2-terabit die, right? That makes a big difference because when you build an enterprise SSD, you only have so much real estate to pack these things into, so you got to have the right die.

And then on top of that, now we've had an opportunity to spend the last many years building a clean sheet controller and bringing all the expertise that we have inside Sandisk around our ability to build controllers for the consumer business, the ability to bring build controllers for the client business. And all of those businesses we're in, we've taken all that expertise and applied it to building a brand-new controller for our storage class enterprise SSD. That product is in qualification. And that product and the receptiveness of that product is really what's unlocking these conversations that we talked about before. If you're going to spend 2 years or a year going through a qualification process, that's when you're going to start getting more insight into what [indiscernible] years in the future and that's what kind of unlocks this conversation. So we feel very good about where we're at.

Yes. Okay. NVIDIA talked a little bit about a new key value cash technology that if you just take the number of bits they talk about and the units that we know the like 8% of the world's NAND. It seems like that's getting phased in maybe over time, not something that's imminent. But do you have visibility into what that opportunity may look like, it seems consistent with people giving you very high 2028 forecasts.

Yes. I mean this is why I love this business. It's like people are always thinking of new things to do with. It's fantastic. It's fantastic technology.

Look, we've looked at this architecture. We've talked a bit about this. I mean, I think, the bigger picture is we've had confidence for some time that NAND is the most scalable semiconductor technology. And the AI architecture is about scaling. And so models are getting bigger, context links are getting bigger, cases are getting bigger. You're naturally going to start pulling in that very scalable NAND technology into that architecture. I think that's now very clear to everyone and that's driving a lot of the business.

And if you look at the announcement you're talking about, we just did some -- it's early, but in our early analysis of that is if you just look at some penetration rates device and then you look at how fast you put some assumptions around how fast they're going to be sold and ramp. You do get to a number like 75 to 100 exabytes of incremental demand, which is great, right? That's a '27 number and you go up from there. So yes, there's lots of reasons to be optimistic about demand. But again, it's about back to the previous conversation, signing up for that demand, just doing a paper exercise and saying this demand is there. But I think that process is happening, right? And that's where I say we have a willing partner in this conversation on how do we get our interests aligned around producing and consuming NAND.

Okay. And then you also you talked about high bandwidth flash around the time of the spin. And none of us really knew exactly what you were talking about, but there's a fair amount of momentum building around that.

You're so nice about that.

It's devastates me, not you. I think that opportunity starting to take shape a little bit, the agreements you have. Can you just give us an overview of where we are?

I'll say, Joe, we were just chatting before we started. It's been an exciting year. We're like almost exactly 1 year from when we launched the company and a lot has happened in that year. And if I look back on where we were a year ago and where we are today, I would say this is one of the things I'm personally happiest about.

We had been working on this idea that NAND needs to play a larger role in the AI architecture, especially inference where NAND brings an enormous amount of density. When you talk about something is 10x more than something else, that is a very good sign that you should spend time trying to figure out how to make that product fit into that architecture. And so we started working on that many years ago. And I think it was some insight by some very clever people in our organization, which is if you're a NAND designer, you've been told your whole life figure out how to get me more bits. That's all I care about. I want more bits at the lowest cost possible. But now you need more bandwidth, for inference, you need more bandwidth.

And so if you go back to that NAND designer and you say, hey. okay -- now that -- we're not declaring victory on density. We still but we have a long road map on density, right? That's the technology is very productive. Why don't you start thinking about how to increase the bandwidth? And very clever people come up with ideas how to do that and enough ideas where this technology can move into the inference architecture. And that's what high-bandwidth flash is all about, right? Can you build a NAND product? Can you use NAND in that inference architecture? It's not training. We're not replacing HBM. We know that. That would be crazy. But a read optimized very deterministic. I know what I'm reading. I'm reading the same model over and over again, putting it into a processor. We believe that, that's a memory constrained problem, not a CPU or a GPU constrained problem. So we started working on that.

And then we were going to launch the company we had a long discussion about should we talk about this. It's very early. And we decided, hey, let's talk about it, right? Because we're asking people to invest in the company. And we think -- we like this idea, and we talked about it and everybody looked at us like, what are you guys talking about? And maybe was met with a little bit of skepticism.

And one of the things I'm happiest about in this year that's transpired and everything that's transpired is people are not -- they're not looking at it that way anymore, right? Others have come along. Other people in the industry are now saying, hey, storage needs to be redesigned for AI. They're not talking necessarily about high bandwidth flash, but it's the same kind of concept. How do we bring this very scalable semiconductor technology to bear to help this architecture, which is phenomenal, scale better. And we're working on it. We're talking to potential customers, both on devices and cloud infrastructure of how they could use this.

It's not a plug compatible component for the current architecture. So you got to change the system a little bit to accommodate it. Going to do that. You got to know what use case you're trying to optimize around. So there's a lot of work that has to go on, and we're having those conversations, and we're optimistic that's going to lead to a good outcome. We're not ready to declare a victory.

And at the same time, we're doing the work -- at the end of this year, we'll have a die and NAND die, right? It's a derivative of BiCS8. It's not like we have to build a whole new node. And we're also working on the controller. And maybe a year from now, we'll have assisted our -- what we would call a device that we could put in customers' hands that they could start using and then along the way, one of our peers decided they wanted to work with us on the standardization of this. I think that was a big step forward. It's hard to create a market all by yourself. And so one of our peers step forward, SK and they wanted to standardize it together. And I think it was just last week that we announced that we're going to do that at OCP.

Now we're not working on the NAND die. We're not working on the device together. We're just working on the specification of the system. So people would know how to use this. So I feel very good about how far we've come in a year and we still have more work to do, and we're going to stay very focused on that. And I think that original insight that this very scalable semiconductor technology has got something to add to the AI architecture and will be central to that architecture, I think, has proven to be a very good insight, and I think generally accepted now. And so there's different ways of doing that, primarily enterprise SSDs today and I think we're going to continue to see innovation in that space. And I think this is what's super exciting about the world right now. I think we have this awesome technology. We have this -- we've been working on this technology for 25 years. We have like 25 years of accumulated R&D. We have 25 years of accumulated CapEx investment on fabs that cost tens of billions of dollars. And here, we have this just incredible innovation or -- in addition to all the other great markets we're in, which is like every possible device, you can imagine, smartphones, PCs, tablets, just goes on and on and on. And we have this entire new area of AI to innovate in and figure out how we can bring all of this intellectual property and all of this accumulated investment that we've done over 25 years to bear on one of the most exciting technology developments in a very long time ever.

That's very cool. So you don't worry about demand destruction in consumer markets. We've talked about this I guess, why not? If you see prices in a consumer solid state drive double or triple isn't the natural thing to cut the content in half?

so I would rather focus on, I think he and I would both rather focus on the incredible demand creation that's going on, right? And we're looking for the -- what we consider the attractive demand for our products, which is something that recognizes that value of all this accumulated intellectual property, the value of all this accumulated CapEx that -- most technology businesses are either very IP-intensive very CapEx-intensive, kind of one or the other. We're like both. And so this technology is extremely valuable and I think this is extremely exciting time because that value -- I think it's fair to say for a long time, that value wasn't really recognized. I think that's -- you just have to look back a year at our value of our stock and like people did not recognize that value.

Well, the income for the last 5 years hasn't been what you shouldn't have for assets like that.

So the good news of that is we have always accumulated R&D. We have all this accumulated CapEx. It's like this gigantic coiled spring that's all uncoiling all at once. And it's uncoiling in this creation of incredibly attractive demand. So other demand that's not as attractive, again, we all of our customers are fantastic. But there's supply, there's demand, they're going to be rationalized through what is the price and I think we're covering that the world is valuing this technology a lot higher than it has in the past.

Great. So we only have 4 minutes left. Let me see if we have questions from the audience. One in the front row.

What would you need to see to supply to, let's say, a mid-20s bit growth rate? And how does that conversation with your JV partner go?

You want to take that one?

Yes. I mean, remember, we invest on a 10-year basis, right? That's our CapEx. And we need to see -- we need to have conviction that for the next 10 years, we're going to see that type of growth. And therefore, we're not there yet. We're very far and we're sticking to our plans, which is to invest to the mid- to high teens rate, and that's what we'll continue to do. We work very closely with Kioxia to define the investment plans, and we do that together for the JV portion of their spending. And it has worked very well for 25 years.

I guess just a follow up on that. Is there a hypothetical world where your LTAs necessitate CapEx given the prepayments?

So I think this is one of the things that the more people I talk to, I think, is a bit misunderstood about what we're doing. So we're not trying to create a world where we can spend more CapEx. What we're trying to do is create a world where people commit to buying what we know we're already going to produce. That's really what we're trying to do.

And so we know we're going to produce in the future. In fact, we're going to produce more in the future than we do now. And we're committing billions of dollars to make that happen. And what we're looking to do is to work with our customers and our partners to align ourselves around how that supply is going to be consumed. And like I said, we have, I think, it's super interesting because I think the main buyer -- everybody in the market is extremely important. We have incredible enviable customers there. Some of the most fantastic technology companies ever across all domains, whether it's smartphones, PCs, gaming, data centers, all of it. We're just trying to get this business model better aligned of our investment horizons and their consumption horizons. That's what we're trying to do.

And I think as we get that better aligned, we'll have a basis to answer this question. Right now, there's no basis to answer this question. Like my view is we're already investing mid- to high-teens bit growth. We're doing we're investing more to grow this industry. It's now about getting the consumption of that aligned to that same level of investment.

Maybe just to wrap up then. I mean, the conventional wisdom for the last few years is this is a space that needs to consolidate. All of this goodness has happened without anything consolidating.

Isn't it amazing?

So it doesn't really seem to me that we do need that, but just what's your perspective?

I think any time you're in a high fixed cost industry like scale matters, but we curtail through the JV, right? So there's always benefits of if you can do that, I just don't think it's a precondition for the economics being incredible in this industry. I mean the way I look at it is there's like this entire spectrum of technology that the world needs. NAND is a key part of all of that, and there's only just a few companies in the world that can do that. And if you want to create a NAND company, that's a lot -- find yourself an R&D team is to start with, that's really hard, and we'll see you in 10 years. So -- but the world doesn't need that, right? It's just like there's this is -- I mean this is why I chose to come to this industry a year ago, and I think a lot of people told me I was crazy. I found out that a lot of people put in writing the thought I was crazy because I think this is just a spectacular industry. I think it's a spectacular technology. I think all the elements are there. We just need to change the business model a little bit and everybody is a winner.

I didn't think you're crazy, but I probably underestimated WD a little bit.

You were probably one who think I was crazy.

Anyway, look, guys, we're out of time. Thank you very much.

Thank you. Appreciate it.

Thank you, Joe.

Thank you, guys.

Okay, great. Good afternoon, everyone. Great pleasure. Just to remind you, everyone, I'm Mark Newman from U.S. Bernstein's U.S. IT hardware analyst. Great pleasure to welcome David Goeckeler, the CEO of Sandisk. And also Luis Visoso, CFO.

Thank you.

Thanks very much for joining us today.

Well, thanks for having us. We're Happy to be here.

And also, just before I get started, I want to wish you a happy birthday for 1 year yesterday, I believe.

Yes, that's right. That's been quickly.

Public listing. Public listing. And have been -- all right. Yes. A lot of. Fantastic.

Just want to get the safe harbor, if you don't mind?

Absolutely, go ahead.

So we will be making forward-looking statements in today's discussion based on management's current assumptions and expectations, including with respect to our technology and product portfolio our business plans and performance, market trends and opportunities and our future financial results. These forward-looking statements are subject to risks and uncertainties. We assume no obligation to update these statements. please refer to our annual report and forms 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 be making reference to non-GAAP financials and a reconciliation of our GAAP and non-GAAP financial results can be found on our website.

Great. Thanks very much. So to kick off, I would just like to touch on the -- this crazy pricing environment we've got currently in NAND flash. And on the earnings call, the last earnings call, I asked you about long-term agreements, given how fast many prices are rising, -- and given the shortage in supply in the market, there's some pros and cons to long-term agreements. So I remember on the call, you talked about how long-term agreements have transitioned from price negotiating tools to more like critical supply assurance mechanisms, I believe, is how you put it on the call. Just maybe if you could just talk a bit more about how you think about those pros and cons because lots of investors asking about are you signing up to LTAs given that pricing is going up 50%, 60% a quarter, is there going to be any chance that do you have any hard price caps that restricts your upside further further down the line. But of course, there's also some benefit to having a long-term agreement, which is if you can have more stability longer term. So just think those pros and cons is obviously a hot topic on investors' minds right now given the current pricing environment.

Yes. I mean there's a lot to talk about here. So before we get into the specifics on kind of agreements and what we're trying to do, let's go up a level. And really, what's happening here is we're -- I think the NAND market is going through some fundamental changes, right? -- fundamental structural changes -- and it's catalyzed by something we started talking about not this past earnings call with 1 before that. If you look at calendar year 2016, now you're going to see data center is the largest market in NAND. Over over 2 forecast cycles now, we've gone from believing that market was going to grow mid-20s to mid-40s to now mid- to high 60s in calendar year '26. So clearly, the demand side is moving very rapidly. And that those customers are becoming the largest consumers in the market. And that's a big change of a market that for the last 10, 15 years has been a device market, predominantly.

And so what that is catalyzing is thinking about this supply -- how do we get supply-demand aligned, how do we do planning, how do our customers do planning what's the business practices about how we work with our customers and kind of all that is changing very rapidly in this environment. So it's not just the price is moving very quickly. I mean prices Price is just an artifact if we have a market. A market has supply and demand. It's not either short or long or anything else. It's just a market and that rationalizes every single day and the way supply meets demand is through price.

So things are very dynamic right now, and that's kind of catalyzing people in the market to think differently about how we're going to do business together. And I would contend that as an extraordinarily positive development because this has traditionally been a market where on the supply side, we try to project what demand is going to be. right? And we've been very transparent about what we're investing to. We launched the company a year ago. We went on stage. We said...

A year and 1 day.

1 year and 1 day. So like something like a year and 3 weeks ago or something we went on stage and said, "This is what we believe about growth in the market. This is what we're investing behind. -- mid- to high-teens bit growth. We're putting billions of dollars behind that thesis. We're putting hundreds of millions of dollars of R&D behind that thesis. And then we're going to see how it plays out, right? And we were bullish on the market a year ago. We got some pushback on that. Market has turned out -- we thought the market was going to be undersupplied through the end of '26. We got some pushback on that, and we're kind of seeing how that is all being worked out right now.

But I think this kind of now turmoil in the market is causing quite frankly, especially on the data center player side, if you look at what they're going to need over the next several years in supply, right, what their demand is going to be. and they're being more transparent with us on this because we're qualifying new products for them. We've been very -- we've been talking about new enterprise SSDs we've been building. We've been qualifying a new hyperscalars and so they come to us with their demand forecast, right? And so this isn't like next quarter or what's happening right now, but you look at the demand forecast out in '26, '27, '28. And there's some pretty impressive demand numbers. And our reaction to that is we're not going to be able to supply what you're asking for with the way the market is working now, which basically we just project what we think demand is going to be. We invest to that.

And then really every quarter, the world's NAND supply is sold, and there's a clearing price every quarter. That's kind of the way the market's worked. And I think what the realization is, is giving that there's a new buyer, new use case new demand driver, new economics of that buyer versus other buyers perhaps. It's kind of catalyzing this change for us to think about how do we get the supply and demand equation better aligned, right? And from our perspective, that is really, really positive. Because if we have a better view of demand, it's more likely we're going to get it right as far as what we invest to and they give us a better view of their demand. It's more likely they're going to get what they need, than not get what they need.

And so that's catalyzing this conversation, which is, okay, how do we rationalize this into an agreement that lasts longer than a year or last longer than a quarter for pricing? And we're working through that, right? And we think that's extremely positive as far as what we're trying to do in our business is we're trying to obviously optimize the value of what we're producing every single day. And we want to dampen the volatility in this industry, right? We want to stop going through these kind of very episodic, we're oversupplied, we're undersupplied all this kind of stuff and kind of smooth that out a lot more because we think what we build is extremely extremely valuable. And if we can get more consistent in the market, we think that's good for everybody.

So that's kind of what we're working through. Luis is the one that's like on point on talking to everybody about these and putting it together. So I'll let him talk a little bit more about how we're thinking through them.

Yes, Mark, Success for us is a sustainable and attractive financial right? And how do we make it over longer periods of time. It's not about maximizing every single dollar, but making sure that over time, we're maximizing that value and on price, to your question, right, we may have a portfolio of fixed pricing, variable prices that ensures that we can perform very well in an upmarket and very well in a down market. and outperform most times. So that's where we're working to deliver. Think about our portfolio of outcomes with different customers, with different nodes that maximize their value in any possible scenario.

And do you get any kind of -- if your customer is giving you a projection of 60% growth, 5% growth over the next 1 year, 3 years or whatever time horizon, what kind of guarantee do you have? Do you have some kind of guarantee that they're going to buy that much? Is there appetite for prepayment from some of your customers? Is there any kind of level of commitment? Or is it more just based on their projections.

Yes. So I'll say -- I mean, first of all, I think everybody comes into this conversation from a very, very good place saying like, we want to work this out. Like we want to get to a model, a business model that works for everybody because we believe we build a very valuable product. They believe we build a very valuable product. Their companies are some of the most spectacular companies that have ever been created. Their business models are incredible. They don't want to be short of components. And so everybody comes into this from the right place and it really is just trying to figure out what is that model where we feel like the economics are attractive for us on a long-term basis. They feel like the economics are attractive for them on a long-term basis. And then we make sure that there's going to be -- things are going to get tough at some point, right? There's going to be quarters where things maybe are not what we thought they were going to be. But our business as such, like we have to build a fab. And when we turn the fab on wafers come out and they come out every single day, and there's more tomorrow than there was yesterday because we're investing for growth.

So what we're looking for, for them is what Luis said, that predictable, sustainable, growing financially attractive demand, and it's how do we put a business construct around that, whether it's 1 year, 2 years, 3 years, up to 5 years, that we both have confidence we're going to get what we need out of that. They're going to get to what they need, we're going to get that predictable demand, growing demand that we can run our business in a very, very financially attractive way. And I think we're working through that right now. In many ways, we're kind of inventing a business model. And look, we're very aware of what's been tried in the past, what works doesn't work. I think kind of the premise of your original question, is this going to be a regrettable at some point. And we're pretty convinced that it's not going to be the case, right?

We're trying to maximize these 2 things, as Luis said, we need to get very attractive financials for our business, and then we need to sustain that.

Predictability and economics basically the 2 things.

Predictability, consistency. Remember, the fab runs every day. You can't take a quarter off. You can't take 2 quarters out. That's where the cycle comes from, right? And so -- and customers, I mean, again, they're not -- everybody comes to this from a good place. they're not necessarily trying to create issues for us. They just don't run our business. We run our business. So it's about understanding what each of us need out of this and putting a business practice around that, that works for everyone. And look, we're a deep participant in the market, right? We have very, very unique insights on what people are willing to pay for different products. what pricing is going to be in the future. And so I think to trust that we're going to like set this up in a way where it's attractive for everybody involved.

