Sandisk Corporation (SNDK) Q2 2026 Earnings Call Transcript

Sandisk Corporation (NASDAQ: SNDK) Q2 2026 Earnings Call dated Jan. 29, 2026

Corporate Participants:

Ivan Donaldson — Vice President, Investor Relations

David Goeckeler — Chairman & Chief Executive Officer

Luis Felipe Visoso — Executive Vice President and Chief Financial Officer

Analysts:

Mark Newman — Analyst

Joe Moore — Analyst

CJ Muse — Analyst

Jim Schneider — Analyst

Carl Ackerman — Analyst

Michael Fednoff — Analyst

Tom o’ Malley — Analyst

Presentation:

operator

Good day and welcome to the SanDisk second quarter fiscal 2026 earnings call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today’s presentation there will be an opportunity to ask questions. To ask a question, you may press Star then one on a touchtone phone. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Ivan Donaldson, Head of Investor Relations. Please go ahead.

Ivan Donaldson — Vice President, Investor Relations

Before we begin, please note that today’s discussion will contain forward looking statements based on management’s current assumptions and expectations which are subject to various risks and uncertainties. These forward looking statements include expectations for our technology and product portfolio, our business plans and performance, market trends and opportunities, and our future financial results. We assume no obligation to update these statements. Please refer to our annual report on Form 10K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non GAAP financial measures today.

Reconciliations between the non GAAP and comparable GAAP financial measures are included in written materials posted in the Investor Relations section of our website. With that, I’ll turn the call over to David.

David Goeckeler — Chairman & Chief Executive Officer

Thanks Ivan, Good afternoon and thank you for joining SanDisk’s fiscal second quarter earnings call. In the quarter revenue was $3 billion, up 31% sequentially with non GAAP earnings per share of $6.20. Artificial intelligence continues to drive a step change in demand with data center and edge workloads and expanding system complexity and storage content requirements. This shift, along with disciplined commercial actions and strategic capacity allocation has strengthened our business results. Let me frame the NAND industry’s evolution before discussing our end markets. NAND is now recognized as indispensable to the world’s storage needs, driving a foundational shift in how commercial relationships between suppliers and customers are structured.

Supply certainty, longer planning horizons and multi year commitments are increasingly essential to support structural demand that extends beyond the traditional cyclical model of our market. As a result, we are engaged in discussions with customers to evolve from quarterly negotiations towards multi year agreements with firmer commitments on supply and pricing enabling better planning practices and more attractive returns. These changes would better align our planning cycles with customers demand profiles to our mutual benefit. Accordingly, our supply plans will continue to be designed around predictable long term demand at current and forecasted market prices. These dynamics reveal the true value of our NAND technology and reinforce the need for continued innovation and disciplined execution.

Our products are enabled by decades of sustained investment in R and D and innovation across NAND and systems solutions supported by substantial capital investments in world class front end and back end manufacturing. As a result, we believe NAND is becoming a more durable, structurally attractive industry with higher average returns. Turning to our end market highlights during the quarter we continued to execute against our roadmap advancing next year generation product innovations and qualifications across the business with key customer programs progressing on schedule in data center we are at the center of a broad expansion in AI infrastructure.

Enterprise SSD demand is accelerating across the ecosystem as AI workloads scale, with inference in particular driving a meaningful increase in NAND content for deployment. This momentum reflects deepening engagement with a wider range of customers building and deploying AI at scale reshaping our data center business which we expect to grow meaningfully in both the near and long term. We are seeing strong adoption across all types of AI infrastructure builders including cloud hyperscalers, edge and enterprise data centers, OEMs and system integrators. Deploying AI at scale Our technology has become a critical enabler of these deployments, delivering the performance characteristics required for optimized AI infrastructure.

The breadth of customer adoption across the AI ecosystem underscores the strength of our technology and the depth of our product portfolio within hyperscalers. We have completed qualification of our PCIe Gen 5 high performance TLC drives at a second hyperscaler and are on track to complete qualification at additional hyperscalers over the coming quarters with Bix 8 TLC solutions soon thereafter. This product is driving significant revenue growth across our data center portfolio which was up 64% sequentially. Our BICS 8 QLC storage class product codenamed Stargate, continues advancing through qualification with two major hyperscalers and is expected to begin shipping for revenue within the next several quarters, providing an additional tailwind for data center.

