SanDisk (SNDK.US) Q1 Earnings Call: AI Drives Structural Growth in NAND, Long-Term Orders Extend Beyond 2030

Title context: SanDisk (SNDK.US) Q1 Earnings Call: AI Drives Structural Growth in NAND, Long-Term Orders Extend Beyond 2030 Text: After the U.S. stock market closed on Thursday, SanDisk (SNDK.US) released its fiscal 2027 first-quarter earnings report and held a conference call. Boosted by surging NAND flash demand driven by AI infrastructure buildout and rising product prices, the company's quarterly revenue grew 378% year-over-year, with data center business revenue soaring nearly 17-fold. The company expects further revenue growth next quarter and announced a 1-for-8 stock split. SanDisk management highlighted positive signals for future prospects on the latest conference call: AI inference demand is driving NAND into a structural growth cycle, data centers will continue to be the growth engine, bit demand is expected to grow approximately 40% in calendar year 2027, and the NBM long-term agreement pipeline has extended beyond 2030, with demand exceeding supply. The company expects NAND bit demand for PCs, smartphones, and data centers to all grow positively next year, automotive is expected to become one of the largest markets in the edge business, QLC adoption is accelerating, and new technologies such as HBF are also advancing. Overall, management is confident in the long-term nature of AI-driven NAND demand and its own earnings visibility, and has committed to returning 100% of excess cash to shareholders. I. Management Remarks (I) Opening by Vice President of Investor Relations Ivan Donaldson Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations regarding the company's technology and product portfolio, business plans and performance, capital allocation priorities, market trends and opportunities, and financial results. The company undertakes no obligation to update these statements. Please refer to the company's Annual Report on Form 10-K and other filings with the U.S. Securities and Exchange Commission (SEC) for more information on risks and uncertainties that could cause actual results to differ materially from expectations. In addition, today's discussion will reference non-GAAP financial measures. A reconciliation between non-GAAP and comparable GAAP financial measures is included in the written materials posted on the Investor Relations section of the company's website. (II) Remarks by Chief Executive Officer David V. Goeckeler 1. Performance Highlights and Core Strengths Thank you, Ivan. Good afternoon, everyone, and thank you for joining SanDisk's fiscal 2027 first-quarter earnings call. We opened fiscal 2027 with another strong quarter, creating value for customers and shareholders and delivering results that exceeded guidance. Our strategy is working, and execution is driving strong results. Quarterly revenue was $11 billion, non-GAAP gross margin was 85.1%, and non-GAAP earnings per share was $49.51. We generated $5.7 billion in adjusted free cash flow and returned $5 billion to shareholders through share repurchases. Our confidence in the long-term trajectory of the business is built on three enduring advantages: technology leadership, deep customer partnerships, and disciplined financial management. These advantages are strongly supported by AI-driven structural growth in NAND demand, and through our new business model NBM partnerships customer signals now extend beyond fiscal 2030. Together, these advantages enable us to invest confidently in our technology roadmap, strengthen and expand customer relationships, and deliver sustained growth and durable free cash flow while returning capital to shareholders. 2. Technology Roadmap and Product Progress It all starts with our technology leadership. BiCS 8 is the backbone of our current production portfolio and the industry benchmark for TLC and QLC in performance and density. BiCS 8 introduced our CMOS Direct Bonded Array (CBA) architecture, delivering the performance AI data center customers require and establishing the framework for future generations. BiCS 9 combines the proven BiCS 8 memory cell array with next-generation CMOS, significantly improving interface performance while retaining the mature memory architecture. BiCS 10 advances full-node architecture across TLC and QLC, introducing a 1Tb TLC chip designed for performance-intensive workloads and a 2Tb QLC chip offering industry-leading density with read/write bandwidth twice that of BiCS 8. Together, these technologies will extend the BiCS 8 foundation to meet the evolving performance and capacity needs of next-generation infrastructure. Beyond the core roadmap, High Bandwidth Flash (HBF) reached an important milestone in the first fiscal quarter, with our first HBF