Did you ever really expect that prices will be up this far though? When we talked 6 months, 12 months ago, of course, you were bullish. I was also bullish. However, -- it's okay. Things turned out to be, I think, a lot better than we all expected. Is that not true?

I would say it's happened very rapidly. I mean in many ways, I think about our business is like this coiled spring. -- right? We have been investing R&D for 25 years to build some of the most sophisticated semiconductor technology in the world, 3D NAND, right? It's incredible technology. And we have 25 years of accumulated experience of doing that. We've got 25-plus years of spending billions of dollars on fabs and infrastructure. I mean we have some of the most spectacular fabs in the world in Japan with our partner. And for a very long time, the value of that has not really been recognized. I mean I know that's very clearly because when I took this job at the separation of Western Digital, everybody told me, "Are you crazy? Why are you going into the NAND business? Nobody's ever made any money." And I had the conviction that this was a really, really valuable franchise if we could get the business model right. If we could get the economics correct with our customers, we were clearly providing something the world needed.

It was clearly very difficult. It was clearly very capital intensive. And I think that because of these changes in the market, I think this cannot be underestimated. The biggest thing I see right now is a lot of people with a lot of old game film on the way memory works. Oh, this is just a cycle. It's going to come back. I've been doing this for 30 years. Let me tell you what's going to happen in the future. And we look at that and go, maybe it's a luxury we haven't been in this industry for 30 years because when I look at it, the buyer is different. The use case is different. We're in one of the most spectacular deployments of AI. I mean it's incredible what's going on around us.

So I think just waiting for the past to come back is not a very good strategy. And what we're really trying to stay very close to our customers, and they get it. It's like, no, look, we need to figure out a way that we can drive this business forward in a different way. This is a spectacular business and a spectacular industry, and if we get the business practices, right, everybody is going to get what they want. Everybody is going to be a winner here. And we're not -- we're going to kind of get out of this, hey, let's try and guess what demand is. Let's try to guess what supply is, let's try and figure out -- because we have to invest years ahead of time. And once we invest, it's like a 10-year horizon, we need to get that consistent supply. You build the fab, you fill it with equipment, you do all the R&D, wafers come out every single day. Every single day, the wafers are coming out, right? You got to sell them.

And so I think that what's happening right now, look, you see all the artifacts, the pricing and did you think it would happen all this fast. And I think what you're seeing happen is a very big, very liquid market with some of the most spectacular technology companies on earth are all transforming that market in a very short period of time to get what they need out of it in the future. Because in the future, it's more valuable than it is in the present. And nobody wants to be in a situation where I can't get what I need. So we have to figure out a different way to run this business, and we're doing that in real time.

Is the calculus now changing the gap between the demand and supply being seemed like so wide right now. Is it now changing the catalyst where companies such as SanDisk and your partner, Kasha, considering to actually add capacity so far, there's not been there's not been much. There's not -- actually in the NAND industry, there's not much capacity additions, but perhaps besides YMTC in China adding a little bit, there's actually not much capacity in NAND flash coming online. So is that something you're looking at given how strong demand is right now?

Again, let's go back to our Investor Day, we got up on stage and said we're going to invest billions of dollars in this business. Hundreds of millions dollars in R&D every year. Some of the most brilliant technologists around and we're going to invest all that to grow high teens for as far as the eye can see. It's a pretty big commitment. So we are spending a lot of money. We are spending. And again, up until like July for August, people had conviction that like in the December quarter, pricing was going to be down, right? That was the prevalent wisdom. I had people calling me up and saying, "Oh, you're not going to make your December numbers because pricing will be down in December, the market is going to be oversupplied.

So it's a little quick like a couple of months later to say, are you going to like go in for billions more. I mean I think what we need to do is need to get this conviction around what is the long-term demand. And the way we get that conviction is having the conversations we talked about earlier. So we continue to invest for that bit growth. We're very comfortable with that. By the way, I'll challenge your terms a little bit. I mean markets don't really have shortages. They just have balance you can lower the price of any product and demand will go up. That doesn't mean it's an economic thing you want to invest behind. So we need to understand what is the sustained growth rate of attractive business.

To maximize profit.

To maximize Yes. To maximize the value of the franchise we own, that's our job, right? We have a responsibility to do that.

Makes sense. On data center growth, can we talk more specifically about SanDisk mix? Because where are you today? And I know data center is increasing as a percentage of your mix. Can you talk about quantitatively or qualitatively, like where you are, where you expect to get to in terms of your exposure to data center?

Yes. So I'll talk about it a little bit. Luis has a lot of detailed comments on that as well. Look, I kind of see 3 like big arcs of horizon of Sandisk, right? Sandisk I wasn't around at the time, I have an enormous round of respect for the people that were, I mean, Sandisk was a tremendous consumer franchise, IP franchise. It really built its name on that. I think you can look back at the period of time that Sandisk was a part of Western Digital was the rise of the client business. in respect, it makes a lot of sense to me. I mean NAND was replacing the hard drive in the PC. We exited Sandisk now sits today is like 25% share in the Edge business. And I think the third or going forward is that arc of building out the enterprise business and the data center business.

We basically been at that since I came in, right, reorganized the company and put some different people in place and we're making -- we're very, very optimistic where we are with that product portfolio. And we've been transparent about that. We -- 2 quarters ago, I think we were like low mid-20s sequential growth in data center, last quarter, it was 64% sequential growth in data center. And we see that pace increasing throughout the rest of the year. So we feel really good. And in many ways, it's the strength of that portfolio, that again is part of what's catalyzing these conversations on the more long-term business agreements as people see that enterprise SSD portfolio is very, very valuable, right?

So I think you can assume that going forward, we're very confident of our position in that market. We're always going to have a balanced portfolio, right? We're always going to have a balanced portfolio. But it's good to have a very strong market to grow into as a business owner.

Yes, you covered it, David. I think the only thing I would add is just as data center is the market is exploding. We're bringing amazing technologies to the market, right, with big sale, and we have our Stargate products. So everything is happening at exactly the right time, and that gives us momentum.

Actually, on your Stargate comment, can you talk a bit about this target, the whats 128 turbine target QLC eSSD, I believe it is now in qualification, do you think that unlocks new incremental TAM as it potentially the places are district with the QLC?

I was with you right described Look, there's 2 came there's 2 big products that are driving the data center business right now on enterprise SSD. It's a compute focused drive 8-terabyte 16-terabyte, PCIe Gen 5, very fast interface that product. We have a great product in that part of the market we introduced a couple of years ago that's driving all this growth we talked about. Now we have a new product coming out, which is more of the storage side of it. So 64 to 128, 256, 512, even terabyte is on the road map. That product is what we code named Stargate. That is a complete clean sheet ASIC build for that. We have lots of runway. We introduced that 128 level is what we're qualifying and then we'll start rolling that forward. And there's a lot of pieces that make up that, right? It's BICS to start with, which is phenomenal QLC performance even on BICS, 2-terabit die, right? So you can -- the form factor is not that big. You got to have a high-density die. Then it's the ASIC and all the work that's been done over the last 3 to 4 years to build that.

So again, as Louis said, all those pieces are now coming together in a world-class product. and the market is responding very -- our customers are responding very well to that. That product has not started shipping for revenue yet. So all this growth we've talked about has been without that product. So when that kicks in, we expect that will, of course, drive better growth for us.

Now is that product replacing HDDs? Is that what's driving the growth? I'm not a big believer in that thesis.

That's more the that would go more into the JV cash, the separate storage trade that NVIDIA is talking about?

That would more be the compute 1 -- this is just a -- it's a storage class like the data lake you're going to create.

Got it. Also, you're talking about BCA. BIC has been very successful so far. There's been some recent commentary, chat Market Chatarabout you accelerating BigT technology to 2026 to meet hyperscale needs. Anything you could talk about bite?

I think you called that right as Cheddar I mean we have a big plan. We've been very consistent with it. We expect to exit this fiscal year with it, the predominant node in our portfolio. BICS 10 is a great note. Don't get me wrong. -- we're not accelerating BICS 10 to meet demand. We can meet the demand and the bit growth we need with the CapEx plans and the plans that we have. Very, as you can imagine, a very sophisticated fab plan behind month by month, what is the notable mix going to be. And there's a lot of work that goes into making sure that's set up right and it's not something you can change overnight. But we don't -- look, BICS 10 are great now. Don't get me wrong. Like we're always working on multiple nodes. I mean, that's 1 of the great things in NAND. I mean, I think this is why 1 of the reasons the NAND market is so spectacular. I mean we just have Moore's Law, if you want to call it that, is alive and well.

There's a lot of R&D productivity that we can put into this market. And that's a big part of NAND now becoming a big part of the AI architecture. It's the most scalable semiconductor technology. It's inevitable that was going to become part of that architecture as models get bigger, cashes get larger, content lengths get bigger, you have to bring the most scalable semiconductor. That's not -- there's no negative comment on DRAM or HBM, that it's like brilliant technology. But at some point, you need the scale and that becomes a big tailwind for NAND. And I think for the last maybe up until 2 quarters ago, everybody was asking me, does AI really impact NAND? And I think that question is kind of being put to bed so that it's like definitely I think Tino put that completely agree that like, yes.

Switching gears a little bit. How do you view the competitive threats from the Chinese, so YMTC in China? And there was some -- there's been some, again, market chatter, although I think this time, it is actually backed up this market share to some to because there was an announcement from the Pentagon saying that YMTC and CXMT have been removed from the list of entities that are working with the Chinese [indiscernible], but then that announcement was on indeed, I understand. So slightly confused about what's going on there. I'm I doubt you want to talk too much about that specifically. But just how do you think about the Chinese that competitive set and how that may change going forward?

So I mean, a couple of comments. I mean anybody that's in this business is very capable, right? So we take all of our peers very, very seriously. When we talk about our market numbers of supply-demand they're completely in all of our numbers, right? And so we have factored in. Again, this is why we say things like we're very confident with mid- to high-teens bit growth because we're factoring all the stuff you're talking about goes into our thinking and our equations. So -- the thing -- you're right. I mean, I certainly can't speak for the U.S. government. I take it at their word. That was a DoD list. It was retracted right away. It wasn't the stuff out of commerce or export controls and all that. And I'm sure that will get clarified going forward.

Got it. Can we talk a little bit about HBF, High Bandwidth flash. You recently formed this partnership with SK Hynix on HBF. Can you talk -- first of all, any progress you can talk about on HBF and I also wanted to ask how is your partnership with SK hynix, like how do you actually collaborate with them?

So if you -- again, you started with happy birthday. So if I look back on what -- we made a lot of progress during our first year. And 1 of the things I may be the happiest with is the progress we've made on HBF. So a year ago, this week or whatever we got on stage and we introduced this whole concept of High Bandwidth Flash. And let's just be kind about it. We got some people that were a little bit skeptical about what we were saying, right? And what are these guys talking about? Is this real? And we were very serious about it because this came out of some work of our engineering team. Again, I think one0 of the things about Sandisk heritage is our R&D prowess.

A lot of company really known for innovation. And a lot of our -- some of our engineers started thinking a number of years ago when the -- I mean they saw AI. They're very close. And they kind of have this conviction, Hey, we've got very scalable technology or how do we make it -- how do we apply it to AI. And they started thinking about these questions. And if you're a NAND designer, you've kind of spent the last 25 years of like being told constantly give me more density. Density, density, density. I want more density, give me more density. And I mean, okay, 2D, 3D, like memory holds closer together, like all kinds of crazy stuff to always deliver more density. But then if you actually start asking those same people, what if you're going to start thinking about higher bandwidth instead of just more density? What if you start thinking about how could you increase the endurance as opposed to just more density?

So people started thinking about those questions. Oh, we actually can come up with some ideas for how to solve those. And out of that comes this idea for high-bandwidth flash. We believe we can take the flash technology we have again, the BICS 8 technology we have going to BICS 10, going to B11 and all the whole road map, and we think we can change that by building a new die that is much more suitable for AI. And out of that -- because we believe, I think our R&D team believed that at some point, this AI technology is going to need the density of NAND. And anytime something is 10x something like that's an area worth spending time on because that's a major difference. And so we made a lot of progress. And going into the Investor Day, we talked a lot about do we want to talk about this. And we decided we should talk about it. We're asking people to invest in the company. We're spending time on this. We think we're very optimistic about it. So we started -- we talked about it.

And there was a little bit of skepticism at the beginning. One of the companies that wasn't so skeptical was SK Hynix. They called us up and said, "Hey, can we work together on this because we think it's a good idea." And that was very important because if you're going to make a market, it's hard to make a market by yourself. It's better if you make a market, you have a co -- and so we're working with them on the specification of how the HBF system would work. the interfaces to it, those kind -- we're not like collaborating on the die. We're not collaborating on a controller. We're doing all that stuff ourselves. They're doing all their piece. But we're collaborating how HBF would fit into a system.

And again, looking back over our first year, I'm just extremely happy about where we sit here a year from now and nobody is asking skeptical questions about HBF. We're talking about how HBF is the future, like bringing -- models have gotten bigger. -- cashes have gotten bigger, content lengths have gotten bigger. -- number of tokens have gotten bigger, like all this kind of stuff has kind of went in the direction we thought it was going to go kind of came to the point where at CES. Somebody very important in the AI world got up and said, "Hey, storage needs to be rearchitected for AI." And we're like, yes, we agree with that. We're kind of -- we're ahead of that a little bit. And so I think it's -- where we've landed after 1 year is, I think, just fantastic. And the relationship with our partners at SK on this technology is great. right? They're working on their NAND stuff, but we're collaborating on the system, which helps everybody adopt it. And we're working with customers on how they could use it in both devices and the cloud. Because again, this is not like we're building a plug compatible piece of technology for something else.

The system is going to have to change to accommodate our technology. And to do that, you have to know exactly what the use case is going to be, how is it going to scale, all these kinds of things, and that's quite difficult. And so we're going through that process, and we're optimistic that that's going to lead to something very interesting, and we'll have more to say about that when we get more details around that. But in the meantime, we build -- we continue to -- we're building the NAND die. We expect to have that towards the end of this year. And then we're working on the controller in the system to put it together. Maybe a year from now, we'll have that. We can put in customers' hands where they can start using the system, kind of understanding of how we work with their infrastructure.

And how is customer interest so far you have already preliminary discussions with customers about this? Or is it more working with the GPU makers at this stage?

No. We've been working with customers for quite some time on this technology and this idea. So it's a long process. It's like pure innovation, right? It's pure like you're building something new. And so it takes a lot of collaboration. We're experts in building storage. They're experts in building data centers or building devices and it's the collaboration of those 2 expertises, putting them together on what's possible to build here that allows us to build a better system, and we're in that process.

Presumably, you still have to work with the CPU makers that have done for this?

Well, yes, we've got to work with the people that are building the infrastructure.

Right, right. What does success look like for HPF? I think you talked before about it's really focused more on influence, not training.

Yes, it's inference. It's inference. It's not -- look, I mean, nobody would sit up here and say we're going to replace HBM and training. That would be like a crazy thing to say. Like that's like brilliant technology. Yes. But inference is very different. The model is already built. It's a very predictive read. It's a big model. You got to pump it into a CPU somewhere or a GPU. So you can run inference against it. It's a very different kind of problem. And also inferences where you really have to scale, right? You build the model and then you propagate the model and you drive inference everywhere, whether it's on your device, whether it's on your phone, your laptop or in the cloud. If it's in the cloud, you're going to have to scale inference around the globe at incredible levels. And I think that's where -- when you start to talk about technology that's 10x more dense, that has a scalability road map in front of it. Once you hop on that NAND road map, now you're going to get -- you still have those nodal transitions in front of you that is providing you significantly more supply every time we turn the crank on the node. And that's a great place to be if you need a lot of storage and it turns out AI needs a lot of storage.

It does certainly sounds very exciting on paper. So I would hope it just watching it closely. -- hoping to to hear more.

We're excited about.

Yes, yes. Can we -- so I guess my follow-up question was around -- we talked about how strong demand is. And actually, you made the comment, David, about this demand versus supply in the end shipments, there's a clearing price. So in the market.

It's a big market -- like it's not we don't set the price. The market sets the price.

So my question really is on the demand side and what are you seeing happening there? Because -- there are some customers that are not going to be able to get enough. I'm hearing that from some of the OEMs. HP just reported yesterday, they talked about how they can't get enough memory that they're lumping DRAM and NAND together. Are you seeing that in the market? Are you seeing that some of the customers that essentially maybe they're not as important as hyperscalers, I'm not sure or they can't -- that's not as important or they can't afford. Are you starting to see some kind of demand destruction because of this higher pricing?

Everybody is important, right? So let's start with that. everybody it's important but I'll let Louis he's very close to the.

Yes. So we treat every customer very importantly. Some of them are more willing to talk to us about their longer-term needs they are willing to make commitments longer term. And some others would prefer to have this quarterly process where we negotiate price every single quarter. And in that process, so you're not going to have all the availability, right? In a market that it's tighter, you're going to give preference to those customers with which you have a longer-term a -- and so that's what we're doing. But every day, we're making sure we're allocating the bids to the right places. And if customers are willing to come to us and talk about longer-term pricing, I mean, we're happy to do that. Happy to do that.

Any other long-term opportunities. We haven't talked about that you're excited about for Sandisk is going forward that perhaps we haven't talked about or Wall Street is not aware of currently.

Look, I mean, I think our consumer franchise is in fantastic shape. It's an area we're investing in the brand. And I think there is -- I think that that's just a a tremendous franchise. People tend not to focus on it as much because the other ones move faster, but we have incredible reach. We have incredible brand power. We're now treating that more like a real consumer business. And so I'm very optimistic about what's going to happen there over the next couple of years. I think our technology road map is extremely strong. I mean I think BICS 8 is an extremely strong technology and it stems from our relationship with Kioxia. Again, we invest together in R&D. I think people tend to focus on the JV is like a manufacturing, which it is, but it's really that R&D piece, where we're able to invest the number of engineers as if we have the highest share in the industry. And it's that sustained 25 years of working together that allows us just to bring incredibly powerful technology at the lowest incremental cost per bit to get that incremental technologies, what puts us in a cost leadership position.

We just extended the JV for another 5 years in Yokkaichi. I think that was a huge step forward for us. Again, it's -- it just highlights a little bit of that -- this difference on supply demand. We're putting money behind where we're going to get supply from 2030 to 2034. And people are very focused on where they're going to get supply for next quarter. We need to align those time frames a little better. That's what the -- the business practice piece is all about. As Luis said, the enterprise SSD portfolio is coming together as a world-class portfolio. It couldn't be at a better time. It absolutely couldn't be a better time, right? The pull is there.

It's hard to push a new product into the market. It's a lot easier. People are pulling you along. That's in a very, very good spot. And I think the team inside of Sandisk is just completely on fire as an independent company. I mean it is just a very, very exciting place to be. So we're having a lot of fun. And we think we can -- maybe we have the audacity to believe that a lot of that old tape that people keep playing in their mind about waiting for when is the next cycle going to come? Like we're very focused in making sure this is a sustainable model, and we kind of get some of that out of the system. We've changed the way the industry works. We changed our piece of it. I can't change anybody else. We can change our piece of it, so everybody wins. And I think as we do that, this is just a spectacular franchise. And it's kind of why I'm here and why I chose to come to this business a year ago because -- and that's why Luis 6 months before that, agreed to join me and we just think this is an unbelievable opportunity. And we're having a lot of fun doing it, and we think we -- there's an incredible amount of value creation in our future.