Growth in Edge demand meaningfully exceeded supply as replacement cycles and AI adoption across PCs and mobile devices drove richer configurations and higher storage content per device. In this allocation environment, we are partnering with key Edge customers to prioritize their mission critical needs and optimize product mix within our available supply, ensuring the best long term returns across our portfolio in consumer mix shifted toward premium products and higher value configurations supporting storage content growth and profitability. We introduced a breakthrough in the USB form factor with the launch of our SanDisk Extreme Fit, our smallest high capacity USB C flash drive.

This breakthrough stay put product gives our customers a seamless and affordable way to significantly expand storage on their PCs and smartphones. We expanded key licensing initiatives with global household names Crayola and FIFA bringing full circle the commitments underscored last February with the debut of colorful SanDisk Crayola USB C flash drives and officially licensed FIFA World Cup 2026 products. This strong momentum continued through the holidays with demand driven by targeted gaming led initiatives including our don’t delete your Games campaign. At CES 2026, we introduced the SanDisk Optimus lineup rebranding WD Black and WD Blue NVMe SSDs to sharpen brand architecture and reinforce performance leadership.

Together, these actions reflect our continued focus on driving demand through brand innovation and disciplined go to market execution, reinforcing SanDisk leadership across gaming creator and everyday consumer segments. These wins across our end markets reflect the agility of our operations and the resilience of our broad portfolio. Looking ahead, we continue to see customer demand well above supply beyond calendar year 2026 which requires careful allocation planning in alignment with our customers. We remain focused on disciplined execution through the BICS 8 transition, supporting average long term bit growth in the mid to high teens while maintaining our capital expenditure plan.

We are working diligently to support customer demand while ensuring profitability supports the substantial R and D and capital investment required to deliver some of the world’s most advanced semiconductor technologies. With that, I’ll turn the call over to Luis to dive deeper into our financial performance and guidance.

Luis Felipe Visoso — Executive Vice President and Chief Financial Officer

Thank you David. Before diving into the financials, I will provide a brief market overview we believe that the NAND market is going through structural evolution catalyzed by AI. The evolution is more pronounced in data center where data growth is accelerating as the temperature of data is rising, token intensity is accelerating and storage is a critical enabler for inference. As a result, NAND is an increasingly critical component of the AI infrastructure. Higher demand for NAND in data center impacts other markets which are also growing as NAND flows to the most attractive markets. It is our view that this structural evolution is sustainable and should reduce cyclicality of our NAND business, creating higher average long term margins and returns.

In the December quarter we experienced a clear and significant improvement in market conditions across end markets which led to higher pricing. During the quarter we made strategic allocation decisions as demand for our products continues to exceed supply. The framework we use to allocate bids is to maximize value creation. We prioritize supply for our strategic customers, those who recognize the value we can create. Together, these are the customers with whom we intend to build valuable partnerships thus establishing sustainable multi year business practices with high predictability of demand returns and capital deployment. Given the strength of the market, we were unable to fulfill demand for our customers.

This quarter we’re evolving how we define strategic engagement, prioritizing customers with multi year supply frameworks and share planning commitments over transactional short term demand signals. We continue to be prudent and are not changing our capital spending plans will support mid to high teens bid growth through the BICC transition. Our investment posture remains focused on serving attractive sustained demand at healthy profitability levels. Any material increase in capital deployment would require high confidence that demand at attractive pricing levels is durable over a several year horizon with financial commitments in the current environment, we’re committed to supplying our three end markets as we believe that diversification maximizes value creation.

We plan to continue to build strategic relationships with a diversified customer mix within these markets allowing us to have a deeper understanding of of their long term needs. In the quarter, we continue to make progress with customers in establishing share commitments that improve the predictability of the business. Customer commitments and agreed commercial terms are the most effective mechanism to deliver supply certainty and return on invested capital predictability, allowing us to more prudently manage our capital intensive business across geographies. With that context, I will dive deeper into the quarter results. Revenue for the second quarter was $3,025 million of 31% quarter over quarter and 61% year over year.

