Sandisk Corporation (SNDK) Earnings Call Transcript & Summary

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.

Thank you very much appreciate it.