Well, I think also on your comment about you can't control what others are doing, but I think you can influence via some kind of leadership in the industry in terms of telegraphing how your managing supply, how you're thinking about things, how you're thinking about economics, then that can actually impact the industry can actually impact but you can't guarantee that they're going to do the same thing. You cannot guarantee they're going to [indiscernible]?

Look, I think we have -- I wouldn't go quite as far as what you were saying. But I think we have an interesting position as a standalone NAND company because we can talk about how we're going to manage the -- and we can talk about how we think the best way to run this business is. And I think we try to be very transparent about that, right? I mean I think this is -- I watch all of the a lot of the stuff in the media and all that, and it's like, oh my gosh, like there's not enough. There's not enough or whatever it's like, look, we've been saying for a year, this is what we're investing to. And nobody like you got to ask for more a little earlier. And I think people are listening. That's good. Like again, everybody is very important. We want everybody to get everything they need to -- I mean our customers have spectacular businesses. And we're envious of what they're able to do. And we think we're providing an incredible technology, and that technology is not easy. And that technology is extremely IP-intensive, and it's extremely capital intensive. And there's not a lot of companies in the world where you have both of those.

You usually have 1 or the other. We have both. And so what this is about is getting the right return on that business, for what we're investing. And again, I think everybody wins. And I think it's an incredibly dynamic market. And I don't think I'll just say it 1 more time, if your frame of reference is, "Oh, this is just another up cycle and ride the price curve and all this, I don't think that's what's happening here. What's happening here is a very big very important technology for the world is undergoing a fundamentally structural transition and it's going to come out of it in a very different place.

Long-term lease. SP1 New moly power, I'm missing it ever SP-13 New memory. Didn't someone like that 10 years ago I think. Anyway, I wanted to see if there's any questions from the audience. Hands up if you have any questions. Everyone is just so convinced, I think, by the argument today. Okay. Well, I think we'll wrap up, Thanks very much.

Thank you really appreciate.

Thank you. Thank you.

Good day, and welcome to the Sandisk Second Quarter Fiscal 2026 Earnings Call. [Operator Instructions] 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. Good 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 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 road map, 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 workload 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 PCle Gen5 high-performance TLC drives [ and a ] second hyperscaler and are on track to complete qualification at additional hyperscalers over the coming quarters. With BICS8 TLC solutions soon thereafter. This product is driving significant revenue growth across our data center portfolio, which was up 64% sequentially. Our BICS8 QLC storage class product, code named Stargate, continues advancing through qualification with 2 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 and AI adoption across PCs and mobile devices drove richer configurations and higher storage content per device. In this allocation environment, we are partnered 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 state 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 [indiscernible] 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'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 BICS8 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 will 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 center, 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 cyclicality of our NAND business, creating higher average long-term margin terms.

In the December quarter, we experienced a clear and significant improvement in market 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 prioritized 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're evolving how we define strategic engagement, prioritize customers with multiyear supply frameworks and share 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 [ big ] transition. Our investment posture remains focused on serving attractive sustained demand and healthy profitability levels. Any material increase in capital deployment will 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 3 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 share commitments that improve the profitability 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 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 million to $2,650 million. The revenue over-delivery came from higher prices across segments, which strengthened during the quarter.

Bids 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% and 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 per dollars came in as expected, reinforcing margin improvements.

In the second quarter, we incurred $24 million in start-up 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 represent 13.7% of revenue. This compares favorably to our guidance range of $450 million 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 [ $150 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 $255 million and represent 8.4% of revenue. Earlier today, we announced that we have reached an agreement with Kioxia to extend the Yokkaichi joint venture through December 31, 2034. With this extension, the Yokkaichi and Kitakami JVs will have the same expiration date. Building on more than 25 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 NAND technology that powers the world's infrastructure. As part of this extension, Sandisk agreed to pay for the manufacturing services that Kioxia will provide, enabling continued availability of product supply, a total of $1,165 million. This amount will be paid between calendar years 2026 and calendar year 2029. The cost will flow through our cost of goods sold over the next 9 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% 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 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 meaning 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, PC, smartphone, 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 center is 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 pre-existing 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 Instructions] The first question will come from Mark Newman with Bernstein.

Congratulations on fantastic numbers today. Really great numbers, especially the third quarter guidance. So Clearly, what's happening is that prices are rebounding extremely unprecedented rates. I guess my question is going to Dave's comments at the beginning. How are you thinking about long-term agreements? What -- obviously, there's close and comps in long-term agreements because long-term agreements lock in the prices. When prices are going up so fast, you actually don't want some of the long-term agreements, I guess. But I guess I'd just 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 would be great.

And if you could also just touch on the supply-demand balance longer term if -- in this very, very huge, what seems to be quite a sharp undersupply situation at the moment, if there's any, any plans to be adding supply? Or how you think about? That would be also great.

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 BICS8 node, which we've started ramping now and continue to ramp is just a fantastic node. The performance, the QLC performance, the 2-terabit [indiscernible]. There are 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, which that's going to continue for now another decade. That's enabling very strong enterprise SSD portfolio. This is something we've been driving for a while. I talked last quarter, we're going to see growth of that throughout the fiscal year. We saw, I think, 29% sequential growth in the first fiscal quarter. Now we just saw a 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. It's kind of a bit of 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 people like FIFA, which could be the biggest event of this entire year. We have great co-branded products there. we look at our consumer business, we saw a 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 lost margin business for now the highest margin business, and that provides a significant tailwind to the business as well. And 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 obviously, it's great to be in a strong pricing environment.

Moving on to LTA's. I'll talk a little bit about this. And I know Luis will have some great comments about this as well. So 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 mean, 1 thing to note on 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, what our supply plans are. We're investing heavily in this market. We're investing hundreds of millions of dollars of R&D to push the road map 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, great market, and what's helping is we're just not getting enough visibility into what the demand side, what the demand really is. I mean if we look at data center, we've had 3 forecast cycles now. Last quarter, we went from mid-20s to mid-40s percent growth in that market. Now we're looking at high 60% exabyte growth in that market for I think our customers realize this, especially in the data center market. Their numbers are big, what they're going to need in '26 '27, '28. We're even talking some of them about '29 and '30. They're doing their own planning, the amount of exabytes they're going to 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. But we want to get the long-term growth rate, aligned behind where the long-term sustained demand is, to your point, at attractive financials.

So let me turn it over to Luis with that.

Yes. I mean, 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. And we're making significant progress. So we're making significant progress with several of our customers who are very -- 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 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 would be a value accretion -- should be value accretive and not the opposite.

Great. And any quick comments on how you're thinking about the price demand longer term? And any flexibility to add supply?

Yes. 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 -- 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. I mean we get demand signals for our customers in all fairness on a yearly basis. But we really only transact that. We negotiate price every quarter. And 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 center, I think the data center customers are more willing -- as Luis said, it's across all of them, but I think the 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 do we come up with a -- what are the business practices we can peron that? And 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 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.

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

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

Yes, 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 of 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 elaborate 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, '27 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 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 kind of technology that this profound and is being deployed at this much scale. We're going to continue to see innovation and evolution of the architecture. So we're going to stay very close to that. NAND is just going to be a big part of that architecture. It's the most scalable storage -- semiconductor storage technology or most -- maybe the most scalable semicenter technology at all. And 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 '27 and '28.

Great. 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 forward?

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 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 up the mix of QLC. But at this point, I think the overall market in our portfolio is -- it's tilted towards TLC.

Thank you. Great numbers.

Thanks, Joe. Appreciate it.

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

I guess first question, is there a way to quantify incremental demand for NAND related to AI infrastructure build-out? Not including KB cash, but 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 at '26, '27, '28?

I think the best proxy we have for that right now is C.J, is just what we're seeing in exabyte demand in the data center. As I said earlier, I mean, 2 cycles ago, we were looking at call it, mid-20s exabyte growth in '26 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-60s exabyte growth in data center as our forecast and that doesn't include any CapEx raises on this earnings cycle. So significant increase just quarter-over-quarter in demand. And we think most of all of that is driven by AI, obviously.

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

Yes. 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 this quarter, and we'll continue to take that down. C.J, our priority is to continue to invest in the business as we have been winning and to build prudent cash reserve. This is a business where having cash on hand is helpful. We're not going to waste your cash, don't worry, but we're going to build prudent cash reserves, and we'll continue to reduce our debt. And at the right time, we'll continue to expand and give you an update. But so far, those are our priorities.

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

First of all, on the supply side, I was wondering if you could give us a snapshot of the factory network across Yokkaichi and [indiscernible] 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 big growth outlook, how do you expect to sort of ramp your -- the overall kind of JV factory network over, say, the next, say, 18 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, we have -- as you said, we have 2 major sites, Yokkaichi and Kitakami. I think a big step forward this quarter is what we announced in extending the JV agreements around Yokkaichi to coincide with the agreements in Kitakami. So they now are all run through 2034. So that gives us really good supply assurance for the next 9 years, and we'll keep talking about what happens after that. But this has just been an unbelievable relationship with Kioxia for decades now, and it's going to go on quite some time into the future. So we 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. We got past that a couple of quarters ago. There may be a little bit of the memory of 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. We just opened the K2 fab, and so we have additional space there. I think we've just JV, led by Kioxia, on this part, 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. As far as the rest of the industry, it's -- 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 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 -- 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 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 a final comment, all this is factored into our numbers when we talk about supply and demand.

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

Yes. 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. 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 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 BICS8 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 BICS8 QLC performance has been extremely well received. So we continue to see very high interest in that -- those products and work through the qualifications. And we'll look forward to continued growth, and it will 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.

The next question will come from Mehdi Hosseini with [ SIG ].

Yes. Two follow-ups for me. And this is for the team. When I look at your guide for the March Q3 fiscal year, assuming low-single-digit bit growth, there is 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 premium that you capture or economic value that you capture. Is there any way you can help you understand? Because just thinking about the ASP absolute may give us a wrong impression. So any help you can provide would be great. And then I have a follow-up.

Yes. So the mix impact we have are less related to changes in our end markets 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 much better gross margin as a result of that. So there is a mix component in that, to your point, [indiscernible] and will -- and there is some pricing as well. We believe the market. Go ahead -- sorry.

I was just going to say, just a quick follow-up. Is there any mix breakout you can offer us so that we're not so fixated with the run and ASP trends?

Yes. I 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 1 question for David. Look, we're sitting here and there is increased shortage 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 a more urgency? Why aren't your customers, your customers' customers 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's going to wait until second half of this year, that means the shortage is going to intensify, unless the the SSD exabyte growth of 60%, maybe just a short lived. How can I reconcile the 2?

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, right? I mean you're talking about a market that's operated, the way it's operated for arguably decades. And the way that market is 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 try to get it right on how much we supply and often get it wrong. And when you get it wrong, the economics is just completely crater. And 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 can talk a lot about. But like to change behavior on something you've been doing for a decade and just wake up and within a quarter, it tied to completely change the business practices in an industry is almost like really, 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, this is a market that's been dominated by -- or not dominated. But when the primary customers the Smartphone, PCs, what I talk about is I kind of view that as what's 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 that's part of a very sophisticated AI architecture, and I need extraordinarily high performance, and I need innovation, and I need a specific enterprise SSD that fits my configuration is kind of way on the other side of, I just need the same product and I can plug in any 1 from 5 different suppliers. That's not -- 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 some that are coming along. But 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 this big, this many players, this much business transacted every quarter to see it change as fast as it's changing, it's been remarkable, actually.

[Operator Instructions] The next question will come from Wamsi Mohan with Bank of America.

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 as well as any capital return plans or M&A plans?

Yes. So let me try to unpack the OpEx question because I thought maybe somebody was going to ask. So we made a recurring change to our -- 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 costs as they were incurred, right? They were period cost. And this is the nonrecurring element, which is a gain of -- a onetime gain as we move from period cost into inventories as we're now selling this qualification units. Does that make sense?

Yes, and that's clear.

So we're going to get an ongoing saving as we charge our customers for best qualification units, and there is a onetime benefit as we do the transition and we go through inventory.

On the capital allocation question, 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 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. And we're fully funding the business. Now we're funding the business from a BICS8 transition, we're funding our OpEx, where we feel that we're properly funding the business itself.

Are there any underutilization charges in the guide?

No. Not only guide and not all [indiscernible] either.

The next question will come from Vijay Rakesh with Mizuho.

David and Luis, awesome quarter here, just a 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 different segments from the data center to retail to consumer [indiscernible]. If you can give us some color.

Yes. So the bit growth that we're seeing across '27, '28, it's consistent with what we talked at the very beginning of February. We're still talking about mid- to high teens bids growth every single year, unless we see that, that demand is very 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 bids 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. 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 markets. Prices go up pretty much across the board.

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

Congratulations for the very good quarter. Turning back to road map. I think you -- so now your data center mix has reached 15%, and [indiscernible] now increasingly being attached to AI compute. So I think it's creating new requirements for performance. So are you -- can you update with us your production road map to meet with the new [indiscernible], I think there are SSDs, and you have engagements with the HPF. so how those new products look like?

Yes. 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. So you're right. The -- 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 a 64% sequential growth. So we continue to see really strong pull for those high-performance products. As I said, we're -- we feel like we're extremely well positioned as we start to migrate those to BICS8. But there's a whole bunch of new innovation going on. As you said, there's -- I think the innovation engine is alive and well across the whole industry, which is how are we going to satisfy the demand for the storage of AI. Models get bigger, more tokens get generated, cashes get bigger. This is naturally saying 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 is, of course, something you could imagine we're working on. we had our own ideas about this 2 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 trademark 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, and we continue to work on it, by the way. We're very, very happy with the progress. We're deep in conversations with customers on use cases. We're designing the NAND dye. 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 I think all of this is just an example of there is just tremendous opportunity for innovation as the AI architecture continues to scale. And it's just incredibly exciting that we are just in the very early innings of driving this technology and scaling it around the globe. And we have the industry -- the technology industry may be large is like incredibly well positioned to do that. They're some of the most largest most capable technology companies in history, they're obviously putting an enormous amount of resources about how they drive this technology and scale it around the world at a very rapid pace. And 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.

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

This is Michael [indiscernible] 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, has partial or full prepayments been a part of I guess, any finalized agreements or -- is that something that we should expect to you kind of alluded to it.

Yes. We've signed and closed 1 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 1 and several in the queue.

The next question will come from Asiya Merchant with Citigroup.

Great results here. The 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 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 the back half of '26 and into '27 ?

And if I can squeeze 1 in for Luis as well. Structurally, NAND is going through this dynamic where obviously 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.

Okay. Thanks. So look, a couple of thoughts on this. First of all, on the consumer market. I'm going to -- 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, 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 with the value of the Sandisk brand. So we think that's a great business and will continue to be and we'll continue to invest in it. In some of the other markets, like Look, I think this is 1 of the things -- I was looking at the numbers, obviously, as we were preparing, if you look -- just look at '26, we've got PCs at 285 million units. I don't think we would have -- 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 effects of that of some declines in units I think we're still getting very strong signals from our customers in those markets of wanting supply. I mean, very strong signals on a continuous basis. And we're working with them as closely as we can. I think in this in this period of the market, it's extremely important to stay close to our customers, and we're doing that. But 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, all of a sudden component, mix went way up because prices went way down. And all of a sudden, 1 terabyte drive became quite inexpensive and all of a sudden 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. And 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 been we've invested an enormous amount of R&D over the last 25 years to get to where we are, and we have invested an enormous amount of capital to get to where we are 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.

Yes. And I think the way I would answer your question about through-cycle margins is similar to where David left it, which is in a high CapEx, high R&D industry or company. Frankly, 35% is not where we would like to be, right? 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, 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.

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

This is Matthew Payne on for Tom O'Malley. Just a quick 1 for me. Apologies if you mentioned it, just hopping around on the call. Wondering if you said the SSD percentage of total bids in the quarter.

I don't think we said that, but it's like in that high-teens range.

The next question will come from Blayne Curtis with Jefferies.

I just want to talk about the model. Obviously, I mean, doubling sales over 2 quarters. I want to just make sure I understand how you're going to handle OpEx. I think the percentage of revenue is now in half, right? So are you going to accelerate the way you look at investing in R&D and then tax rate as well with the 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?

Yes. 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 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 that, as I mentioned earlier, it has a nonrecurring benefit. If you want to quantify that number is around $35 million. So you can use that number for your modeling.

We think OpEx should not go significantly higher from where we 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 efficiencies all the time. And how do we make sure that there is no waste in the system. So a long way of saying 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've consumed very quickly. Now 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 14%, 15% kind of percent on an ongoing basis. That's what 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.

All right. Welcome back to the Barclays Global Tech Conference. I'm Tom O'Malley, semi and semi-cap analyst here. Very pleased to have David Goeckeler and Luis Visoso from Sandisk. Thank you for joining.

Great to be here. Thank you, Tom.

Yes. So why don't we start. How the...

If I just read the safe harbor quickly. We'll be making forward-looking statements in today's discussion based on management's current assumptions and expectations, including with respect with our product portfolio, business plans and performance, market trends, and dynamics and future financial results. These forward-looking statements are subject to risks and uncertainties.

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 be making reference to non-GAAP financials and a reconciliation of our GAAP and non-GAAP financial results can be found on our website.

Perfect. So how has the quarter progressed thus far? What are you seeing in terms of demand trends and customer engagement?

So I think we came into this quarter a very dynamic market. I think things were changing very rapidly from this kind of moving into more of an allocation mode. And I think we've seen that -- we've definitely seen that continue as we go throughout the quarter. Things have gotten stronger. The market continues to be very dynamic, move very fast. I would say, the big picture, what we're finding that our demand side is very clearly in a position where they value supply over price.

And so the market is working the way you would expect, and supply and demand is constantly being rebalanced in that equilibrium point -- wow, that was hard. I mean it's early in the morning -- that point is in a constant state of flux as the market continues to kind of absorb where we are as far as the supply-demand balance.

And I just wanted to interject because you saw the news last night, obviously, an earthquake in Japan. You have facilities that are nearby. Any comment on impacting to the fab or any production facilities?

Yes. No real comment on that. Team is dealing with it. We'll update more. No immediate impact into what's going on. It's -- they deal with these issues and there are some tools that need to be restarted, and they're working through all that now, but we don't expect any near-term impact on output, and we'll update more as we work through the whole process.

Got you. Helpful. Thank you for going off the script there. In terms of the gross margin side, so you talked about demand trends. You talked about through-cycle performance of about 35% at the Investor Day. Just given the current dynamics, could you talk about how that may change that outlook? Could you get there a little bit faster?

Yes. I think we're -- I think what we're seeing in the market right now, and I'll ask Luis to comment on this as well because he's very, very close to this. One of the things I think we did when we set up Sandisk is we moved the kind of all the pricing and allocation organization to Luis, which was -- I think was very -- a great move. So he's very close to this on a day-to-day basis. But I think what we're seeing is the market restructuring, right? We're seeing -- we're not necessarily -- I think we want to frame this in the context of the past. It's a cycle. It's a super cycle.