memory chip taped out and manufacturing now underway. As outlined at our Investor Day, HBF is a new memory architecture for inference designed to achieve HBM-class read bandwidth with greater capacity to support larger models, longer context lengths, and growing KV caches. It is designed to complement HBM by bringing NAND-class capacity closer to the processor, and we remain on track to deliver the first HBF-based product samples in the next calendar year. HBF remains a future innovation and is not included in the long-term financial model we introduced at Investor Day. As customer adoption, product demand, and manufacturing readiness become clearer, we expect to provide more perspective on the market opportunity. Customers recognize the strength of our innovation and increasingly view SanDisk as a critical partner in achieving their growth objectives. Through our NBM, we continue to evolve customer relationships into long-term partnerships based on innovation, collaboration, and mutual commitment. Our recent customer engagements with leading global AI companies indicate there is further upside in demand for our technology. Our market-leading technology, product portfolio, and customer partnerships are the pillars of our strong financial position, enabling us to reinvest to maintain technology leadership and expand supply through R&D-focused capital expenditures. 3. AI-Driven NAND Demand Each of these advantages is strongly supported by AI tailwinds. As inference workloads grow, demand for scalable memory and storage is expanding, making NAND increasingly integral to AI infrastructure. During inference, every generated token must reference its preceding context, creating a growing KV cache that serves as the model's working memory. Longer prompts, more complex reasoning, multimodal inputs, and persistent user context all significantly increase these storage requirements. HBM and DRAM support the highest performance tiers, while flash provides the capacity needed to efficiently retain broader context and avoid costly recomputation. We believe this is a long-term dynamic that is expanding NAND's role in the AI stack. The memory hierarchy defines the role of each NAND architecture. TLC provides the lower latency, higher write performance, and higher endurance required for active datasets, checkpoints, and latency-sensitive KV cache workloads. In the AI lab comparison we presented at Investor Day, systems using SSDs achieved approximately 3x the token throughput of comparable systems relying solely on volatile memory, while consuming approximately 75% less energy. QLC further increases storage density for capacity-intensive applications such as data lakes and vector databases supporting AI search and retrieval repositories. Across these tiers, a growing persistent context tier establishes data that needs to be retained and recalled rather than regenerated. As inference costs decline, we expect adoption and usage to expand, supporting our view that by the end of this decade, KV cache will account for approximately one-third of the AI data center flash market, and the AI data center opportunity will approach the size of today's NAND industry. 4. End Market Performance Turning to our end markets. In data centers, our portfolio addresses the full spectrum of AI infrastructure needs, from performance-intensive enterprise SSDs to high-capacity platforms. Demand remains strong and continues to grow, and we estimate that data centers' share of industry bits has expanded from approximately 20% at the beginning of this decade to approximately half currently. This structural shift in customer mix is reshaping industry economics and is at the core of SanDisk's ongoing transformation. In the quarter, data centers again delivered strong growth and continued to outpace the overall market as we allocated more supply to meet growing demand in this end market. Edge is a large and strategically important market for SanDisk, encompassing smartphones, PCs, automotive, tablets, and an expanding range of physical AI applications. Automotive is becoming an increasingly important growth engine within our edge business and a meaningful long-term growth opportunity. Our engagements with leading customers continue to deepen, reinforcing our confidence that automotive is poised to become one of the largest markets in the edge business over time. Our consumer business remains a differentiated strategic asset, combining direct brand engagement with hundreds of millions of end users and broad shelf coverage through leading global channel partners. The consumer end market provides a durable foundation for our business, while its direct connection to the market informs product development and gives the company early insight into shifts in end-user