This compares favorably to our guidance of 2,550 to $2,650 million. The revenue over delivery came from higher prices across segments which strengthened during the quarter. Bids were up 22% year over year and up low single digits quarter over quarter. In the second quarter we saw strong sequential demand across all end markets. Edge revenue came in at $1,678 million up 21% sequentially. Consumer came in at $907 million up 39% quarter over quarter and data center came in at $440 million up 64% sequentially. Our non GAAP gross margin for the second quarter was 51.1%, up from 29.9% in the prior quarter.

This compares favorably to our guidance of 41 to 43%. The gross margin over delivery came from higher pricing. Unit cost reductions came in as expected, reinforcing margin improvements. In the second quarter we incurred $24 million in startup cost. Excluding this cost, non GAAP gross margin would have been 51.9%. Non GAAP operating expenses for the second quarter were $413 million and represent 13.7% of revenue. This compares favorably to our guidance range of 450 to $475 million, reflecting a non recurring benefit from changing how we manage new product introductions. As a result, non GAAP operating margins at 37.5 are up from 10.6% in the prior quarter.

Non GAAP EPS for the second quarter was $6.20, up from $1.22 in the prior quarter. This compares favorably to our guidance range of 3 to $3.40. The non GAAP EPS bid reflects higher than expected revenue and lower costs. Key GAAP to non GAAP Reconciliation items include $52 million in stock based compensation net of taxes which represents 1.7% of revenue and $93 million related to certain legal matters. Moving on to the balance sheet, we closed the quarter with $1,539 million in cash and cash equivalents and $603 million in debt. During the quarter, we paid an additional $750 million of debt and closed the quarter with a net cash position of $936 million.

Moving on to free cash flow, during the quarter we generated $843 million in adjusted free cash flow which represents a 27.9% free cash flow margin. This includes $1,019 million from operations, partially offset by $176 million from net cash capital spending. Our gross capital spending totaled $255 million and represent 8.4% of revenue. Earlier today we announced that we have reached an agreement with Kyokusha to extend the Yokkaichi joint venture through December 31, 2034. With this extension, the Yokkaichi and Kitakami JVs will have the same expiration date. Building on more than 25 years of partnership, we believe that the JV reflects the scale of our operations and and the significant mutual value created over time.

The JV enables both companies to design and manufacture the highest performing, lowest cost NAND technology that powers the world’s infrastructure. As part of this extension, SANDISK agreed to pay for the manufacturing services that Kyooksha will provide, enabling continued availability of product supply a total of $1,165 million. This amount will be paid between calendar years 2026 and calendar year 2029. The cost will flow through our cost of goods sold over the next nine years. Moving on to guidance for the third quarter, we expect revenue between 4.4 and $4.8 billion. We anticipate the market to be more under supplied than it was in the second quarter.

We expect bids to be down mid single digits due to a lower than historical seasonality as we benefit from accelerating strength in data Center. Our forecast for non GAAP gross margin for the third quarter is between 65% and 67%. For the third quarter we expect non GAAP operating expenses between 450 and 470 million dollars. We expect non GAAP interest and other expenses and between 25 and $30 million and non GAAP tax expenses between 325 and $375 million. We forecast non GAAP EPS for the third quarter between 12 and $14 assuming 157 million fully diluted shares.

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

David Goeckeler — Chairman & Chief Executive Officer

Thank you Luis. In summary, we continue to successfully navigate these early stages of a far reaching evolution in our business. In addition to its central role in technology, we use every day PC, smartphone, tablets, the cloud, cars, gaming devices, robotics and on and on. NAND is a critical technology enabling the development and proliferation of artificial intelligence. For the first time, Data center is expected to become the largest market for NAND in 2026 driven by some of the world’s largest and well capitalized technology companies. Fueled by the performance our technology delivers, customers across all our end markets are increasingly seeking business practices built around shared commitments and agreed financially attractive terms aligned with our pre existing supply plans.

Our supply plans will remain aligned to such attractive real and sustainable long term demand. With this backdrop, margins are expected to reset at a structurally higher level, delivering fair returns on the substantial innovation and investment required. Our technology and product portfolios intersect these changing market dynamics at the perfect moment, positioning us to manage a balanced portfolio and deliver industry leading financial performance. With that, let’s open up for questions.