But I think what's really happening is the market fundamentally changed coming out of the downturn in '23. There is a lot less investment in capital because there was just -- we had to come off of this high of this idea that there was continuous 30% growth, 15% cost downs. That's not the reality. Growth is going to be more like mid-teens on an ongoing basis. Cost downs are not as much as they were in the past.

So the market has been kind of resetting and restructuring. I think we're on this -- we certainly see that the market really values our technology. I think one of the things -- I think one of the reasons we're part of this company is we really like the market. It's a big market, very diverse market, lots of demand drivers. NAND is used in almost every single useful technology device in the world.

We're also seeing this structural change where the data center market in '26 will become the biggest market -- biggest NAND consumer after, let's call it, 15 years of mobile being the biggest demand consumer. It doesn't mean mobile is going down. That continues to grow as well. PCs continue to grow, devices continue to grow. But now we have this huge other market that is getting very, very large, and we'll just grow more as we go forward.

And I think the whole market is kind of trying to digest this in real time and figure out what is really the marginal value of this product. And I think we're -- kind of the answer to the first question, that equation is changing almost daily as we figure out kind of how this is going to -- how this market is going to settle out. So Luis...

Yes. No, I totally agree. And I think your question on can we get there faster? We guided to be above that now. So we're getting there as fast as possible. Now we guided 35% to be our through-cycle model, right? And we had 3 quarters below 35%. So we clearly need to average higher than that. And if you look at several years back, we've been clearly below that. But as David said, the market dynamics are changing. And we're, frankly, 35% is what we aim to deliver, but we need to do better than that. We need to generate our return for our investors, and we believe that getting above that is super important.

So if I look at memory in general, DRAM tends to be a little bit more straightforward for the average investor because you see the accelerator. You see how much DRAM and HBM is around that accelerator, and you can do some math around how much new or incremental demand is being brought to the market and then you can do some math around supply/demand dynamics in DRAM.

NAND is a little trickier, where you don't necessarily see NAND or all of the NAND that's needed for all of these accelerators sitting in box. It sometimes sits at a box at the end of the road. There's some that sit in that box, but the math is just a little bit tougher to do. So you have these 2 dynamics going on, right, where traditionally the largest exabyte contributor to the data center, the hard [ test ] drive guys have talked about not committing as much CapEx to the market.

You're seeing them just kind of stay at a similar slower trajectory of supply than historical. And then there's also this data center boom in which I'm sure that you're seeing some tailwinds for NAND as well. So how do you split out how much of this tightness is really related to the demand side? Or how much is related to tightness given one of the largest exabyte providers is slowing down?

So there's a lot to unpack there. So let me start to work on it. So first of all, I'm going to quibble with you a little bit. I don't -- the words like tightness are not in my vocabulary. We have a market. There's supply and demand and the market then rationalize how those things equal out. Any market, you could increase supply and you would change -- or you could decrease demand or whatever, and you would change that equation, right? Just because that equation of where it balances is changing, doesn't mean it's tight.

It just means we're figuring out the balance point and the marginal value of our product, right, before we see excessive demand destruction or something like that. So that's the starting point. So look, I think where we're at in this industry is rooted deeply in what happened in the downturn, right? I think the industry kind of had a way -- I'll just talk about us. I'm not as comfortable talking about the industry because I don't run those other companies. But for our company, I think that there was this idea that we continue to drive the cost of our product down. It increases the TAM that accelerates the growth rate.

We're an industry or a business where we have a lot of R&D productivity, a lot of R&D productivity. We can introduce a new node, and that node will deliver an enormous amount of new product to market. And so we got to the point, especially we're a 3D technology as well. I mean the NAND story from an R&D perspective is just spectacular, right? It is 3D technology where we can continue to deliver more productivity to the market, and that just got kind of out of hand, right, where that new -- those new nodes got extremely expensive, 3x the CapEx is what it was in the 2D era. They became much more productive. And the amount of cost downs you got out of those nodes was just not as much.

So this idea that I could just continually fuel the market, drive the cost down, the market would absorb that and my economics would be okay, that model spectacularly ended in '23 because you got too many bits, not enough cost downs, too much capital is what that strategy led to, and that's how the industry had the worst downturn, maybe ever, tens of billions of dollars of value destruction.

So now coming out of that, I think there's a different way of managing the industry, which is be much more kind of thoughtful on the supply side. Just because we can launch a new node doesn't mean we should, right? The market will not absorb all of this additional supply. The cost downs are not significant enough to rescue your economics in those deep downturns.

So we have to be more thoughtful on supply. I think that's what we've been doing. And when we look around the industry, that's what's been happening. And we're still investing enormous amounts of capital to drive mid-teens percent growth in the industry. That's a great industry. $100-plus billion industry growing at a mid-teens rate. That's a great industry.

And so that's where all of -- that's kind of we're 2-plus years into that way of running the business. And we're starting to see the results of that now. Like literally, over the past 10 or 12 weeks, we're starting to see that shift in how people think about our technology, how they procure our technology, how do we have conversations with our customers about future investments. And that's where this is rooted in my opinion.

And then you have all kind of second and third order things. Has data center demand gone up? Yes. I mean we -- it wasn't that long ago, we were projecting, call it, low to mid-20s growth in data center exabytes in calendar year '26. Now we're projecting 40, right, something with a 4 handle on it. And we're projecting that market becomes the largest consumer of NAND. That's fundamentally changing the way the dynamics of the industry work. It's new customers that are the biggest buyers. They have different ways of thinking about their procurement. Quite frankly, if you look at their demand numbers in like '27, '28 kind of time frame, you project forward what's happening, the numbers are significant amounts of demand.

I think they're thinking about it differently. And so I think all that is happening at once. The market is trying to digest that, and that's where we see this kind of world we're in right now as that gets sorted out. And I think it's going to take a while to sort that out. And I think it's going to have far-reaching impacts on the way the industry works.

And I don't think we know what all of those are yet, but I think one thing we do know is we're producing a very valuable product that is a part of every part of the technology stack and getting back to a little bit of your question, AI is just another part of that, right? Clearly, the models are getting bigger. The models are getting bigger, you need more storage. The context windows are getting bigger. The caches are getting bigger. And that architecture and then you have the limited scalability of DRAM, and so that architecture has to extend now into NAND.

NAND is the most scalable memory technology out there. It's maybe the only scalable memory technology out there. So it naturally has to become part of this equation as this architecture continues to mature and the demands just get bigger and bigger. And that's happening, and that's just another part of this demand driver into this equation. And you're right, it's not as easy as saying, there's this many GPUs, therefore, I have this much HBM. It's more complicated than that.

And we're all still sorting out what those demand drivers are. But when you add it all up, that's how you go from like a market that's as big as it is. We'll be 35% plus of the entire NAND market in '26, growing at something with a 4 handle on it is pretty spectacular result, and that's what's happening underneath there.

And I don't believe it's because it's a substitution for HDDs. I just don't -- that doesn't make sense to me, quite frankly. I think it kind of logically like -- if that were true, maybe that is -- would explain what's going on, but I think there's a bunch of other reasons why that wouldn't be true. And I think these other demand drivers are more sustainable and more real.

So it sounds like a structural change in the way that the industry is viewing NAND and the way that you are positioned in this ecosystem. I guess one thing that comes with that change is conversations around long-term agreements with customers. Like let's not use the word tightness, but let's talk about structural importance in the industry. If you are structurally important, customers are going to want to get your hands on your product earlier and they want to have assured supply for longer.

So maybe talk about what you're seeing in terms of LTAs or longer-term agreements with customers? And where do you think the right balance is? Is that a quarterly kind of conversation? Is that a half year or a yearly? Anything there would be helpful.

Yes. I would say it's a little bit premature to get into the details. We're in conversations. I think a few things I would say is some big customers have reached out to us. It's not the other way around. And what they are basically saying is they value certainty of supply, which is critical, right? Because that's their foundation of their business model is they require the NAND to create this $1 billion that they generate as a franchise. So more to come, but we're very encouraged with the conversations overall and where the industry is heading.

Yes. I think you're getting to the right way to think about it, which is -- and I think the changes on the industry could be potentially profound. I mean this is an industry where essentially on the supply side, we're making 10-year capital commitments in fabs, in R&D, enormous amounts of ability to supply the market. And again, even in the current situation, we're still supplying the market 15% growth every year for as long as the eye can see, we talk about our capital plan to do that, our R&D plan to do that.

We're working on new nodes. The demand side essentially shows up 4 times a year and kind of runs an auction on what they're willing to pay for that. So you have this massive like we're making 10-year decisions. The demand side is showing up essentially 4 times a year and deciding to make a commitment or not and at what price. And I just think as more people come into this market with different business models, and they look at -- and also very large demand drivers. They look at this situation and probably go -- probably not willing to bet my franchise 4 times a year that I can get infinite supply to NAND. And maybe we should think about this a little differently. And we're completely open to that conversation. Exactly where it's going to land, I think we're going to find out, right? I think we'll find out.

Well, all this leads to the conversation of, if you are more critically important, if the ordering process doesn't look like we'll check in every quarter, and we'll see how much we can get because it is more strategically important. It begs the question of if you have line of sight to a better demand profile over a multiyear period of time, it would beg the question of capacity and potentially increasing capacity, and you guys have been pretty clear thus far around your plans for capacity.

But maybe talk just briefly so that the listeners can understand what ability do you have to add capacity today in terms of existing space? And what are your feelings towards increasing that capacity? Would you need to have line of sight to some more firm orders? Is the market kind of dictating a different trend than you have historically? How do you think about the addition of capacity and what you would do in the instance?

So we think about the capacity in that time frame we talked about, right? I mean, we have to get -- if you build a fab, you turn it on and ideally, you don't turn it off because it's very expensive asset. And so we think about getting a return for that over a decade. And so what we do now is we look at the market and we say, well, what do we think the long-term growth rate is? And we want to supply the market, right? We want to stay very close to our customers. And I don't want to be unfair to our customers either.

Our customers give us commitments to say, look, this is about -- this is what my demand is going to be for the next calendar year. But we actually don't lock in on supplying that at a price, and we do that every single quarter. So we have views of what they need for, let's say, a year. And then we do our own analysis of where we think the market is going, and then we put a capital number behind that to supply the market. And as I said, clearly, pre-downturn, there was too much capital going into the business and too much R&D productivity going into the business, there wasn't sustainable profitability.

And so you're asking a question of, well, what would it take to increase from mid-teens growth rate to something higher. And it's very clear, you would have to get conviction that not demand next quarter or 2 quarters from now or even next year is higher, you would have to get conviction that demand on a sustained basis for the next decade is going to be higher. And certainly, I think the demand side can help with that by giving more visibility into what that demand looks like and what is the commitment to that level of demand.

And I think one of the things that's very important right now is to stay very close to our customers. We have great relationships with all of our customers. We want to be a very trusted -- we are a very trusted partner to all of our customers and kind of understand what that equation looks like, and that's exactly what we're doing.

Another trend we're hearing in the market today is with bits needing to be allocated to certain areas, particularly the data center, there's concern that just given the supply footprint today that customers in PC, smartphones, consumer electronics could get shorted into next year, and you're starting to hear people talk about potential limitations to output. Do you guys have any thoughts around the industry's ability to meet demand trends into next year? Obviously, right now, I think the general expectation is for low single-digit growth across PCs and smartphones. But anything that you guys would comment on in terms of those other end markets and their ability to grow?

Yes. I mean, overall, we're committed to the 3 end markets that we have, right? We have a very nice position on the consumer market, where -- which is great on a downturn. It happens to be the most profitable market there is. We have close relationship on the edge with PCs, mobile, gaming companies, and that's something we definitely value. And we're growing in data centers. So I think over -- our strategy is to maximize value over the short, medium and long term, and therefore, optionality in the 3 segments is very important. So we're not going to dramatically move from one end market to another. We want to penetrate more of the data center, but that's -- we will continue to be committed to the other end markets.

Why don't we switch to the technology side. So I think last year, we were up here and talking about the transition to BiCS 8. I think you pointed to 40% to 50% of your portfolio by the end of the fiscal year. Can you talk about the -- where you are today in that transition? Are you on track? And then in this environment, right, where clearly the structural demand trends are a bit different and very much in your favor. Does that change your thoughts on the technology transition at all? Does it accelerate them?

So let's go to the first part of the question. Yes, we're very excited about BiCS 8. It's a great technology wafer bonding, bringing it to market. The QLC performance that we're seeing, the power efficiency, it's just a really good note. And this is the foundation of the NAND business. We can talk about everything else, right? We can talk about what markets we're in or what controllers you're building for SSDs and all that kind of stuff. Whether a client or enterprise, if you don't have a great node, then it's really hard because you're building on top of something that's not sound.

And this is really the magic of the JV. Between us, we're the largest provider of NAND in the world. And that means we can invest more than anybody else in our R&D, and it shows up in both the quality of the product and the capital efficiency, where we're able to get that incremental bit in the most capital-efficient way because of this R&D prowess that we have.

And so BiCS 8 is a fantastic node. We ended last quarter at 15% of the portfolio. We've talked about at the end of this fiscal year, it will be the predominant node, which is 40% to 50%. That ramp is locked in. When we talk about the CapEx plans that we have, we have to order tools and all that stuff way in advance. So that plan is kind of there, and we look forward to ramping that throughout the year.

And then I think you alluded to it earlier, just the idea that NAND in terms of the crossover, let's just start. Historically, you've seen a lot of NAND crossover products, and there hasn't been much success. You're seeing now with accelerators, this -- the leaning on HBM. So -- you've effectively seen HBM become such a pivotal point in the market that when you have shortages, there's no other area in which companies have been able to grow. So you see NAND, you see products that you can introduce in NAND that can alleviate that stretch. You talked about HBF in the past, right?

Is HBF something that is going to be in the market in the next 12 months, in the next 24 months? People have pointed to it as potentially alleviating the stress of HBM. Why is this product going to be the one that actually works when historically, you've seen some of these crossover products kind of come to market and then go away?

So first of all, I think we'll start with the premise that we're in one of the most exciting times in many generations from a technology of view. And it's early. It's like super early in this -- this whole idea of introducing AI. It's just like magical what's happened and what's happening before our eyes. And this is one of the things I learned in my last job where I ran the technology for the Internet, but it takes a long time for technology to penetrate the world. The world is a big place, right? So we've got a long way to go on this.

And this is like just a complete incredible opportunity for innovation, right? You don't just take the architecture that you have today and just linearly extrapolate it for the next 20 years. This is an opportunity for people to come in and how do we rethink this architecture, how do we bring new technology to bear that's either more scalable, we can move faster, how do we reimagine some of these -- the way things work. And that's what HBF is really about. And I think we're seeing this in the architecture today where there's lots of approaches to this. There's the high IOPs enterprise SSD because that SSD is becoming more part of the AI architecture. It needs to be faster. We need faster access to that data. We can't store it all in HBM.

DRAM does not have the enviable scaling principles that we talked about earlier of NAND. So you've got to bring NAND into this equation. That's happening in real time. HBF is a way to look at the inference side of it and say, hey, inference is a more deterministic type, it's not training, It's more deterministic, kind of read-based application.

NAND is a very dense technology, as we say, very scalable 3D technology. Models are getting larger. So the amount of data is growing. We have a technology that supports a lot of data in a small footprint. So I think the insight was clearly a couple of years ago, hey, if you're a NAND designer, you've been told your whole life, figure out how to get more density into your product. Just give me more density, give me more density at a lower cost, right? That's been your job for literally like 25 years.

Like 2, 3 years ago, some very clever people in the organization went to those same NAND designers and say, hey, build me something that is higher bandwidth. Like how would you redesign this technology where I can get higher bandwidth out of it. I'm not going to create -- nobody is going to create DRAM. We're not creating a plug and play. But can I change the characteristics of my technology that now starts to fit this new application space. That's exactly what we're doing. And that shows a lot of promise.

We're talking to customers about how they would integrate that technology into their road maps. This is not a component play. Like we're not just going to build a component and put it out in the market and then somebody is going to plug it in. This is a systems play. You got to work with everybody else in the ecosystem and say, hey, I'm going to build you something. What if I -- you go to the person designing the device or the data centers, what if I give you a technology that did all these kinds of things, right?

I gave you way more density, more storage than you possibly even thought you could get at these kind of specs as far as bandwidth, endurance, all these other kinds of -- what could you do with that? Like, oh, if you give me that, well, I can design my system this way. And now I can deliver this great device or this much more scalable or more cost-efficient solution to the market. That's what HBF is at, and we're in that conversation with customers about how they would integrate that in. And that's an iterative process, right?

You're not just going to design it and give it to you. You're going to have to like go back and forth and iterate, how do we get this, how do we change the specs. And we're in that process right now with customers. We'll have the memory die in late '26, the second half of '26, obviously, you need a controller on top of that memory die that's going to tie into the system. We're designing that. That will be available in early '27. We have a relationship with Hynix about how we do the specification of that controller integrates into the system.

That's how you create a market. It's hard to create a market by yourself as a supplier. But when you get other suppliers that come to the table and say, hey, that's a good idea. Let's work on that together. That helps build momentum. And that's where we're at.

And as we progress in this process and we get more certainty around that, we'll have more to say about more specifics around the questions on timing and TAM and business case and all those kinds of things. But we think the technology is very exciting, and we think that the market we're playing in is just incredible. And it's -- we've got a long way to go on this, and it's like wide open for innovation. Obviously, the innovation that's going on in those markets right now is spectacular. And I think bringing the most scalable memory, semiconductor technology deeper into that architecture is a welcome development.

So I think the highlight of this conversation has really been a change in the industry dynamic, a change in the importance of NAND more broadly. Maybe just to conclude things here, Luis. In terms of your capital return strategy and priorities, does this change anything just given the business trends in the broader market?

No. I mean, as we said before, we want to be very prudent, right? We're in a transition in the industry. We've been paying down our TLB. We started with $2 billion. Last quarter, we closed at $1.3 billion. We continue to make progress. So we're very encouraged, and we'll be very prudent and take our time so that we make the right decisions here.

Very helpful. Well, I appreciate you both being here. Thank you so much.

Thanks, Tom. Appreciate it.

Okay. Good afternoon. I think this is the last session. Maybe there's one more. But I'm Tim Arcuri, and I'm a semi and semi equipment analyst here at UBS. And we're very pleased to have Sandisk with us. We have David Goeckeler, who's the CEO; and we have Luis Visoso, who is the CFO. So thanks to both.

Thanks. Great to be here. Thanks, Tim.

Okay. So first of all, let me just say congratulations because as last time you and I talked before, you split the company up, I was a bit skeptical of the value...

Oh, come on, Tim...

Obviously, I've been completely wrong. So...

Do you mind if I read the safe harbor...

Yes, please go ahead.

We can celebrate by reading the safe harbor.

Great. We'll be making forward-looking statements in today's discussion based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends and dynamics and future financial results. These forward-looking statements are subject to risks and uncertainties. Please refer to our annual report on Form 10-K and other SEC filings for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also be making references to non-GAAP financials and reconciliations of our GAAP to non-GAAP financials can be found on our website. Thank you.