demand. Taken together, these results reinforce the durability of the model we outlined at Investor Day. We have established strong profitability and cash flow generation, and going forward our focus is on consistent execution across the entire portfolio. (III) Remarks by Chief Financial Officer Luis Visoso Thank you, David. We are executing the strategy and plan outlined at Investor Day and delivering attractive financial results. In the first quarter, we completed 2 NBM transactions. Because both transactions were completed before our fourth-quarter earnings call, we announced these partnerships on that call. We are actively engaged with existing NBM customers who are evaluating extensions of existing agreements, as well as with new customers evaluating new NBMs. These long-term partnerships provide greater visibility into demand and financial performance, supporting a more durable financial model. In determining the optimal percentage of bits to allocate to NBM, we will remain patient and disciplined, and this percentage may be higher than current levels. First-quarter revenue was $11 billion, up 23% sequentially and up 378% year-over-year. This compares favorably to our guidance range of $10.3 billion to $10.8 billion. Volume growth and price increases together drove revenue growth, with approximately 60% of the growth from volume and 40% from price increases. Data center revenue was $4.8 billion, up 61% sequentially, exceeding estimated market growth for the quarter. Our leading products and strong customer partnerships, including 3 U.S. hyperscalers, underpin our continued expansion in this fast-growing end market. Edge revenue was $5.8 billion, up 7% sequentially, reflecting resilience in premium and mainstream markets, partially offset by contraction in the low-end market. Within edge, we saw strong growth from automotive and IoT customers. Consumer revenue was $397 million, down 29% sequentially, as the market adjusts to higher prices. We remain committed to serving all 3 end markets through a diversified portfolio to optimize our performance over time. First-quarter non-GAAP gross margin was 85.1%, up from 84.6% in the prior quarter, driven by volume and pricing increases. This compares favorably to our guidance range of 83% to 85%. Non-GAAP operating expenses were $513 million, or 4.7% of revenue. Non-GAAP operating margin was 80.4%, compared with 79.2% in the prior quarter. Non-GAAP earnings per share was $49.51, up from $39.25 in the prior quarter and $1.22 in the year-ago period. This compares favorably to our guidance range of $44 to $46. At quarter end, diluted shares outstanding were 154 million. Key GAAP-to-non-GAAP reconciliations include $91 million in stock-based compensation, or 0.8% of revenue, and $513 million in gains on equity securities, primarily attributable to our investment in Nanya Technology. During the quarter, we repurchased approximately 3.2 million shares of common stock for $5 billion. Over the past two quarters, we have repurchased a total of 6 million shares, representing approximately 4% of our total shares outstanding. Our repurchases reflect our confidence in the long-term value of the business and our disciplined approach to capital allocation. We continue to invest appropriately in the business while returning 100% of excess cash to shareholders. Next, free cash flow. Operating cash flow was $6.4 billion. Total capital expenditures were $378 million, or 3.4% of revenue. We expect total capital expenditures to increase over the remainder of the fiscal year, at a mid-single-digit percentage of revenue for fiscal 2027. In the quarter, we generated $5.7 billion in adjusted free cash flow, a margin of approximately 52%. At quarter end, we had $5.1 billion in cash and cash equivalents and no debt. Next, guidance. Our confidence in the long-term health of the market is reinforced by structural growth in AI infrastructure and NAND's expanding role in inference workloads. Before turning to the second-quarter outlook, I'd like to announce that SanDisk's Board of Directors has approved a 1-for-8 stock split of the company's common stock. The additional shares are expected to be distributed on November 19, and split-adjusted trading is expected to begin on November 20. For the second quarter of fiscal 2027, we expect revenue between $12.2 billion and $12.6 billion. We expect non-GAAP gross margin between 84.5% and 85.5%, including modest year-over-year price increases. On a pre-split basis, we expect non-GAAP earnings per share between $55 and $57, assuming 151 million fully diluted shares. Adjusted for the 1-for-8 split, this equates to non-GAAP earnings per share between $6.88 and $7.13, assuming approximately 1.208 billion fully diluted shares. As context, we expect a strong