Questions and Answers:

operator

Thank you. We will now begin the question and answer session. To ask a question you may press Star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, Please press star then 2. The first question will come from Mark Newman with Bernstein. Please go ahead.

Mark Newman

Hi, thanks very much and congratulations on fantastic numbers today. Really really great numbers, especially the third quarter guidance. So clearly what’s happening is that prices are rebounding extremely at unprecedented rate. I guess my question is going to Dave’s comments at the beginning. How are you thinking about long term agreements?

Ivan Donaldson

What?

Mark Newman

Obviously there’s pros and cons to long term agreements because long term agreements lock in the prices. When prices are going up so fast you actually don’t want so many long term agreements.

Ivan Donaldson

I guess.

Mark Newman

But I guess I just like to understand how you’re thinking about that how we should think about that in terms of your portion of agreements that are going longer term and how that may impact going forward, that’d be great. And if you could also just touch on the supply demand balance longer term if in this very, very huge, what seems to be quite a sharp under supply situation at the moment, if there’s any plans to be adding supply or how you’re thinking about, that would be also great. Thanks very much.

David Goeckeler

Thanks Mark. Appreciate the comments. So let me say a few words about what’s happening in the business and then we’ll move on to the lta. So there’s a number of things happening in the dynamics of our business that are contributing to the results you’re seeing. So first of all it starts with the portfolio and innovation. You know our BICS 8 node which we’ve started ramping now and continue to ramp is just a fantastic node. The performance, the QLC performance, the two terabit die. There’s a lot of things that just position us very, very well. Customers are responding very strongly to that fundamental NAND technology we’re producing.

By the way, I’ll just note that we extended the JV which we’re very happy about, which that’s going to continue for now another decade. That’s enabling very strong enterprise SSD portfolio. This is something we’ve been driving for a while. I talked last quarter. We’re going to see growth of that throughout the fiscal year. We saw I think 29% sequential growth in the first fiscal quarter. Now we just saw 64% sequential growth in the second fiscal quarter. And I think you’ll see that accelerate from here in the second half of the fiscal year. So you know that the third leg of kind of major business innovation is happening in the consumer business.

Quite frankly a lot of new product introduction. This extreme fit product that we announced this year is really a breakthrough product. It’s allows our customers to very seamlessly and affordably increase capacity storage capacity of their devices. You know it’s kind of a, you know, innovation in the USB space. You wouldn’t think that would happen anymore. But it’s not a removable product. It’s designed just to plug in and stay. You see our, the agreements we’re doing with you know, people like FIFA which could be the biggest event of this entire year. We have great co branded products there.

You know we look at our consumer business, we saw 50% year over year growth in the consumer business. So really strong performance there. This you know, improving portfolio innovation driven excellence in the product is Allowing us to just have a better portfolio mix than if we look back over the last several quarters, we’re literally able to trade out the lowest margin business for now, the highest margin business. And that provides a significant tailwind to the business as well. And then on top of all of that you’ve got the supply demand dynamics which are pushing the entire market forward.

So it’s really a combination of all of these that’s driving the business forward. It’s not simply just pricing, although obviously it’s great to be in a strong pricing environment. Moving on to LTA’s, I’ll talk a little bit about this and I know Luis will have some great comments about this as well. So as we reach points where we believe we’re getting a more fair return for our technology and customers quite frankly are looking for more supply assurance, I think one thing to note on the market right now, this is a completely demand driven phenomenon. What’s going on in the market.

We’ve been very transparent for well over a year what our supply plans are. We’re investing heavily in this market. We’re investing hundreds of millions of dollars of R and D to push the roadmap forward. We’re investing billions of dollars of CapEx. And we’ve been very clear we’re going to drive, you know, mid teens to high teens bit growth on a sustained basis, which we think is a great, great market. And what’s happening is we’re just not getting enough visibility into what the demand side, what the demand really is. I mean if we look at data center, we’ve had three forecast cycles now.