Perfect. So let's talk about just the business in general. And obviously, things are very tight. Pricing is going up. Some of this is because of demand, but some of this is due to the strategy where you're investing as if supply to meet mid- to high-teens bit growth and unconstrained demand is more in the low to mid-20s, possibly even higher right now. So you're sort of purposely under shipping and maximizing margins through allocation. It's a similar playbook to what's being done at WD as well and has remained the case. So can you kind of talk about this?

Yes. So I think you got -- I think the way you framed it is right. I think this is a long-term kind of supply side the way this has played out. If you look back to the major downturn in the market, there's a lot of value destruction in that downturn. I think we came out of that downturn. We certainly did looking at our portfolio, realizing that we needed to be more specific on how we manage supply. I think that there was kind of a view in the NAND market that when the economics turned against you, you released a new node, and those new nodes drove better economics because they were lower cost and also expanded -- it also expanded the TAM. And I think the downturn was really that strategy kind of ending spectacularly as a business strategy because what has happened in the 3D era is these high layer count nodes very CapEx intensive, a 3x is CapEx intensive as a 2D era.

And also, more importantly, the relationship between bits provided per node and cost downs fundamentally changed. It used to be more cost downs, fewer bits and it's moved to more bits, fewer cost down. So this idea that you could release a new node, and that it would change the economics of the market actually inverted. And what happened is you ended up flooding the market with supply, which drove even more oversupply situation. So I think we came out of that downturn and we were pretty explicit about how we talked about this. We talked about the new era of NAND, how we were going to manage our portfolio. And it's -- we're going to be more prescriptive on how we manage supply. And we're going to manage supply for a mid-teens growth rate. This idea that the market was going to grow at 30% and cost downs were going to be 15%, like that was like ancient history at this point.

So we're going to manage for mid-teens growth. We're not going to talk about cost downs anymore because they're variable and they're not what they used to be, and you can't just model them so easily. And that's what we're going to manage to. And I think that played out -- you played that forward for several years. And we started seeing this probably in late '24 and '25, started talking about the market was -- we thought the market was going to be undersupplied through the end of '26. We saw some wobbles in that because of some -- the way the enterprise SSD market played out, which is a larger story.

And I think what you've seen over the last quarter is essentially the endgame of that whole strategy playing out, where inventory had been drained in the suppliers, inventory had been drained in the customers, and we're now just back to raw supply and demand. And we're in a very efficient, very liquid market, right? And markets are very good at equalizing and they do that through price. And so I don't view the market -- I personally don't subscribe to these terms like tightness and shortness and all this other kind of stuff, we have a market. And we have an amount of supply, and we have amount of demand and the market will equalize to what the value of that supply is, and that's happening at a very rapid pace.

This -- in the past, the skeptic would say that, that never really worked because there are enough NAND suppliers that 1 always wants to gain share. And so 1 is always going to invest to a demand trend line that's higher than the others. And so there would always be a disruptive force on the supply side. What's changed now? Is it because demand is so much higher than what everyone's managing supply to?

I just think that it's a big market, right? I mean, maybe when the market is a $5 billion market, you can like -- I'm going to use my balance sheet to distort the market, and I'm going to do all these things to change the dynamics. But we're going to be close to a $90 billion TAM. This is really a big market, right? So the idea that 1 person can influence it that directly, I just think that, that is -- again, the downturn showed that if you oversupply the market, everybody loses.

I mean we're the -- we have 1 of the smaller shares in the market, and we performed the best. So that strategy would have said the opposite should happen, and that didn't play out. So I think that this is a market -- my observation is, I've been in the market for 5.5 or 6 years, and has managed a bunch of other technology franchises before this. There's always like rules of thumb about the way things work. They're just not really true, and they're certainly not true anymore. And I think if you sit around waiting for that world to come back, it's going to be a long wait. I think the market is going to behave differently going forward than it did in the past.

So maybe on that front, can you talk about the decisions to add supply? What are the variables? I mean, I think maybe some of what's going on today is because the incremental clean room space is going to probably go to HBM. But if the margins keep going higher, then the margins in NAND are going to be higher even at an HBM. So for now, do you -- would you agree that maybe for now, the new clean room space, yes, you have a limiter on supply because people will add HBM capacity and not NAND capacity. But what are the variables when you think about adding capacity?

So I'll start by saying we add capacity every year, right? We're investing billions of dollars to add -- to grow the market in the mid-teens percent, right? And we have absolutely 0 commitment from people to buy that output. So we're already investing an enormous amount of money to increase supply in a market that we think is -- and we do that freely. We think it's a great market. I think this is a great business. It's why I spend my personal time here. I think it's why Luis spends his time here. We think this is an unbelievable market and the economics can be fantastic. I mean NAND is like a market that's extremely diversified, it's got tons of different kind of buyers. It's obviously every mobile phone, every PC, every tablet, now every data center, it's a spectacularly attractive market. And we invest billions of dollars every year to grow that market.

But you're asking the question, I think is, well, what would it take for you to invest for that market to grow faster? And I think -- the way I think about that is when we invest, we think about a 10-year return. We're building a fab that costs billions of dollars. And once we build that fab, we need to run it 24 hours a day and the output is going to come, and we need to sell it.

And the market is structured in a way today that on the demand side, they can show up every quarter and decide if they want to buy something. And so our time horizon is 10 years, and most of the buyers' time horizon is 3 months. And I think those 2 things need to converge a little bit more before we start talking about what we think should grow faster, perhaps the demand side should think about making commitments that are longer than 3 months at a time.

And I think that behavioral change will happen because I think that's a very healthy thing for a market. I think the market is -- I think that the market has been conditioned that I can show up at any time and by NAND. And I think that it would be a healthier thing to say, well, if we're going to actually grow faster than that mid-teens, which is a nice growth rate, right, a $90 billion market growing at 15% is an attractive place to spend your time assuming the economics are right. And we need to get the economics right to get -- to be able to continue to invest that money and not go through these huge episodic periods of losing money.

And so when people ask me, well, what is it going to take for you to get -- grow the market faster than what you're spending billions of dollars to grow it already, it's going to be more conviction that there's sustained demand. I can't do anything about providing more supply in the next 2, 3, 4 quarters. I have to think about making an investment that's going to pay off for many, many years. And so when we -- when I think we get the behavioral change in the market, that there's conviction all around that we're all willing to commit to that higher growth rate, then that would be a way to start to think about how to invest differently.

So really, you're talking about LTAs. And you have been talking more about that. How are those discussions going? And how many bids do you think can actually move in the near term under an LTA?

Yes. It's a little bit premature, right? But what we've seen is a few -- very few but very large customers have approached us, and they are interested in having a conversation. And they are talking about '26, '27 potentially beyond that. But it's -- as I said, it's premature to talk about more details because those conversations are just starting.

And I guess maybe you wouldn't even answer this question, but the parameters under which you would engage based on what you said because if you're going to go invest money under an LTA, you want to make sure you have guaranteed, a, guaranteed offtake and b, guaranteed price within a range.

Yes. I mean that's what Luis -- I mean, it's a little early to start talking about what the terms of that would look like. I think the fact that on the demand side, people are like lifting their head up and looking further down the horizon and saying, hey, I've got a big investment -- I have a big investment in my business, and it requires a big investment for you in your business, perhaps we should have a conversation that's longer than a quarter at a time. And I don't mean that in a negative way. I mean, we've discussions with customers today all the time, customers commit demand to us a year at a time, but that's conditional on us agreeing on the price every quarter, right? So it's kind of a structure that makes the market work. The market works fine, but it's not a structure that says there's really a level of commitment to actually buy something. That actual commitment to buy something happens every quarter. For the vast majority of customers -- some customers that there's small number of customers who do it on a yearly basis.

Got it. Maybe we can talk about China. That's another debate, obviously. Is the base case that China will be supplied domestically, but the rest of the world will not be supplied by China. I mean it seems like Hynix and Micron are basically exiting that market by and large. So are there opportunities for you in China? What's your thinking around that market?

Obviously, there's a very -- there's a great company in China that's supplying China. They're an enviable company, and they're investing heavily. And I think that's a China for China story, and I expect that to continue. I still think there's incremental opportunity there. But it's clearly a market with an indigenous supplier that's doing a very good job of supplying that market, but that's not a supplier we see in the rest of the world.

And do you think that other suppliers are deemphasizing China enough that it would create opportunities for you?

Look, I mean, it's hard for me to talk about what other people's strategies are. I just can talk about what our own strategy is. And our strategy is we certainly have some -- we do have great customers in China, right? That's a market we do participate in. But we participate in markets all over the world. We obviously have a huge consumer franchise that's sold in China. So it's a very important market to us.

Let's talk about demand elasticity. I mean prices seem like they're going higher for the foreseeable future. What does that mean to demand in your eyes, in particular for edge devices and for consumer devices? There's a lot of concern that demand is going to get destroyed by prices going up as much.

Yes. I mean it was really part of the first question we didn't get to because we were talking about the supply side. But in the midst of this like long supply story going on, we're investing to this mid-teens growth rate, and seeing that we're going to get better equilibrium of supply and demand. You also had the data center market over the last year coming in and continuing to up and up and up the amount of demand in that market. So you've ended up in a situation as we look at '26, where there is -- if you looked at unconstrained demand, it would be significantly above what we think actual supply is going to be. So there's clearly going to be a situation where there's -- not everybody gets everything they want. And I think that's -- I mean, that's a market. That's what a market is. I think that's what's happening. That was what I said earlier. That's what's happening right now. You have a market. Markets are extremely efficient. We're in a very liquid market. We're in a very big market, and that market is very good at matching supply and demand on a real-time basis, and that will continue to happen throughout next year as long as you have this situation where you have demand over supply, you're going to have that situation, and there's going to be markets where it's just not economic to sell into that market.

So would you say -- would it be fair to say maybe -- yes, maybe that happens, which is what you're saying, yes, maybe it happens. But maybe it's a little premature to worry about that because prices are really, if you look at year-over-year prices are up, but not -- I mean, not a ton. They're up a lot in the last 6 months. But in the last year, they're not up that much. So even if that were to happen, would you say it's a premature debate?

Well, I mean, again, I think that's well said. I mean, look, we're very optimistic about where the business is going. I mean, the business is very strong. I mean, on a real-time basis, business is very, very strong. But I mean, the quarter we printed last quarter was 29.9% gross margin, our through-cycle target is 35%. So we need to see some continued progress on the economics of the industry. And I think we'll continue to see that. I don't know, Luis, do you have any?

Yes. I totally agree. We're making progress. We're very confident we're going to continue to perform well, but there is still a lot to do.

Great. Let's talk about data centers. So the WDC, the split knife cuts both ways because obviously, the combination helped the old Sandisk gain share in data center. But there are some dis-synergies from splitting the company up, which seems like maybe it's in data center. So can you just talk about that? And I remember back in the 2022 Analyst Day slides, the combined company showed a 16% share goal in 2026, up from 8% share in cloud. So can you just talk about that?

I'll maybe give a little longer historical context on what I think as Sandisk being in the company. I think when you look at -- you think of kind of the pre Western Digital Sandisk. I mean just a fantastic company, a really great consumer brand, great IP monetization. I think looking back on the chapter of Western Digital was really the rise of the clients in the Sandisk portfolio. I mean we're like 25% client share. That's not surprising because we had the product that we were replacing in the client. The client started as -- the PC was hard drives that got replaced by a client SSD. It's not surprising that a company that had both franchises took advantage of that because you knew the customer, you knew the use case, you knew how to test it, you knew all the features. And so that worked really, really well. And throughout that, the company was working on making progress in enterprise, which is a very big prize and it's also very difficult. The most difficult market, most IP intensive from a controller point of view. And we've been working on that market very diligently. And I think you're going to see the chapter going forward is where we really start to make progress in that market.

We've spent the last 3-plus years building a new controller for the storage class enterprise SSD, this what we call the Stargate program. That program is just going in the qualification with the first 2 hyperscalers. We have a third hyperscaler that wants to start a qualification in '26. Those are long processes. There are many quarters to get through that, but the prize on the other side of that is significant consumption. So we feel very good about where the technology is. We feel very good about where the customer engagement is. And I think we'll see that as a -- as we go through '26, I think we'll see that story continue to get better and better.

And does the qualification of BiCS 8, the timing of the qualification, I mean these are the highest density, best performance products by some metrics in the market. So does that -- does the timing of that call cycle there also make you optimistic to gain share in...

It does -- I mean, that's well said. I mean, we've got a lot of -- you got to get a lot of stuff right, and it starts with the NAND itself. Like if you don't have a great node, it's hard to make it up for with the controller. And so we've got a great node in BiCS 8, Ultra QLC. QLC performance is extremely good. Power efficiency is very good. We're building a brand-new controller on top of that. And so we feel very good about where the whole -- the way the whole picture is coming together. On top of that, we have 2 terabit die. If you're going to build a high-capacity drive, the bigger die you have, you need fewer of them, so you can put -- build a bigger -- the same capacity and a bigger -- in the same footprint. So a lot of things have come together that took years of development to all arrive at the same time. The node, the die, the controller, and then the customer engagement and all that is happening right now as we speak. We're ramping BiCS 8. We're starting the qualifications of the controllers after many, many years of building it and it's going to -- it's a great product. And so we're super optimistic about it.

Great. Let's talk a little bit about your road map. You and your partner historically have a little higher hold density, and you don't stack layers as much as the peers do. And that strategy has worked out pretty well. It's been a pretty capital-light strategy. And customers see, as you said, pretty happy with BiCS 8. Does that approach run out of runway at some point and you have to start to join the layer race?

Well, I think we're always -- we know how to add more layers, right? I think that our strategy is you want to add a few layers as possible because more layers means more CapEx. And so I think this is really the -- really a story of the joint venture. With Kioxia, we're the largest provider of NAND, that means we have the largest R&D team, and we've been doing this for decades. And as you do this for decades and you have people that have been doing it and you can invest a lot, we can both if you will, punch above our weight because we have the same road map so we can invest more than we could individually. And so you roll that forward for 20 years or 25 years, you have this road map that we very focused on capital efficiency.

How do I get the most output for as little capital as possible? And to your point, the way you can scale NAND without getting into it too deeply because I'm not a NAND designer myself, but there's lots of ways you can scale NAND. You can increase the die size, memory hole density, which what you referred to, if you can get the holes tighter that means you can put more of them in the same footprint, which means you need fewer layers.

Our actual IP on the cell itself is very, very strong and very good, which pack them tighter. So basically, you're just continuing to iterate on that. The materials you're using, the way you're doing it, and that team is just really expert at that, and they've done a fantastic job. And I've even before the downturn when everybody was trying to -- the more layers you have means you're ahead, I've never believed that. I've never bought into that. It's all about CapEx efficiency, delivering the most bits you can in the most economical way. And I think our teams between Kioxia and Sandisk are extremely good at that. And there are -- we're working on multiple generations into the future on driving that road map. So we feel -- the fundamental technology, which is the basis of the business, if you don't have a strong foundation, the actual NAND node itself is the foundation of the business. That is very, very solid. We feel very good about that.

Great. I wanted to ask about high bandwidth flash. Inference is making it potentially more interesting. You were the first to present it, but now Hynix is more vocal about it as well. You have a partnership that you talked about last call. Can you talk about the use case and the advantages? And most importantly to me is how do you get around the power being high and the right speeds being low?

Yes. So this is an interesting story when -- internally when the teams came to us and we started talking about this. And I think this was a really, really smart insight. Again, the folks have been doing this for a long, long, long time and are experts in this. And I think the insight, a number of years ago was NAND designers have always been focused on density. How do I get the most density, which is a great thing to be focused on, because we're -- we have a very big market and people need a lot of bids. But I think the insight a couple of years ago was, well, what have we focused on bandwidth instead of just density, just raw density. Let's assume we got the density road map, that's there. We're going to pay attention to it. We're not going to lose focus on that. But what if you started to think about how do I design NAND for better durability, better bandwidth, especially when you start looking at specific use cases like AI inference, which is a lot of just loading this huge model into a processor.

And so in some sense, it's almost deterministic the read you're going to do. So how would you redesign the NAND die to optimize for that. And it turns out when you get a bunch of really smart NAND designers and you have them focused on that problem as opposed to just more density, they solve that problem and come up with some really interesting ways to do that. And that kind of what turned into high bandwidth flash, which is if you look at the inference problem and you say, how do I -- models are getting bigger. That's -- there's no doubt about that. How do I get more memory around this problem of inference. And the way to do that is to bring NAND to the table. And we're seeing this in the enterprise SSD market. You're seeing that models are getting bigger, caches are getting bigger, context windows are getting bigger, and you're having to move up into the NAND layer of the memory architecture, that's 1 of the things that's driving this data center demand.

And so high-bandwidth flash is another way of looking at that equation and saying, how can we bring this highly scalable technology to this new use case and solve it in a unique way, and that's what the team is doing. We thought when we went to our Investor Day, we were asking people to invest in the company, they should know what we're working on, and we announced it. And Hynix reached out to us and thought it was a good idea, and they wanted to collaborate on the specification of the system level, not of the NAND design and all that kind of stuff. But just how would you build the system with this, and it's been a good collaboration. It's still -- there's still heavy lifting going on there, working with customers. It's not a plug and play for some other component of the architecture. It's rethinking the architecture in a way that's more scalable to introduce this technology, which has a lot of great benefits, which you can bring an enormous amount of capacity in a very small footprint. And so we continue to work with customers on what -- how would they integrate that into their product design, whether it's a device or the cloud, and then we continue to work on designing the actual die itself in building the controller on top of it. And as we go through -- we've talked about the dates for having the memory by the end of this year and having an initial system by early '27 that we can put in people's hands and start to make some of those use cases come alive.

Luis, I wanted to ask you, you paid down $500 million of your term loan B. So really, I have 2 questions is, a, what's next? And most importantly, you're obviously generating a lot of free cash flow. So at what point do you expect to start to return cash to investors?

Yes, that was just last quarter, right? Remember, in February, at the end of February, we started with a $2 billion TOB and $1.3 billion in cash, right? So we had, call it, $700 million in net debt. And now last quarter, we reported $91 million in cash, right? So we've made a ton of progress, and we feel very proud about that.

I think going forward, I believe that the way you create value is by generating cash. So we're very focused on continuing to generate cash, and that goes obviously through gross margin all the way to cash. And we're being very prudent on what we do with that cash. We want to take enough time to really assess our options. But at the end, we'll return the cash to investors, right? When exactly and in what form, we need more time to evaluate our options.

And maybe just last thing. How do you -- you sort of talked about the eSSD rollout for high-speed TLC and high-capacity QLC. Can you sort of update us on that?

Yes. No, this is a big part of the product strategy. We launched a product last year on the compute -- what we call the compute side of things, which is the TLC product, very fast interface. That product is qualified at multiple hyperscalers. When you see our numbers, when we talk about 26% sequential growth in enterprise SSD, it's that product carrying a big piece of that as it scales out at those places where we're qualified.