market in calendar year 2027. Data centers are expected to again be the growth engine, accounting for more than 55% of the market, with bit demand growing approximately 40% year-over-year, driven by increased AI-driven capital expenditures. This follows doubled growth in 2026. Our NBM pipeline demand will exceed our supply capability throughout the remainder of the decade. (IV) Closing Remarks by Chief Executive Officer David V. Goeckeler Thank you, Luis. We continue to execute the strategy outlined at Investor Day, which reinforces our confidence in SanDisk's long-term trajectory. Our technology leadership, deep customer partnerships, and disciplined financial management, supported by AI-driven structural growth in NAND demand, position us to serve customers, deliver sustained growth and durable free cash flow, and return capital to shareholders. Over the past year, we have transformed the earnings and cash flow generation capability of the business and laid a solid foundation for durable performance. We remain focused on disciplined execution, continued value creation, and achieving our long-term financial targets. II. Q&A Session 1. On NBM Pipeline and PC Market Melius Research analyst Benjamin Reitzes asked: Will the pace of NBM signings accelerate? Will the percentage of bits locked under contract change in the coming years? Will there be more NBM demand from the PC market? Chief Executive Officer David V. Goeckeler answered: The NBM pipeline is very strong, with approximately 50% of the company's bits locked through NBM this fiscal year and approximately two-thirds next fiscal year, and the percentage is expected to continue rising. The company will remain patient and selective with the next batch of customers. At the same time, the company is balancing customers returning for more supply with bringing in new customers. Customers generally report that they underestimated the amount of NAND needed to run their infrastructure, and multiple customers are seeking a second round of engagement. Chief Financial Officer Luis Visoso added: Currently 95% of NBM customers are investment-grade companies, which together generate approximately $130 billion in operating cash flow, and the company is pleased with its partner selection. Chief Executive Officer David V. Goeckeler added (PC market): The company's internal model shows that NAND bit demand for PCs, smartphones, and data centers will all achieve positive growth next year, primarily driven by increasing content per device and premiumization trends. Although the current two calendar quarters represent the "toughest period" with unit volumes declining year-over-year, improvement is expected from current levels. 2. On Data Center Growth Drivers Morgan Stanley analyst Joseph Moore asked: Data center business grew nearly 20-fold year-over-year and 61% sequentially is the growth primarily from BiCS8 or from the market itself? What is the long-term target for data center bit share? Chief Executive Officer David V. Goeckeler answered: Growth is the result of multiple factors working together. The BiCS 8 node and CBA architecture provide excellent interface speed; the company has the right product portfolio, with TLC products in the market for several years and QLC products beginning to contribute revenue a few quarters ago and now ramping. AI inference architectures are becoming increasingly refined, with customers using NAND more granularly, employing TLC and QLC in different areas such as KV cache, scratchpad, and fast data lakes. Some customers are even beginning to use QLC in KV cache, while SLC is also being introduced into architecture discussions, primarily focused on the endurance required for agentic workloads, exploring the possibility of replacing DRAM with NAND. Once these architectures are converted, they will be highly sticky. The company is working to align its product portfolio with the market's bit structure, and expects continued progress in calendar year 2027, with the portfolio mix significantly improving by the end of fiscal 2026. 3. On Pricing and HBF Progress Bernstein analyst Mark Newman asked: What is the split between price and volume contribution in the second-quarter guidance? How are HBF customer communications progressing? What are your views on new NAND technology tiers such as Storage-Next and CMX? Chief Financial Officer Luis Visoso answered (pricing): Approximately 60% of first-quarter revenue growth came from volume and 40% from price. In the second quarter, both are expected to contribute to growth, with modest price increases, and prices are expected to continue rising modestly throughout the year. Chief Executive Officer David V. Goeckeler answered (HBF and new technologies): Communications with potential customers are ongoing and active, and the company will continue to update on progress once product samples are in customers' hands. AI inference architectures are continuously being optimized around economics, which is driving NAND into more parts of the architecture. The company is both advancing density improvements from TLC to QLC and exploring providing higher endurance through SLC mode in specific areas to replace costly DRAM. The company views these explorations as healthy, with the key being to stay close to customers investing capital to expand infrastructure and provide the right technology, timing, intensity, and cost based on their use case requirements. 