You know, last quarter we went from mid 20s to mid 40s percent growth in that market. Now we’re looking at high 60% exabyte growth in that market for 26. I think our customers realize this, especially in the data center market. You know, their numbers are big. What they’re going to need in 26, 27, 28 or even talking some of them about 29 and 30, you know, they’re doing their own planning. The amount of exabytes they’re going to need are substantial. And so the long term agreements are about coming up with a model where we can get confidence in supplying that level of demand on a sustained basis.

For us it’s not about what demand is next quarter or the quarter after that. There’s not much we can do about that given the dynamics of our business. But we want to get the long term growth rate aligned behind where the long term sustained demand is to your point at attractive Financials. So let me turn it over to Luis with that.

Luis Felipe Visoso

Yeah, I mean, David covered most of it. What I would say, Mark, is we’re seeing customers across end markets reach out to us and across geographies. So this is not just a few. We’re really seeing a broad base which is, it’s very interesting for us and we’re making significant progress. We’re making significant progress with several of our customers who are very. Who really want us to prioritize or assure supply. To David’s point, they see that as a critical enabler for their business and that’s what they’re looking for. Now, to your point, we’re being very thoughtful on how do we define a few metrics? One is the length of the agreement, the price at which we will transact, the quantities, how much of our business we want to put in there, and any prepayment component of that.

So we’re being super thoughtful and this should be a value, should be value accretive and not the opposite.

Mark Newman

Great, thanks very much. And any quick comments on how you’re thinking about supply, demand, longer term and any flexibility to add supply?

David Goeckeler

No, I mean, Mark, we’ve got our supply plans. You know, we’ve been, again, we’ve been very clear on what our capex plans are, what our bit growth plans are. That’s what they are. It’s about meeting our customers at that supply level and understanding how we allocate that. And then as we said, it’s about all of us picking up our head and looking a little further out on the horizon as to what demand is really going to be in this market and what sustained demand is going to be. And you know, we just really need to get out of this idea that this is a transactional market where we only get a strong signal a quarter at a time.

I mean, we get demand signals for our customers, in all fairness, on a yearly basis, but we really only transact that. You know, we negotiate price every quarter and that just makes it very, very difficult to increase any kind of spending because we just don’t have visibility to the economics of it. And again, especially as the market transitions to data center, I think the data center customers are more willing. Louise said it’s across all of them. But I think the data center customers, given their demand profiles and how big they’re growing, quite frankly, are kind of a little more proactive in engaging in that conversation and really wanting to understand supply assurance several years out.

And how do we come up with a what are the business practices we can put around that. And you know, that’s, as I said in the prepared remarks, when I say we’re early in this transition, that’s where the early part is. I think the business practices are going to change and, and I think that’s all for the good. We gotta get through those conversations over the next couple of quarters.

Mark Newman

Thanks very much. Congrats again, guys.

Luis Felipe Visoso

Thanks, Mark.

David Goeckeler

We appreciate it.

operator

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

Joe Moore

Great, thank you. At the Consumer Electronics Show, Jensen talked about this key value cache and gave some numbers in terms of, I think terabytes per gpu seems like a pretty big market. Are you getting indications around that? Do you think there’s. We should take that as kind of straight math. Does everybody have different implementations and just the ramifications for what happens to data center nand? Yeah, Joe, we’re working through that right now. You know, we’re working through it with Nvidia and kind of how they’re thinking about it. And of course then we’ll work through it with our customers about how they’re going to configure it in deployments.

So it’s still a bit early. I’ll say a couple things about it. First of all, none of that demand is in the numbers. We’re talking about demand numbers at this point. I think it’s a perfect example about how we all need to collaborate a little bit more on what future demand is going to be. Secondly, our initial looks at it, when we look at let’s say 27 demand, we think that’s roughly maybe 75 to 100 additional exabytes and then the year after that you can double that. So it is significant amount of demand. And I think it is again, just another example of NAND is just front and center in the AI architecture.

That’s very, very clear at this point. If it wasn’t before. The AI architecture is changing, right? And that’s not a surprise. Any kind of technology that’s this profound and is being deployed at this much scale, we’re going to continue to see innovation and evolution of the architecture. So we’re going to stay very close to that. You know, NAND’s got was just going to be a big part of that architecture. It’s the most scalable storage, semiconductor storage technology or most, maybe the most scalable semiconductor technology at all. And you know, so we’re looking at those configurations.