And then we have the storage class product, which is QLC, what we call the Stargate program. That's just going into customers' hands now and starting qualification, and as we get through that, we'll see that start to kick in and add to the growth as we go through the second half of '26. So when you add that all up, we feel very good about where -- that on top of what's happening on the demand side where the use case continues to evolve and continues to accelerate. We feel very good about where that part of the business is. And it's going to give us just more optionality of where we ship our bits on a quarter-by-quarter basis to get the optimal return.

Great. We've run out of time. But thank you to you both. Thank you.

Thank you. Thanks for your time, Tim. Appreciate it.

Good day, and welcome to the Sandisk First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ivan Donaldson, Vice President 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 reference 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. Good afternoon, and thank you for joining Sandisk's First Quarter Fiscal Year 2026 Earnings Call. Sandisk delivered a strong quarter with revenue of $2.3 billion, up sequentially 21%, and non-GAAP earnings per share of $1.22. We generated $448 million in adjusted free cash flow and closed the quarter in a net cash position of $91 million.

As discussed in February during our Analyst Day, we are focused on growing revenue, expanding margins and generating sustainable free cash flow to create shareholder value, and we are executing that plan. Our results reflect the strong execution by the Sandisk team in an environment marked by strengthening demand across our end markets. In the first quarter, demand for our NAND products continued to outpace our supply, a dynamic we expect to persist through the end of calendar year '26 and beyond. In response, we are making strategic allocation decisions to maximize long-term value creation. We are focused on advancing our technology road map and strengthening customer partnerships to deliver the right products to the right applications and customers.

Customers are proactively seeking long-term commitments given the critical nature of our technology and to secure continued access to our products. These priorities are expected to deliver durable and attractive financial results while unlocking the strength of our broad product portfolio. With investments in data centers and AI infrastructure expected to surpass $1 trillion by 2030, the demand for NAND storage products capable of processing large volumes of data quickly and efficiently is increasing dramatically, creating a strong tailwind for our high-capacity power-efficient SSDs enabled by our BiCS 8 technology.

BiCS 8, which delivers industry-leading capacity, I/O performance and energy efficiency, accounted for 15% of total bits shipped and is expected to reach majority of bit production exiting fiscal year '26. Our BiCS 8 products are expected to enable us to grow our data center business while further strengthening our positioning in the edge and consumer markets.

Let's dive into the first quarter results by business. Our data center business gained momentum, with revenue up 26% sequentially as global hyperscaler, [ neo cloud ] and OEM customers are seeking to deepen their partnership with Sandisk. Our storage-focused SSD product line, codenamed Stargate, is growing in demand with 2 hyperscaler qualifications underway and a third hyperscaler along with a major storage OEM planned for calendar year '26. Across the data center portfolio, we are working with 5 major hyperscale customers through active sales and strategic engagements.

In edge, we are seeing positive momentum from a PC refresh cycle, aided by Windows 11 adoption and Windows 10 end of life. PC unit shipments are expected to grow low single digits, with mid-single-digit growth in capacity per device in calendar years '25 and '26. Beyond PC, premium smartphones are delivering modest unit growth, supported by new model launches featuring enhanced generative AI capabilities. Average smartphone capacity per device is expected to grow high single digits in calendar years '25 and '26.

Looking ahead, we expect continued momentum in edge as device upgrades accelerate, driving increasing NAND content. Ongoing supply and demand dynamics are expected to extend the need to strategically place bits, as mentioned above. As customers across data center and edge seek higher performance AI inference capabilities, demand for innovative solutions to address AI inference storage has increased interest in what our high-bandwidth flash or HBF technology will deliver.

Building on the Technical Advisory Board, an ecosystem partnership with SK Hynix we announced last quarter, we are actively engaging potential customers for inference applications in both data center and edge. As we enter the holiday period, we are also well positioned to capture strong seasonal demand with our refreshed consumer portfolio and significant presence across key retail and online channels. We are engaging with the gaming and creator communities to sustain our momentum. Our recently launched [ Memory Man ] campaign is creating lots of interest and excitement, strengthening brand relevance ahead of the holiday season.

Also in consumer, our partnerships with leading companies like Nintendo remain strong with solid adoption of our co-branded Switch 2 microSD Express Card, which eclipsed 900,000 units sold in fiscal Q1. We are also expanding our presence in the handheld gaming sector with the new Sandisk microSD for ROG Xbox Ally, reinforcing our position in gaming storage. Our consumer business remains a major focus for the company, driving revenue growth and attractive margin through cycles.

In summary, it's a new era for Sandisk. We have a strong balance sheet, an industry-leading product portfolio and a clear technology road map that drives organic, strategic customer engagements. As we help power one of the most transformative technology megatrends of our time, driven by accelerated AI proliferation, we are confident in our ability to create significant and sustainable value for our customers and shareholders.

With that, I'll turn the call over to Luis to dive deeper into our financial performance and guidance.

Thank you, David. Let's dive deeper into the quarter results. Revenue for the first quarter was $2.308 million, up 21% quarter-over-quarter and up 23% year-over-year. This compares favorably to our guidance of $2.1 billion to $2.2 billion. Bits were up mid-teens sequentially, with pricing up mid-single digits. Pricing strengthened during the quarter. Higher-than-expected bit growth enabled the revenue overdelivery.

Before reviewing the details by market, I will share that we will be aligning the names for our end markets to match the nomenclature commonly used in the industry. Going forward, we will use data center to refer to the business that's comprised primarily of our products for public and private cloud environments. We used to refer to this business as cloud. We'll use edge to refer to the business that serves our original equipment manufacturer and channel customers with a broad array of high-performance flash solutions across computer, mobile, gaming, automotive, virtual reality headsets and other edge devices. We used to refer to this business as clients. We will continue to use consumer to refer to the business that contains our broad range of retail and other end user products, which capitalizes on the strength of our product brand recognition and vast point of presence around the world.

In the first quarter, we saw strong sequential demand across all end markets. Edge revenue came in at $1.387 million, up 26% sequentially. Consumer revenue came in at $652 million, up 11% quarter-over-quarter, and data center came in at $269 million, up 26% sequentially. Non-GAAP gross margin for the first quarter was 29.9%, up 350 basis points quarter-over-quarter. This compares favorably to our guidance of 28.5% to 29.5%. The incremental revenue drove the higher-than-expected gross margins.

In the first quarter, we incurred $61 million in start-up costs and $11 million in underutilization charges. Excluding this cost, non-GAAP gross margin would have been 33.1%. Non-GAAP operating expenses for the first quarter were $446 million, which is higher than our guidance of $415 million to $430 million. Operating expenses were above guidance, mostly driven by higher variable compensation from the revenue overdelivery versus planned. As a result, non-GAAP operating margins at 10.6% were up 530 basis points quarter-over-quarter.

Non-GAAP EPS for the first quarter were $1.22, up from $0.29 in the prior quarter. This compares favorably to our guidance of $0.70 to $0.90. The non-GAAP EPS beat reflects a higher-than-expected revenue and gross margins and a more favorable tax rate. Key GAAP to non-GAAP reconciliation items include $47 million in stock-based compensation net of taxes, which represents 2% of revenue, $9 million in separation charges and $17 million in onetime costs related to the [ SBSS ] transaction and separation from Western Digital.

Moving on to the balance sheet. We closed the quarter with $1.442 million in cash and cash equivalents and $1.351 million in gross debt. We achieved a net cash position approximately 6 months faster than the target shared during Investor Day in February, driven by strong cash focus in a robust market. During the quarter, we paid an additional $500 million of our TLB and reduced our inventory days from 135 to 115 as demand exceeded supply.

Moving on to free cash flow. During the quarter, we generated $448 million in adjusted free cash flow, which represents 19.4% free cash flow margin. This included $488 million cash from operations and $10 million cash received from our activities related to [ Flash Ventures ], partially offset by $50 million invested in our back-end operation and offices. The $10 million received from our operations related to [ Flash Ventures] includes $337 million in gross CapEx, with $107 million funded through depreciation as part of our cost of goods sold and $240 million funded from external sources, mainly subsidies and equipment leasing. Altogether, our gross capital expenditures totaled $387 million and represents 16.8% of revenue.

Moving on to guidance. For the second quarter, we expect revenue between $2.550 million and $2.650 million due to double-digit price increases and mid-single bit growth. Consistent with our expectations, we anticipate demand for our products to exceed supply throughout the end of the calendar 2026. Based on current supply and demand dynamics, we believe demand for our products will exceed supply beyond that period.

Our products are currently on allocation across all end markets. Recall, the third quarter is a seasonally lower volume period for our consumer business following the holidays. Our forecast for non-GAAP gross margin for the second quarter is between 41% and 43% from higher pricing and cost tailwinds. This estimate includes an expected $30 million in start-up costs.

For the second quarter, we expect non-GAAP operating expenses between $450 million and $475 million. The incremental operating expenses are to support our data center business expansion and our HBF innovation. We expect non-GAAP interest and other expense between $40 million and $45 million and non-GAAP tax expenses between $80 million and $90 million. We forecast non-GAAP EPS for the second quarter between $3 and $3.40, assuming 155 million fully diluted shares. The higher diluted share count in the second quarter is driven by the increase in the stock price following the treasury model. We expect to generate positive free cash flow in the second quarter despite capital investments to enable the BiCS 8 transition, which is expected to be our most significant [ node ] by the end of the fiscal year.

Our fiscal 2026 CapEx plans remain unchanged, along with the long-term strategy to grow supply in line with the market, assuming bit demand compound annual growth rate in the mid- to high teens. Our capital allocation priorities are consistent with what we shared during Investor Day in February. Our first priority was to achieve a net cash position, which we have now accomplished through strong cash generation. Going forward, our capital allocation is unchanged, and we expect to continue to invest in the business and return cash to shareholders.

We're executing the strategies and plans that we shared with you in February, and the results are coming in as anticipated with revenue growth, margin expansion and more efficient use of assets. We remain focused on creating sustainable value for customers and shareholders with continued prudent management of the business.

With that, let me turn the call back to David.

Thank you, Luis. In summary, Sandisk delivered a strong start to the fiscal year, underscoring the success of our strategy to drive profitable growth, expand margins and generate sustainable free cash flow. Our solid execution amidst robust demand positions us well for continued momentum across the data center, edge and consumer markets. Our ongoing qualifications and strategic engagements with key hyperscale customers underscore the growing adoption of our high-capacity, power-efficient enterprise SSDs.

As we move through the remainder of fiscal 2026, our focus remains on disciplined capital allocation, operational excellence and delivering differentiated technology that meets evolving customer needs. We are well positioned with industry-leading technology and products, healthy long-term market fundamentals, a strong balance sheet and an efficient operating model to create substantial value for our shareholders. Our technology is arriving at exactly the right time. When the market is ready, the demand is real, and the opportunity to drive meaningful earnings power is just starting.

With that, we will open the call for questions.

[Operator Instructions] Our first question comes from C.J. Muse with Cantor Fitzgerald.

I guess, Dave, you spoke to customer engagement evolving now that we're in allocation. And you know very well how that's transpired in the HDD world, moving from build to order, followed by long-term agreements. So curious, are you seeing similar trends emerge here in NAND? How does your visibility extend? And how are you allocating the bits that you can produce?

Yes. So I'll let Luis talk about the allocation. But yes, C.J., it's good to hear from you, first of all. Thanks for being on the call. I would say there's kind of two phases of how we're hearing from customers and what they're reaching out about. There's a phase where we're striking deals that are multi quarters, let's say, through the first half of next calendar year that are volume and price kind of deals where customers are looking for certainty of supply. And so that's a little bit different than what we've seen in the past where everything is usually just quarter-by-quarter based.

But especially as data center starts to grow, those customers are reaching out proactively and providing visibility all the way through calendar year '27 of what their demand is going to be and kind of want to have conversations on how we could line up our supply to that demand given the product -- the emerging product line we have that's under qualification across all those players. So it is a very different time. I'd say it's still fairly nascent, especially that second phase of it, and we'll be having those conversations over the next several months and keep you updated on how that goes.

But I think it's certainly a very welcome development in this market. As you know, this is a market where we have to make very long-term CapEx decisions. And demand over the next quarter or 2 or 3 doesn't really move the CapEx number. We're looking for what demand is going to be over the next many years. So having these conversations with what is emerging as the largest customers in the market is, as I said, a very welcome development, and we'll be engaging in those conversations more deeply over the next several months. So Luis, you want to talk about allocation?

Yes. C.J., we're working very closely with our customers. We talk to them all the time. And what we're doing is we're prioritizing our [ most of ] the customers, those customers that have been very close to us, those customers where we see growth, those customers where we can create value for them and value for us, right? And that's how we're evolving our portfolio. We're going from a mobile-centric company to really serve our customers, and we're seeing very strong growth in our data center business. So we're very excited about the opportunity that this presents to us, but working very closely with our customers, particularly those more strategic to us.

As a quick follow-up, how are you thinking about your bit shipment growth opportunities here in calendar '25, '26? Your days inventory down to only 107 days, and [ Vic ] is just kind of ramping. How are you thinking about what kind of bits you can ship this year and next?

Yes. Our goal is to keep our market share, right? We're not here to disrupt the market, but we're very optimistic about where things are heading. We're doing well in our client portfolio. We're doing very well on the consumer business. And we are very optimistic that we can build our business in data center where we are underrepresented, and we've talked this in previous meetings.

So -- and the way to do this is through innovation. We have BiCS 8 coming in. We're getting qualification with our products. So we feel good about our market share on bits across the market.

So C.J., well -- just to add a little bit. I mean, Luis, as he rightly said, we're looking and we plan to grow along with the market. And we've got the capital plans to support that. We're investing, [ assuming ] that mid- to high teens level of demand on the long term. And then as demand exceeds that, we'll talk about the allocation phases that we talked about.

But as I said earlier in the first part of your question, we're optimistic that our customers are starting to look further down the road as far as what their demand is. And I think that helps this whole equation. But we're definitely growing along with the market. We have our capital plans, and they remain unchanged.

Our next question comes from Jim Schneider with Goldman Sachs.

I guess structurally, obviously, we're in the -- in a supply-constrained scenario, and I think a lot of customers are clearly asking you for supply, as you kind of talked about. So maybe you can just kind of give us your view on over the next couple of years, the supply situation you expect to deliver, whether that's just through upgrades at this point? And what would make you decide to add wafer capacity over the next coming years?

Yes. So first of all, on the overall environment, I think we've been talking for, I don't know, at least a year now that we saw an undersupplied market through the end of '26. And that's mainly focused on looking at long-term demand trends and then what capital has been invested in this business over the last several years and factoring in nodal transitions of all the players in the market.

So as we said in the prepared remarks, we're now seeing that push out beyond '26, just given these conversations we had earlier where customers are coming to us looking for '27 supply. So we've kind of planned for this market. It's hard to call sometimes on a quarter-by-quarter basis, but we've seen this set up for quite some time. As far as what does it take, we're not at the phase of talking about additional capital in this business. We're investing a significant amount of capital, as Luis said, to do the BiCS 8 transition. We have a very, very strong technology road map where we can increase productivity and bit supply without increasing wafers.

When you start to get into that kind of discussion, which we're not at, quite frankly, it's where -- we need to -- it's not about what demand is going to be next year or the year after that. If we're going to add capacity, we got to see demand for a long period of time. So we've zeroed in on that mid- to high teens. Clearly, we're above that right now, but that's the long-term number we're investing to.

That's helpful. And then maybe relative to your position in enterprise SSDs. I think you gave some targets at the time of your separation in terms of your ambitions in that market. Maybe give us an update on how the qualifications are going? And as if you look into the end of 2026 or 2027, what percentage of market share you might hope to attain? And what -- how big of a part of the business that might be?

Yes. So we're very, very happy with where the business is. It's driven by where the product portfolio is. We talked about our Stargate program, which is storage-based enterprise SSDs. We talked about that at our Analyst Day. Those products are now in customers' hands and starting qualifications, the [ 128T ] drives, and we'll be moving up from there. Those are the part of the products where people are taking up -- talking to us already about supply several years out. So they feel good about the products. We feel good about the products.

We also have our compute focused enterprise SSD, which continues to do very well, and the number of customers deploying that continues to broaden. So all of the right things are happening to move the portfolio in the right direction and move how much we're shipping in the right direction. Look, I think you're going to see -- our plan is you're going to see increasing sales in this segment sequentially throughout FY '26. I think we'll end the fiscal year in a strong position from an exit rate point of view.

It's a bit of -- it's a difficult market right now to completely start talking about market share because the market is very dynamic. The market is growing -- it's almost like every week or 2, our estimates for calendar year '26 demand in the data center market move around, and they're all moving up. When we were sitting here 3 months ago, we thought our forecast was data center, exabytes would increase mid-20% level. In '26, We've now upped that to mid-40% in '26. So the market is moving very quickly. And what our goal is to get our fair share of that market. We think the product portfolio is exactly in the right spot. We think BiCS 8 is absolutely the right node to drive that across performance and density. And you're going to see this whole story play out in the numbers as we move through calendar year '26.

Our next question comes from Aaron Rakers with Wells Fargo.

I apologize for the background noise here. I guess my first question is just building on the last one, David. There's been a lot of discussion around hard disk drives being supply constrained and what seems to be kind of an inflecting AI narrative around enterprise SSDs. I'm curious, how you assess kind of the enterprise SSD market opportunity relative to hard disk drives? Is that -- has your thought process changed at all? Has the shortages and hard drives on a nearline perspective driven? Any kind of changes of engagements on those opportunities?

Yes. I mean, my primary view on this, Aaron, as you know, we've talked about this for a long time, maybe years and years going back to when we ran both franchises. These are primarily complementary technologies in the cloud. And we're definitely seeing kind of a rising tide lifting all boats. And I do think you have a dynamic that with AI, more data is getting warmer, and warmer data moves to enterprise SSDs.

So I've always thought that both technologies are going to grow, and enterprise SSD is going to grow faster. Is it a substitution question? Is it one or the other basis based on some shortages or tightness in 1 market versus the other over time? There could be some of that dynamic going on. But I think the long-term drivers for enterprise SSD are extremely strong in the data center. We're seeing more data being stored all the time. The value of data is going higher as it's being used to train more and more models. And now we're seeing the video creation models getting much, much more sophisticated and just driving even faster creation of data.

So obviously, we're very bullish long term on the data center market. I think the NAND market is going through a very interesting transition right now. I mean, calendar year '26 will be the first time that data center market is the largest market in NAND. That's always been the mobile market. And so we're seeing a major inflection there. The growth rate is higher. It's now going to be the biggest segment of the market. And it's also -- from a customer point of view, it's a more diverse market.

So I think that changes the dynamics of the way the conversations with customers, the way purchasing decisions are made, pricing, visibility. All those things, I think, are changing before our eyes as the data center market emerges as the largest market in NAND. And the corollary to that is the customers behind that are -- if you look out at their 27 exabyte demand numbers we're talking about, they're very, very big numbers.

So I think all that says, it's a very good market, very better visibility, growing visibility for enterprise SSD. Is some of that because of what's happening in HTD? Maybe it is, but I don't think that's the primary driver of what's going on here and what's going to happen over the next several years.

Yes. That's very helpful. And then Luis, if I can, real quick. I mean in your prepared comments, you alluded to seasonality or just be aware of seasonality into the March quarter. Can you kind of unpack that, what should we be thinking about? Are we down sequentially in the March quarter? It seems like pricing could continue to trend higher? And how do we think about kind of feathering out the start-up costs as we move forward?

