Sandisk Corporation ($SNDK)

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.