It’s very real demand. We’re just trying to get our arms around it and then we’ll put it in the numbers probably for the back half of this year going into 20, 27 and 28. Great, thank you.

Luis Felipe Visoso

And then as a follow up, the.

Joe Moore

Enterprise SSD opportunity, how does that break.

Luis Felipe Visoso

Down between TLC and QLC at this.

David Goeckeler

Point and how is that changing going forward? I think we’re roughly tracking the market right now. It’s predominantly tlc. I would say it’s tilted towards tlc, especially for us. And then we haven’t launched our Stargate product yet for the storage based qlc. It’s in qualification. We’ll start shipping that for revenue in the next couple of quarters which we’re excited about, providing another tailwind of growth to our data center portfolio and that will up the mix of qlc. But at this point I think the overall market in our portfolio is tilted towards tlc. Great, thank you.

Great numbers. Thanks Joe, Appreciate it.

operator

The next question will come from CJ Muse with Cantor Fitzgerald. Please go ahead.

David Goeckeler

Yeah, good afternoon.

CJ Muse

Thanks for taking the question, I guess. First question, is there a way to quantify incremental demand for NAND related to AI infrastructure buildout? Not including kvcash, but we were mid to high teens before and I’m curious now based on your conversations with customers and the demand trends that you’re seeing, where do you think the new demand growth CAGR is looking out? 26, 27, 28.

David Goeckeler

I think the best proxy we have for that right now CJ is just what we’re seeing in exabyte demand in the data center. As I said earlier, I mean two cycles ago we were looking at, you know, call it mid-20s exabyte growth in 26 for data center. Last quarter we were talking about we up that to mid-40s. Given the capex cycle that went on, we’re now looking at high 60s exabyte growth in data center is our forecast and that doesn’t include any, any, any capex raises on this earnings cycle. So you know, significant increase just quarter over quarter in, in demand and you know we think most all that is driven by AI obviously.

CJ Muse

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

Luis Felipe Visoso

Yeah, we feel very proud of the progress we’ve made reducing our debt. Remember we started with $2 billion and it’s coming down very, very quickly. 600 this quarter and we’ll continue to take that down. CJ Our priority is to continue to invest in the business as we have been doing and to build prudent cash reserves. This is a business where having cash on hand is helpful. We’re not going to waste your cash, don’t worry. But we’re going to build prudent cash reserves and we’ll continue to reduce our debt and at the right time, we’ll continue to expand and give you an update.

But so far, those are our priorities.

Ivan Donaldson

Thank you.

David Goeckeler

Thanks, C.J.

operator

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

Jim Schneider

Good evening. Thanks for taking my question. First of all, on the supply side, I was wondering if you could give us a snapshot of the factory network across Yokaichi and Kitakami and where things stand now. I’m assuming utilizations are basically flat out, but as you think more tactically beyond this year about the high teens bit growth outlook, how do you expect to ramp the overall JV factory network over say the next, say, 18 months or so, and then maybe give us any kind of view on your view on the sort of industry greenfield capacity expansions that you see possible given some of the announcements of some of your competitors recently.

David Goeckeler

So, first of all, as you said, we have two major sites, Yokaichi and Kitakame. I think a big step forward this quarter is what we announced in extending the JV agreements around Yokaichi to coincide with the agreements in Kitakami. So they now are all run through 2034. So that gives us really good supply assurance for the next nine years and we’ll keep talking about what happens after that. But this has just been an unbelievable relationship with Kioksha for decades now, and it’s going to go on quite some time into the future. So we feel like we’re in a really good position there.

Look, we haven’t had any underutilization in the FAB for a couple quarters now. You know, we got past that a couple quarters ago. There may be a little bit of the memory of some of the costs flowing through. I guess those were all last quarter. We’re done. So they’re running at, you know, full capacity. Kitakami is where we’re expanding. You know, we just opened the K2 Fab and so we have additional space there. I think we’ve just jv, led by Kioksha on this part of it, has just done really good capacity planning and has good plans about how we’re able to now expand into the Kitakami site as needed over the next Many years.