Yes. So let me start with the last part of your question. Start-up costs, consistent with what we said in the last call, we went from $60 million last quarter to, call it, $30 million this quarter to pretty much 0 going forward. So that's easy to put into your forecast.

Now I don't want to guide into Q3, but I did want you to be careful as you build your models in Q3. If you look at historically, right, our bits are down in Q3, somewhere around 12% to 14% sequentially. Now the dynamics in the market may be a little bit different because data center is stronger. And therefore, the mix of our portfolio is slightly different. But I want you to be careful and just assume that there is some seasonality, which is particularly important for us given that we have a stronger consumer business.

Our next question comes from Joe Moore with Morgan Stanley.

I wonder if you could characterize some of this data center demand that you're seeing? Is there demand for QLC on the enterprise side? And how much of it is QLC? And can you talk a little bit about how BiCS 8 enables you to kind of increase your presence in that market?

Yes. Joe, I would say -- I don't have a split for you across QLC and TLC, but there's these two primary use cases which is what we -- the compute enterprise SSD, which is a TLC, faster interface. We have good demand for that across our customer base. We have a lot of customers coming in looking for upside on that. And then you've got the storage class product, [ 128T ] is what we're qualifying, which is a QLC product. And BiCS 8 QLC, very energy-efficient, high performance. So we think that node is extremely well positioned.

In FY '26, I actually do have some numbers here, QLC going from 20% to 40% of the market by the end of our business by the end of FY '26. So definitely seeing strong growth in that storage category as that product gets qualified in the market.

Great. And then as you described the market, I would have to think that the fabs are all running full in NAND at this point. But you didn't mention underutilization expense. Do you think there's any incremental supply coming from the fact that people had underutilized the fabs earlier in the year? And just how does that affect your view of '26?

Yes. We've moved to 100% utilization, Joe. So perhaps running at full capacity, and we keep on pushing them as much as we can because as you've seen, inventories are down very meaningfully. So yes, we're running full capacity, Joe.

So Joe, just to put some numbers around it. I mean, we see supply growth. We saw supply growth in calendar year '25 of about 8%. We see it at about 17% in '26. We see demand -- constrained demand around 14% because that's what -- mid-teens because that's what -- that's all that's out there from a supply point of view. But unconstrained demand is in the -- literally, a couple of weeks ago, we thought it was 20%, it's probably mid-20s by now. So we see the supply pretty much being able to service that kind of mid-teens level of demand for '26.

Our next question comes from [ Mark Newman ] with Bernstein.

Just digging a bit deeper into the supply/demand dynamics. It seems that things are going great. I wondered if you could give us a little bit more clarity on a portion of your contracts that are shorter term versus longer term? Because obviously, longer-term contracts, as was discussed a little bit earlier, has a lot of positives in terms of giving you more confidence in the demand for longer term. But on the other hand, when you're talking about pricing, some of the pricing data out there is inflecting up significantly right now. But longer-term contracts may not actually inflect, obviously, because they're longer-term contracts. So I just wondered if you could break out for us what portion would be shorter term, so a quarter or less? Or what portion would be [ 6 ] quarters would be useful? And I have a follow-up on HBF as well.

Yes. Thank you for the question. Yes, so we don't have volume and -- we have very little volume price commitments that are beyond a quarter. So that's -- what we referred to in our prepared remarks is what we are hearing now from some of our very strategic customers, very large customers is they want to assurance on supply. So they have approached to us willing to start some of those conversations to see if there is a volume price commitment that we can agree for the year, potentially for longer.

So we're going through that process. But today, as things stand, we have very, very little volume and price commitments that expand the quarter.

Okay. Great. And then if you could give any more clarity on the road map for HBF, high-bandwidth flash? You discussed earlier in the prepared remarks about starting to work with some customers. Any updates on potential time line there?

So we're on -- we announced the time line last quarter of having the memory later in '26 and then having the controller for that in '27. We're still working towards that time line. We have a robust set of customer conversations going, looking at use cases both in edge and cloud of how that product can be integrated into the architectures that customers are building across those -- across devices and the cloud. So we're very optimistic about the technology and where it's headed and the use cases, and we continue to do the work on the technology and have a good set of conversations with a number of customers about how it can be deployed and zeroing in on the use cases, which helps you really dial in all the requirements. So work in progress.

Our next question comes from Karl Ackerman with BNP Paribas.

I have two as well, please. As you seek to qualify more hyperscalers on your enterprise SSD portfolio, would you anticipate simply transitioning [ Klein ] and edge wafer capacity to enterprise? Or would that come primarily from new capacity coming online on your [ K2 ] fab?

No. Look, we're always -- again, we're growing bits all the time because we're growing with the market. And we do not plan to add capacity for any particular market. It will simply be a mix question either on a quarter-by-quarter basis or if there's -- obviously, if we get to the point where there's longer-term commitments, then we'll have more visibility into what that mix is going to look like. But as I've talked about quite a bit, our whole goal is as much optionality as possible and then mix for the best financial return in any given quarter with the supply we have available.

Got it. For my follow-up, I guess, how should we think about cost declines going into the December quarter? And if we zoom out, is it fair to assume cost declines can approach, I suppose, high teens as you transition aggressively toward BiCS 8?

Yes. We stopped talking about cost declines a while back, as you know, but we'll give you some -- a little bit of maybe runway lights around it. So we're coming out of a period where we've had quite a bit of cost headwinds in the business, and we've been pretty clear about that over the last several quarters. And now we're transitioning to the BiCS 8 ramp. We're getting the underutilization cost behind us for getting the fab startup costs behind us. So in the December quarter, those cost headwinds turn into cost tailwinds, which is a great place to be.

As we ramp BiCS 8, we'll continue to get some cost out of it. But again, the costs are more idiosyncratic on a quarter-by-quarter basis. And we don't want to put an overall number out there, but the numbers you're talking about are pretty aggressive, too aggressive.

Yes, Karl, our focus is obviously on driving our gross margin, and we feel good about the progress we're making here, right? We added, whatever, 350 basis points quarter-over-quarter, 720 basis points in 2 quarters. Still, you would say we're 4 quarters below our model. So we need to get several quarters ahead of that number. But we're very focused on gross margin and driving that up.

Our next question comes from [ Nadiv Hacini ] from SIG.

Yes, two follow-up. What's the update on the UltraQLC 256 terabyte? I think last earnings call, you said that you have a 1 Tier 1 data center customer that should be ramping in the first half of calendar year. And what's the update there? And I have a follow-up.

That was the 128 that we're going to be ramping in calendar year '26, and we'll move -- that 256 is -- will start hitting the market mid- to late next year and ramp the following year is the most likely timing for that. Again, I want to be careful getting into product timing that's not announced. But the qualifications going on across Stargate right now is the [ 128T ] drives.

Okay. So you have one customer for 128 that should be ramping in the first half of calendar year?

We have multiple customers under qualification now. We have customers lined up for qualifications next year and you'll see ramping as -- qualifications can take quite a bit of time, as you know, several quarters. So you'll start to see the ramp of that product mid next year. Across all of our enterprise SSD portfolio, we're working with, as we said in the prepared remarks, 5 hyperscalers across all the different technology we're building. So we feel very good about -- there's much broader adoption that goes -- it happens quarter-over-quarter.

Got you. And as a follow-up, assuming that there won't be much of a wafer capacity at the JV, should we assume that as this 5 or as the 128 terabyte ramps middle of next year, you would allocate more bits towards this as customers and therefore, there will be a more accelerated mix shift towards the cloud mix?

Yes. I mean, we don't -- we want to -- don't get too far ahead of ourselves on forecasting quarters, but that's what I said is you're going to see sequential growth in our data center portfolio throughout fiscal year '26, and so you can assume you're going to see an exabyte shift in that direction as well.

And remember, even if we don't produce more wafers, those BiCS 8 wafers contain a lot more bits, right? So that productivity allows you to produce more bits and therefore, to supply more of our customers.

Our next question comes from Wamsi Mohan from Bank of America.

It's Ruplu filling in for Wamsi today. I have too, one for Dave on bit growth. Dave, you had strong mid-teens bit growth in the first quarter. Can you talk about how you're thinking about bit growth across the different markets, data center, client, consumer in the second half? You talked about some products in allocation. Should we assume that's across the product line? And I'm assuming all of these orders are noncancelable. So any comments on the expected by end market in the second half and which products are in allocation? And I have a follow-up for Luis on margins.

Do you want to take that one or do you want me to?

I can. Yes. So we feel good about our growth across segments with data center is the segment, the end market that's growing the fastest. And therefore, we expect to grow there faster in the back half now, as David alluded to at the beginning. But we do expect to continue to make progress on both the consumer and the edge market. So I would say our growth will be a little bit heavier on or higher on the data center's end market.

Okay. Okay. That's helpful. And Luis, if I can follow up on margins. It looks like you said in the first quarter, ex the start-up cost and underutilization, the gross margin would have been 33.1%. You're guiding at the midpoint, about -- sorry, yes, a very strong 900 bps of growth in -- sequentially. So can you talk about what are the factors that are going into there? Should we expect another round of price increases? What is the fact -- how much is mix a factor to that? And I think you said there are no more underutilization costs and you're not talking about cost down. So are these the only two factors? Or is there FX or some other thing also that is impacting margins, which you've got a very strong guide.

Yes, if you're comparing the 33% versus the 41%, 43%, you're comparing that already excluding start-up costs under utilization. So you're looking at it the right way. I would say the majority of that is the pricing that we're implementing. In my prepared remarks, I mentioned that during the quarter, we saw an improvement in pricing during the quarter. So the margins at the end of the quarter were better than the margins at the beginning of the quarter, and we expect that to continue.

So pricing is a key driver of that. And obviously, as we shift more into BiCS 8, we'll see lower cost per gigabyte. Again, that's not an area we want to spend a ton of time talking about, but we do see a little bit of a benefit there. So combined the two, we feel good about our gross margin expansion, which should continue.

Our next question comes from Asiya Merchant from Citigroup.

Great. Can I just clarify on the guide? At the midpoint, I think it's 2.6, and I think that's up like low double digits. I thought pricing in itself was up low double digits. So if you could just clarify that for us, and you're still looking for bit growth, unless I'm missing something here in my calculation? Then I have a follow up.

Yes. It depends on whether you're looking at the midpoint, the high point, the low point. But yes, we expect pricing to be double digit, and we expect some low single-digit bit growth, as we mentioned in our guide. Inventory levels are low, as you've seen. That's kind of the construct, right? So depending on which range you're looking at, that would be the combination of bids versus pricing. So I think the key message is most of the growth in revenue will be pricing driven in the quarter.

Okay. And then just for my follow-up, a lot of questions on the data center. But just wanted to -- if I heard David correctly on the edge, the client PC and the mobile phones, just the confidence as we look into calendar '26 on the growth there. I think some of the expectations on unit growth were a little bit higher than maybe some industry is forecasting. So just if you could click on what's driving the confidence there on the edge devices, particularly PCs and mobile phones.

Yes. I mean -- so phones, we've got units up slightly, but content per unit up double digits. So that's a strong number across [ 1.2x billion ] units. And then you got PCs basically flat to slightly up, and then you got -- we got average capacity up mid-single digits. So you've got -- that's good exabyte growth across those markets. And then on top of that, you've got what we've talked a lot about with the exabyte growth in data center. But this is one of the great things about the NAND market. It's very diversified. NAND plays everywhere. There's these 3 very large pillars in the market. And we're seeing growth out of all of them and really very, very strong growth out of the data center, as we've talked about.

And again, as I said earlier, it's just very interesting to see the data center now emerge as -- on an exabyte basis and '26 will be the largest market in NAND. And I think that's bringing some fundamental change to the way the market works. And I think we're going to see that play out over the next couple of quarters.

Our next question comes from Steven Fox with Fox Advisors.

I just had one question for Dave. I guess I'm trying to figure out like how some of these long-term agreements might play out? I mean, it seems like we're at a historic impasse with NAND and the demand coming from the cloud guys. So I don't know if you want to give any of this away, David, but like is there -- any kind of values that we should think about in these negotiations, whether it's sharing of cyclical risk, sharing of cash, CapEx, things like that? Anything you could sort of talk about? And then how does that trickle down to like customers that aren't lucky enough to be able to have longer-term supply agreements?

So Steven, I think it's a little early to get into that level of detail. I think the key issue is it's the customers reaching out to us, right? And as I've said a couple of times on this call, as data center emerges as the largest market in the -- and again, all the markets are very, very important and all the customers are very important. But these really big players are looking at their road maps and looking at their businesses, they're proactively reaching out now all the way into '27 and want to talk to us about supply across our portfolio.

So it is just a different dynamic. I think we're working to have conversations with them to understand what those relationships could look like. It's very welcome. Again, as I said earlier, we have to make very long long-range decisions when we spend money, and we certainly have an enormous R&D capacity that's working on, 2 or 3 nodes in the future for -- to drive growth in this technology.

So we're making very long-term investments. And to see our customers proactively and what is becoming the largest customers proactively reaching out and talking about multiyear supply dynamics is, I think, a very healthy sign. Exactly how that's going to get worked out, I think it's a stay tuned kind of message. We're kind of in the early stages of those conversations.

Our next question comes from Krish Sankar with TD Cowen.

First one, Dave, you data center revenues grew very nicely. I'm just wondering, is there a way to figure out how much of that is related to AI data center and neo cloud versus traditional cloud? Is there a way to put a percentage around it? Or is it all majority AI? And then I have a follow-up.

Yes. I would say it's majority AI-driven growth.

Got it. And then I think, David, you kind of talked about a 40% growth next year for data center exabytes and then even better growth in '27. I'm just curious, is that the right way to think about it? Data center is a 300-plus exabyte market this year, going to mid-400 to 600 plus in '27?

Yes. We've got it as a high 300s number for '26. So that's healthy growth over what we saw in '25. Remember, going back to '24, we saw 130% year-over-year growth in that market. That was a 200 -- like around a 230 number, followed up by high teens in '25, and we're going to put on top of that, a mid-40s number in '26. So yes, it's healthy growth in that market. And as I said, we're seeing those customers really start to change the dynamics of kind of structurally how we think about this whole supply and demand. More to come.

Our next question comes from Nam Kim with Arete Research.

I also have two questions on HBF. I know it's still early, but how do you see the long-term growth potential? And can you provide any qualitative color or any market [ starting ]? And then second, how are you approaching this given competitors greater TSB stacking experience from HBM? What competitive advantage do you think that Sandisk can bring to HBF?

Yes. So I think on both of those questions, I'm going to defer. We'll talk more about the market potential and kind of the TAM numbers and all the things you're talking about. I mean, just to reinforce, this is an inference-based solution. We're not going after the model training side. We're not trying to replace HBM in that market. But we do believe there's a very large opportunity in the inference market, especially on the device market, given the footprint of what the density we can get out of flash.

As far as what is the -- what is our competitive advantage, again, I think we'll wait on that as well. We've done a lot of work on the actual NAND design itself. And I think I said this a couple of quarters ago, I mean, one way to think about it is NAND designers are always thinking about how they expand density. That's like been the #1 thing, how do I get more bits out of how I design NAND. And when you actually start asking folks to start thinking about, well, how do I get higher bandwidth, all these kinds of questions turns out you can do -- how do I make the technology more durable. We've been thinking about those questions now for several years and have some design innovations, let's say, that we think make HBF a very compelling technology, but we're not ready to talk about what those are publicly.

Our next question comes from Mark Miller with The Benchmark Co.

Just with the strong sequential growth you've seen in data center, do you think you're picking up share there?

Yes. We think we're growing faster than the market is growing, right? And we think we're going to see that throughout the fiscal year.

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

Okay. I just want to thank everybody for joining the call, all the great questions. We look forward to talking to you throughout the quarter. Thanks again.

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

Let's get started. Good afternoon, everybody. Welcome to the Goldman Sachs Communacopia and Technology Conference.

My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Sandisk today, CEO, David Goeckeler; CFO, Luis Visoso. Welcome guys. Thank you.

Thank you. Thanks for having us. Great to be here.

David maybe start with you, it's been roughly...

He's got a [indiscernible] first.

So we will be making forward-looking statements in today's discussions based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends and dynamics and future financial results. These forward-looking statements are subject to risks and uncertainties. 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 be making reference to non-GAAP financials and a reconciliation of our GAAP to non-GAAP results can be found on our website. Thank you, Jim.

Very good. So maybe David, we'll start with you on some high-level strategy questions, if we can. Spend about 6 months since you execute the split between yourselves and Western Digital. How do you progress compared to your initial set of expectations you laid out at your Investor Day?

So first of all, it's been a quick 6 months. It's been quick in some sense, and it seems like a long time ago now. Look, I think the expectations we set out at our Investor Day back in February have been pretty much true to what we've been delivering. And we're just really, really optimistic about the market we're in, the potential for the market we're in, we can talk to some about by demand dynamics, which I'm sure we'll get into. We think we're in a long arc here of the industry getting to a point where supply/demand is balanced and tilted towards an undersupplied market. We believe that for quite some time.

We think the portfolio is in fantastic condition. We talked about our new enterprise SSD programs at the -- at our Analyst Day, that program continues to play out extremely well. We now have that product in customers' hands to start initial qualification. So that's great. Our client portfolio has been strong for a very, very long time and continues to be that way. And then, of course, our consumer brand has always been a strength of the company, and we continue to invest well there. And inside of the company, the team is just incredibly excited. I mean I think to be back as Sandisk as an independent company, has been a big jolt of energy for everybody, and we're just really, really happy with where the company setup is, and we kind of came through the separation just flawlessly, and just continue executing along. And I'll let Luis give his point of view as well.

Yes, I think it's been very interesting. We have 2 quarters that were behind us, and we deliver everything we promised we will do in February. So we feel very good about it. I think the one metric that makes me very happy, so cash flow generation. I believe cash at the end of the day is what matters the most for our shareholders. And we are pretty much in line with what we expected. We've been reducing our debt. Our net debt is pretty much in good shape and we should be net cash flow positive soon.

Great. 6 months on, anything changed about the way you intend to run the business going forward, you want to course correct on?

No, I think, again, we had a thesis on the market when we came out and the way we set up the company, and I think that that's essentially played out. And we're just very optimistic about this business and what we can -- where we can drive it to and the value we can create. And there hasn't been any need for any course corrections what we're doing. As I said, we think the portfolio is in great shape. We can talk about our fundamental NAND technology. We're now going to ramp into BICS 8 over this year. We're going to go from a single-digit percent of our portfolio on that technology and will be 40%, 50% by the end of this fiscal year.

Our customers are telling us it's the gold standard for nodes in the market right now. So we just feel really good about where we're at and what we're driving towards and our ability to generate value with this franchise.

Great. David, you've clearly articulated a view that supply-demand dynamics in the NAND industry are improving, you see an undersupply situation lasting into next year. What catalyzed this change do you think after quite a long period of weak industry dynamics? And do you believe the change in competitor behavior is sustainable from both a supply and pricing perspective.