4. On BiCS Transition and Supply Allocation MST Financial analyst David Gibson asked: Will the transition from BiCS 8 to 9 and 10 be accelerated to meet customer demand? Are there constraints on allocating more bits to data centers? Chief Executive Officer David V. Goeckeler answered: The company is maintaining its previously announced bit growth plan (mid-to-high teens percentage) and does not intend to accelerate node transitions, as node conversions require significant planning and equipment procurement. There are some constraints on allocating more bits to data centers. When wafers are output, the mix of TLC, QLC, and chips is fixed and requires ongoing matching. Chief Financial Officer Luis Visoso added: In the short term (approximately 120-day wafer production cycle), there is minimal room for adjustment, but over the longer term there is more flexibility. 5. On NBM Pipeline and Capital Expenditures Cantor Fitzgerald analyst Christopher Muse asked: What does the NBM pipeline exceeding supply specifically mean? Will it affect capital expenditure plans? Can deposits in NBM contracts be used for buybacks? Chief Executive Officer David V. Goeckeler answered: The NBM model is working well, with the pipeline extending to 2030 and beyond. Customers are willing to provide demand signals and financial commitments, which will give the company the ability to adjust supply and demand in the future, but negotiations and commitments still need to be completed. The company is pleased with progress and will continue to provide updates. Chief Financial Officer Luis Visoso answered (deposits): Most of the financial guarantees in NBM contracts are held by third-party Financial Institutions, Inc. and are not on the company's balance sheet; only prepayments are on the balance sheet, and the amounts are small. In theory, prepayments could be used for buybacks, but there are no legal restrictions. 6. On Enterprise SSD Content and Market Share BNP Paribas analyst Karl Ackerman asked: What is the trend for enterprise SSD content per server in 2027? Is there an update to the enterprise SSD market share target? Chief Executive Officer David V. Goeckeler answered (content): In inference and agentic orchestration applications, the company observes approximately 60 to 90GB of NAND demand per CPU. NAND is being introduced into various parts of inference architectures through TLC, QLC, and high-endurance SLC. The company will continue to track and analyze the elasticity relationship between server TAM and NAND TAM. Chief Executive Officer David V. Goeckeler answered (share): The company does not set specific market share targets to avoid distorting the product portfolio. Data center business grew 17-fold year-over-year, and its share is expected to continue increasing in 2027. The balance point will depend quarter by quarter on market conditions and NBMs signed. 7. On BiCS Nodes and SLC Impact Mizuho analyst Vijay Rakesh asked: Can the BiCS 8/9/10 transition help meet the 40% data center bit demand growth in 2027? How will SLC usage affect NAND market supply next year? Chief Executive Officer David V. Goeckeler answered (BiCS): BiCS 9 is an important part of the data center strategy, enabling faster interface speeds on the same memory cells. TLC products are performing well, QLC is ramping, BiCS 9 will gradually ramp, and BiCS 10 will take time. Chief Executive Officer David V. Goeckeler answered (SLC): Some customers have already signaled SLC demand. There is a clear 3:1 to 4:1 conversion ratio between SLC and TLC/QLC, which will affect overall market supply. However, it is too early to provide specific forecasts, and the company will continue to update over the coming quarters. 