Sandisk Corporation ($SNDK)

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.