I think that's -- it's a very complicated question, but let's decompose it a little bit. So first of all, on just supply/demand. We -- obviously, we talk to a lot customers, we have a lot of visibility, we have a big consumer franchise, 20% of the clients in the world who use our technology. We're a player in the enterprise market as well. So we do a very detailed bottoms-up planning of -- it starts with the 3 big markets, PC, smartphones and data center. And if you look at those markets going back even a year ago, we were becoming bullish on this setup because we saw everything going in the right direction. So smartphone units up slightly, content per device going up. And we saw that in the Android ecosystem, first, as they prepared for AI on the devices.

And then we -- yesterday, we saw it from another big player in the business of kind of up in the content per device. We see PCs units growing and content per device growing. And then the other big market is data center. And we've seen nothing but improving dynamics in the data center. We're coming off of a year of '24 of 130% exabyte growth in that market. On top of that, '25 we'll see double-digit growth. That number keeps going up, and we had an earnings cycle a couple of weeks ago. That number went up again. And then we see that number even stronger that growth increasing even more in '26. So we've been looking at these markets for quite some time and seeing the way this setup is coming out, and we've just been very, very bullish on the demand side for NAND.

And then you look at the supply side, and we all came through a very, very stressful downturn, where I think the traditional way that you manage this business saying, it's an elasticity-driven market. So when you start to see unfavorable financials, you release a new node that drives your cost down and the market is elastic enough to absorb all of that supply. That strategy ended in the last downturn and it ended rather spectacularly, right?

So the way you manage the business now is just fundamentally different. We've got to spend more time being focused on making sure supply is matching demand. The very good thing in NAND is R&D is alive and well. We can produce more NAND. We have a road map for more density we produce. That's a good thing. We got to make sure we don't turn that knob too fast. And if we keep those 2 things in balance, we will see very good financial dynamics in this industry and kind of turn around what's been happening over at least 5.5 years that I've been a participant in the industry.

And that's naturally happening. And it's because I think if you run one of these franchises, you look at these financial dynamics and you come to the same conclusion. And if you look at the amount of CapEx that's being spent in the 3D era kind of dramatically reduced that over the last 4 or 5 years. Nodes are more expensive, they're more productive. So we need to pull back on the level of capital intensity to keep supply and demand balance. So we'd like to set up for a long time. It's a big market. It takes a while for all of that to work its way through, inventory at suppliers, inventory at customers, different markets going up and down. And so we don't see a good market going into '26. We see an undersupplied market all the way through '26.

And would you have the same level of confidence and sustainability of your competitors' supply?

I only run our business, right? So we run our business, and we're very focused on profit generation, cash flow generation. And I think we're doing very, very well. We're going to drive the business to net debt neutral to positive here very quickly going to get to the point where we need to be. And again, I think if you run one of these franchises, you're looking at these dynamics and realize we just can't keep putting new nodes out all the time and spending the amount of CapEx. 3D era nodes are 2 to 3x more expensive -- and so again, good news is we've got a lot of R&D productivity. We need to like make sure we invest in that at a sustained rate. And I'm a believer that this is going to be -- it is and will be a better industry and this franchise is enormously valuable.

Great. There was a press report recently that you are raising pricing on consumer and channel products by about 10%. Can you confirm that? And maybe contextualize that in terms of your broader pricing expectations you've already laid out?

Yes. So we announced a price increase for a part of the market. As you mentioned, these are the customers we don't talk to directly. Now we've also were -- our expectation, as David said is, the market is tight, and we'll continue to see opportunities to increase prices across the board. If you think about our client business, we negotiate every quarter with each of our customers on volume and price. So we're going to go through those processes. We're going to do the same on the data center side, on the cloud side. and it's going to be based on the market dynamics and where we end up. So you should not extrapolate a 10% increase across the board, but that's an indication of where the market is going.

Yes. And how should we think about Sandisk's overall bid supply growth this year and next?

Look, we have a very clear stated goal to grow with the market. I mean, it's a market where things change kind of slowly on a share basis and growth basis. But we're in a mid-teens CAGR demand growth in this market, and that's where we expect to grow in line with that.

Got it. And have those dynamics changed at all relative to what you thought before? And I guess, I mean, do you believe that there's any consolidation needed in this industry beyond what's -- or do you think we're kind of in good shape and we can kind of sustain with the current number of players?

So I definitely think that the market is -- I think it's a great market to be in. I think that the dynamics of the market are changing before our eyes things I talked about earlier, NAND is a business that's changed a lot. It was a business where we were really trying to drive growth in the market. We're $65 billion going to $100 billion. I think we can check that box. And so I think the way you manage the business is different as we talked about. So I think that is sustainable. That's the way we're going to run our business. It's kind of a separate conversation of consolidation. We're very happy with our business. Obviously, in a market where you have high fixed costs, any kind of consolidation is going to drive better cost dynamics. So that's always welcome. But it's a complicated question when you get into the practice of it.

Yes. I understand. Maybe a couple of product questions, if we could. I think back to the Flash Memory Summit last month, you made an interesting announcement about the notion of high-bandwidth flash called HBF. And I believe you're targeting sampling sometime back half of next year. Maybe provide a little content what that is, what is the significance? Is it evolutionary, revolutionary and maybe sort of how how critical this is to future of AI training and development.

So this is one of these, where I said there's so much excitement inside the company is because not only are we really happy with where we're at in the core business, and we've got like -- BIC 8 is fantastic, and we're developing new nodes and the portfolio is in the best shape it's ever been. We're also working on this kind of incredible technology of high-bandwidth flash. So take you a little bit through the journey of where this came from. I mean, obviously, anybody in the world today that has a technology franchise is thinking about how they play in the AI architecture. And while NAND is we have a lot of density, right? We can store a lot.

And in the world where models are getting bigger and bigger, and we're trying to think about how do we apply our technology into that inference phase we needed to focus on kind of how do we increase the bandwidth of NAND. We're not going to build a DRAM substitute. We're not trying to build HBM. What we're trying to do is say, in the inference phase of AI, which is going to have to go to devices, right? And again, 25% of every device in the world has our technology in it.

So how do we take NAND and apply it to this AI architecture. And if you're a NAND designer, you've been focused for the last 25 years on how do I deliver better density in NAND, and you've done a fantastic job, like incredible job, like almost too good of a job right in over a lot of capacity, a lot more bits per wafer. And some of our engineers were looking at this problem and said, what if we focused all of this intellectual energy on how do we make NAND faster? And could we solve the use case of inference for -- in the AI architecture because we knew we had one big part of the problem solved, we had density, right? DRAM has a different issue. It doesn't really scale anymore to the stack. They're doing a fantastic job. Nothing great for DM. But if we could bring NAND to this equation, we could like really be in a good position because we can bring customers an inference solution, much smaller footprint, much more density, much better power efficiency, all these kinds of characteristics.

So we got the team working on that for the last couple of years how to think about how to reoptimize NAND, and we came up with some really clever ideas. And then we went out and started to talk to big customers and say, how are you going to build inference architecture in the future? We started working together, and that's where this whole idea of high-bandwidth flash came from. So we're very optimistic about it. We felt at our Investor Day, it was time to talk about it publicly. After we talked about it publicly, we got approached by one of our peers that says we want to work together to standardize this for the industry. We thought that was a great idea. We announced that at FMS. And we also put a time line behind this where we said, look, we're going to have the NAND available in late '26, and then we'll have the system available in early '27. And the system is building the control we are building the controller, building ASIC for all that. So we're doing work on both of those. And we're talking to customers about it and how they would deploy it in their infrastructure on their device for AI inferencing, and we're super optimistic about cracking that over the next couple of years.

Got it. Is that just meant -- is that meant to compete with anything? Or is it just meant to compete with on device storage and just provide better performance?

It's -- I would say it's meant to enable AI inference everywhere, right? It's on your smartphone, on your PC, even in the cloud, right? The cloud is going to have an infrastructure for inferencing and infrastructure for model training, that infrastructure for inferencing is wide open territory for us to come and provide a solution that's much more scalable, much more power efficient, smaller footprint to drive inferencing. So that's what we're working on. We're working with customers to understand what exactly are inferencing use case is going to look like 2 years from now, 3 years from now, so we make sure we build exactly the right product.

Okay. There's been a lot of focus on the enterprise SSD market you've talked about it quite a bit. Maybe remind us how qualifications are going for your products in that space? What are you hoping to achieve by the end of this year and into next?

So this is an area where we've been building out our portfolio. We have a set of products that we qualified over the last 2, 3 years. That set of products is deployed out there. When we talk about this past fiscal year, it was about 13% of our bits that we shipped were in enterprise SSD with that set of products. And now we have a whole new set of products coming out. And they're really kind of 2 major products. We call one kind of a compute-centric enterprise SSD that's been in the market for about a year now, qualified at one hyperscaler undergoing qualifications is next. It's the product that was certified by NVIDIA as part of their reference architecture was the first enterprise SSD that went through that process. So that product is going well, and we're going to be ramping that over this year.

And then we have the product that we talked about at our Investor Day, this -- what we call our Stargate platform, which, by the way, we picked the name 2, 3 years ago. It's now been reused, which is great, but that's the high density for AI data lake. So start with 120 terabyte, 256-terabyte going to 512 and eventually to a petabyte. That product has been in development for the past 3 or 4 years. we're just at the phase now where we're putting it in customers' hands for the first qualifications.

So you asked me the first question, has anything changed since our Investor Day, we're right on track with that program. We feel really good about where it's at. We're going to go from a position of -- what we're going to be in a position to lead that transition to those next capacity points be right there as the industry transitions to that and enable that. So we feel really good about where we're going. This is going to be a story that plays out over years, right? This is a story that's going to change -- it will get incrementally better quarter-by-quarter, but it's really going to be a couple of years as we get these products qualified, expanded across customers and deployed at scale. But it's going well, and we want to be in a position where we manage our portfolio in a way great consumer franchise, great client franchise, great enterprise SSD franchise, gaming and then whatever each quarter brings, how do we mix across all of that -- those parts of the portfolio to get the best financial outcome.

Great. Now at the end of the day, I'm still a chip guy at heart, so I want to ask you about BICS 8. So you raised it before, step forward in terms of, I guess, performance, but most importantly, cost reduction. Maybe remind us of your expectation for the like-for-like cost production BICS 8 brings once fully ramped. And maybe, I have a follow-up.

So this is one of the things we said at our Investor Day, we're going to stop talking about. So I appreciate the question, but we're not throwing out like-for-like numbers out there. I said at our Investor Day, it's kind of an interesting industry where you talk about costs all the time and then you go negotiate with customers on what the pricing is. They know exactly what your costs are. So you can assume that the like-for-like costs are lower, right? But we're going to keep that for ourselves. But it's -- we're going to go through a major ramp here for the first time in a while.

We were on BICS 5 for quite some time. It was a great node. The peak yields were fantastic, the best in the whole BICS family. We went to BICS 6 for QLC on part of the portfolio, and now we're going to drive everything to BICS 8 over the next couple of years. And we have a lot of confidence in that node. And as that ramps this year that will provide some cost tailwinds to us. And if you look at our business over the last year, we've been preparing for that. So we had some fab start-up costs. We had tools we were buying for -- to get ready for that transition. We threw in a little bit of underutilization costs along the way.

So we've had cost headwinds for the last 3, 4 quarters in the business. And going forward, those headwinds are going to turn into tailwinds. So that's why we like to set up of the business portfolio in good shape. Supply/demand dynamics in good shape. We're in a market where we think pricing continues to in fleet. And at the same time, our business turning from cost headwinds to cost tailwinds.

Great. Want to ask about -- sorry, relative to BICS 8, maybe just give us any kind of framing as for when you sort of achieve crossover from a production perspective?

So what we've said is we're currently mid- to high single-digits percent of the portfolio. We expect to end this fiscal year about the 40% to 50%. So that's one, you'll see that cross over.

Got it. And then maybe returning for a moment to SSD discussion we just had. I think in the past, you sort of had noted and a target or an aspirational level about 16% market eSSD market share. Where do you think you are now? And then when do you think that target becomes realistic?

So I would say right now from a share percentage, we're mid- to high single digits in that territory. So less than our share of bits. So the way I think about it is we want to get to that share of our bits as the next milestone. And then we want to have the optionality to mix when it's the right thing to do, right? I mean, enterprise SSD is a great market to be in. It's great to run a franchise, quite frankly, where you have a great market to grow into. That's actually a good dynamic. That's a good tailwind from a mix perspective, but that's what we want to get to.

And then what each quarter brings, we'll figure out what the right mix is from a share perspective. I mean there's -- again, remember, we have this awesome consumer franchise. And on a through-cycle basis, that is the best franchise out there. So we want to make sure that we get the right balance across the portfolio, but clearly, we're putting ourselves in a position where we'll have more optionality and drive that enterprise SSD share higher. And the way you do that is you build great products. It's just as simple as that. And that's what we're doing. And the generation of products we're just putting in customers and right now we have an enormous amount of confidence in.

Well, I don't want to make Luis feel left out. So let's talk about operational and financial trends for a second. I think relative to your spending targets, given the industry's more prudent supply-side behavior. How should we be thinking about CapEx in terms of spending gross or net on a go-forward basis? And is the primary driver of that still the sort of BICS 8 investment?

Yes. So our model is to spend CapEx somewhere in the mid-teens on a gross basis. And this year is going to be a little bit above that. Why? Because we're transitioned to BICS 8, which David has explained, right, and as we continue to bring new tools and get them ongoing. We need to spend the CapEx to do that. Still very importantly, our free cash is going to be positive this quarter. We said the free cash flow for the full year will be positive. So despite of all these investments, or incremental investment we'll be free cash flow positive for the year. So we can afford it. So that's where we are on, on CapEx. On a net basis, we -- it varies by quarter, right? You have depreciation, you have subsidies, you have leasing. So it varies a little bit by quarter, but we feel very good about our CapEx plans, enabling our innovation, while still generating free cash flow for our shareholders.

Great. I think it's fair to say that your JV with Kioxia is one of the few successful tech JVs over the past couple of decades. If you were to point out 2 or 3 key highlights of that joint venture, what makes it what it is.

You're right. It's a great relationship. I joined it 5.5 years ago, have been going on for over 20 years at that time, and it's just an awesome relationship. We're in a business -- any technology business, you think about how you can invest, especially R&D, we talked about earlier, why is BICS 8 a great node? Because we are able to invest with Kioxia as much as anybody else in the industry. So together, we're largest or close to tied for largest of market share in the industry. You can essentially afford to invest commensurate what your market share is in a business like this. And so I think the JV, a lot of people think about the manufacturing side of it, which had its own benefits don't get me wrong. But the R&D side of it is just of paramount importance, and the teams work together hand and glove. You would think it was one team. And developing NAND is not easy. Like I think sometimes people conflate a commodity priced product with a commodity. They're very different things. NAND is far, far, far from a commodity. It is extraordinarily difficult R&D.

And so the fact that we can work together with our partner, and it's our combined investment that's going into building that road map, that's how we end up with 10 years -- a 10-year track record of spending 1/3 less capital than the industry average because our R&D team is very focused on how do we build our technology in the most capital-efficient way. It's how you end up with a node like BICS 8 where you have wafer bonding. The first company to deliver wafer bonding at scale. And you look at the performance we're going to get out of QLC on that product is just fantastic. And so that side of the JV, I think, is sometimes a little bit underappreciated and a big part of it. And then, of course, you've got the manufacturing, right?

And we manufacture together and we have two incredible campuses in Japan at Yokkaichi and Kitakami that gives us scale there. And so that's just a little bit about the JV. And it's just a wonderful relationship.

Great. Back to financials, 2 last ones, maybe to end on. Your gross margin guidance, long-term model is 35% through cycle. Can you maybe unpack what through cycle means over time? Is that a true average you expect to achieve? Is it a floor? How should we be thinking about that?

It's clearly not a floor. It's clearly not a ceiling, right? It's an average that we expect somewhere in the 3-year average, right? And since we've been below that, we need to be above that, right? So we -- over the next few quarters, we should expect this, as we mentioned, we should expect some gross margin expansion. And what we're seeing is the benefit of ASP increases, we see some of the benefits on cost, and we'll keep on driving that. We will see better gross margins over the next several quarters.

Yes. And then your long-term model implies 15% OpEx intensity. How do we think about sort of your allocation of R&D relative to SG&A, and is there a desire to keep -- to grow R&D materially and try to kind of keep SG&A as flat as possible.

Yes. The vast majority of our OpEx is R&D, and that's where it should be. I mean David talks about this as an innovation company. Say, our innovation is the lifeblood of this company. I mean, it's just the most important thing, right? We have important investments to make, particularly HBF. If you think about eSSDs, I mean we need to enable all of that. And then some -- we're incurring some costs as we launch our products, right? There are samples to our customers that we need to incur. So we could get some of those costs sometimes during the quarter. And we'll keep on investing on innovation. At the same time, we're driving efficiencies in SG&A, wherever we can, we're moving people to lower-cost locations where we can. So we try to do both things at the same time. Fuel the business through innovation and R&D and driving efficiencies everywhere else where we can.

And then how do you think about the debt load and trajectory of debt paydown? And to the extent you're generating very good free cash flow, if everything plays out as you say, in gross margins and so on are running above normalized, would you accelerate that debt paydown?

Yes. I mean we've been paying our debt earlier than what we had to, right? We paid down $200 million, and we'll keep on doing some of that. At the end of the day, we want to be net cash positive. And once we get there, we're going to do 3 things, consistent with what we said in February. We're going to continue to invest in the business. This is a growing business that needs some cash, and it's generating cash, and we'll continue to invest in the business. We'll continue to generate cash to reduce our gross debt, but we also return some cash to investors, right? I mean that's what cash generation is for. We still need a few more quarters to get there, but that hasn't changed.

Yes. And then just to confirm sort of tactically, relative to the back half of this year versus what you had talked about at your Investor Day sounds like everything is on track for kind of tracking to your expectations versus prior?

Yes. I think at our Investor Day, we called -- we gave a very clear view of what we see as the market over -- through the end of the year, and I think it's playing out that way. I think we're happy with that. And as I said, the portfolio is in great shape. We're very bullish on the business. We're very happy to be here. I think like as you started, separation went flawlessly. And I think we're off and running. And I think we have an awesome opportunity we're going to take advantage of.

Great. And maybe very last question, which is you've done a lot of investor meetings over the past day and I'm sure over the last month or so, When investors who do the story or ones have been looking at this story, talk to you, what do you think is the one that is underappreciated about the Sandisk story today?

I just think in this market, there's -- our experience is for 5 years in the HDD market. There's just a very strong desire to want to like map the past to the future. It's a natural thing to do. And all these things are going to happen and the way things work. And I think what you're seeing is a market that is fundamentally changing. As I touched on a little bit earlier, the fundamental way you think about the market, the fundamental way you manage this market, I think, is changing. I think it's changing before our eyes. It takes a while, I think when you're in the middle of it, it's hard to see it, but it's definitely happening. And I think those -- that's going to change the economics dramatically on the other side of this. I think we're seeing that play out in the HDD business, quite frankly. And I think we're going to see it play out and this business and this is a much bigger business. Bigger levers, bigger prizes, and it makes me very, very excited to be a part of it.

It's a great place to end..David, Luis, thanks for being here.

Thank you very much.