8. On Seasonality and Buyback Authorization Goldman Sachs Group, Inc. analyst James Schneider asked: What are the seasonal trends for the third fiscal quarter (March quarter)? Will the buyback authorization be updated quarterly? Chief Financial Officer Luis Visoso answered (seasonality): Historically, the third fiscal quarter is typically the weakest sequentially. Last quarter, bits declined 19% sequentially. The company is not providing third-quarter guidance but suggests modeling conservative sequential growth from the second to third fiscal quarter. Chief Executive Officer David V. Goeckeler answered (buyback): The company's strategy is clear 100% of excess cash will be returned to shareholders. The company meets with the Board quarterly, and buyback execution is not expected to be hindered. Approximately 4% of shares outstanding have been repurchased over the past two quarters, and the company will continue to execute the program appropriately. 9. On TLC/QLC Mix and Mobile Market TD Cowen analyst Krish Sankar (asked by Steven on his behalf) asked: What is the current demand ratio of TLC to QLC among cloud service provider customers and how will it change long-term? With mobile unit volumes declining, can mobile bits grow next year? Chief Executive Officer David V. Goeckeler answered (TLC/QLC): Currently the TLC to QLC ratio is approximately 70:30, and this level is expected to be maintained for the remainder of the fiscal year. There is more discussion among customers about accelerating QLC adoption across different use cases. QLC products (Stargate) are fully qualified, customers are ramping, and market reception is good. Chief Executive Officer David V. Goeckeler answered (mobile market): Pressure in the low-end market is causing unit volume declines, but content per device is increasing. Next year, bits (EB) in this market are expected to grow despite a slight decline in unit volumes. The company will manage its product portfolio with agility and flexibility to optimize short-, medium-, and long-term financial results. 10. On AI Customers and Accounts Receivable BofA analyst Wamsi Mohan asked: Does "leading AI companies" refer to AI labs or neoclouds? Are neocloud credit issues transmitting to the company? What is the reason for the increase in accounts receivable? Chief Financial Officer Luis Visoso answered (AI customers): The company sells to all customers, including hyperscalers and model builders. No impact from neocloud credit issues has been observed; on the contrary, customer demand is very strong, and the largest customers are essentially all investment-grade companies. Customer demand has strengthened compared to a quarter ago. Chief Financial Officer Luis Visoso answered (accounts receivable): The increase in accounts receivable is primarily due to changes in customer mix, with a slight impact on linearity, but mainly attributable to customer composition. 11. On Capital Structure and HBF Milestones Evercore analyst Amit Daryanani asked: Does the transition to an NBM-driven business model change capital structure considerations? Is the company willing to add leverage to accelerate capital returns? What are the key milestones for HBF from sampling to revenue contribution? Chief Executive Officer David V. Goeckeler answered (capital structure): The company is committed to executing the financial model through 2030 and is comfortable with its strategy of maintaining no debt and a strong balance sheet. The company will continue to invest in internal innovation (such as HBF and 3D matrix memory) and return 100% of excess cash flow to shareholders. This strategy is not expected to change in the near term. Chief Executive Officer David V. Goeckeler answered (HBF): The next step is to tape out the base chip (controller), combine it with the memory chip, and deliver to customers. Customers will actually test how the product performs in their infrastructure, which will help answer questions about market opportunity, TAM, and architectural positioning. The company will expand use case discussions with customers once it has actual products. 12. On SLC and TLC/QLC Relationship Susquehanna analyst Mehdi Hosseini asked: Will SLC demand adversely affect TLC or QLC adoption? Can the joint venture fab increase SLC capacity to meet short-term demand? Chief Executive Officer David V. Goeckeler answered (SLC positioning): SLC is not cannibalizing TLC or QLC but rather expanding the TAM into areas requiring different technical attributes. The company can run wafer output in SLC mode, and the product is highly flexible. SLC's main appeal is that it costs 20 to 40 times less than DRAM, and if sufficient endurance and performance can be provided, it has the potential to replace DRAM in some scenarios. Chief Executive Officer David V. Goeckeler answered (supply flexibility): The company does not believe it needs to specifically add SLC capacity; existing memory cells can be flexibly switched between SLC, MLC, TLC, and other modes, utilizing existing wafer supply to serve the market. It is still in the customer exploration stage, but SLC usage will impact the market because "a small amount of SLC equates to a large amount of QLC."