So we feel really good about how we’re positioned there. You know, as far as the rest of the industry, you know, it’s as you know, it’s a long lead time. We see some announcements recently. I would consider those kind of normal. Course we’re all constantly building clean room space. As I talked earlier, this is a market on the supply side where we’ve been very consistent. We’re going to grow bits in the mid to high teens rate. We’re going to do that through innovation. We’re going to do that through that innovation is going to take additional clean room space.

That’s all in the plan. I would expect to see see continued spending to meet that number, but we don’t see anything that’s out of the ordinary. And you know, I think as all of us know, if you want to start building a new fab, you’re talking years before you have that up and running and have production coming out of it. So just a little bit of how we see the market and you know, final comment. All this is factored into our numbers when we talk about supply and demand. Thank you.

Jim Schneider

Then maybe as a follow up could you maybe address clearly you mentioned the qualification with another enterprise SSD hyperscaler customer exiting this calendar year, for example, how large do you expect your enterprise SSD exposure to be as a percentage of the total revenue? Thank you.

David Goeckeler

Yeah, we’re not going to put an exact number around that just yet, but I would say just stay tuned. I think we said this, our business is going to continue to grow in this market. We’ve seen 29% sequential growth followed by 64% sequential growth. Without getting into too much detail, I think you’re going to see a substantial step up next quarter as well. So we feel really good about where the portfolio is. Like I said, the reception from customers and not just hyperscalers across the entire ecosystem of people that are building out AI infrastructure. You know, the compute focused TLC product we have in the market is really driving that growth right now.

We’re going to see our bics, a QLC product, start shipping for revenue here in the next couple of quarters which is going to be another tailwind for growth. And as we’ve talked about, BICS 8 QLC performance has been extremely well received. So we continue to see very high interest in that those products and work through the qualifications and we’ll look forward to continued growth and it’ll be part of the balanced portfolio we always talk about of how we’re going to allocate our supply into that part of the market. But we’re excited about where we’re at and where we’re headed.

Thank you. Thanks, Jim.

operator

The next question will come from Mehdi Hosseini with sig. Please go ahead.

Ivan Donaldson

Yes, thanks for taking my question. Two follow ups for me and this is for the team. When I look at your guide for the March Q3 fiscal year, assuming low single digit bid growth, there’s a big jump in ASB and blended. What I wanted to ask you is how should we think about the mix that impacts the asb? Obviously as you scale your SSD there is a higher premium. There is more than bits and a premium that you capture or economic value that you capture. Is there any way you can help me understand? Because just thinking about the ASP absolute may give us a wrong impression.

So any help you can provide will be great. I don’t have a follow up.

Luis Felipe Visoso

Yeah. So the mixed impacts that we have are less related to changes in our end market and more related to the customers. Right. And how we serve the market. So I talked a little bit about this in my prepared remarks and what you’ve seen is we’re driving a better mix. We’re partnering with those customers that value our relationship, that value our products and therefore we’re getting much better gross margin as a result of that. So there is a mix component in that, to your point, and there is some pricing as well. Go ahead.

Ivan Donaldson

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

Luis Felipe Visoso

Yeah, we’ll provide that to you when we report next quarter. I don’t have anything to share with you at this point on the guide meti.

Ivan Donaldson

Okay, great. And one question for David. Look, we’re sitting here and there is increased shortage intensifying. You and your peers are involved in discussion for a multi year contract and as you highlighted, these projects take several years. Building a fab and putting equipment is a very long process. Why isn’t there more urgency? Why aren’t your customers your customers customer aren’t willing to commit more. They’re committing with investment throughout the AI supply chain. But when it comes to memory or nand, I don’t get a sense of urgency. And if he’s going to wait till second half of this year, that means the shortage is going to intensify.

operator

Unless.

Ivan Donaldson

The SSD XY growth of 60% may be just a short live. How can I reconcile the two?

David Goeckeler

I have Lots of thoughts on that, Mehdi. I mean, first of all, I mean, I would argue that there actually is a fair amount of urgency and things are changing rather dramatically, rather quickly. I mean, you’re talking about a market that’s operated the way it’s operated for arguably decades. And the way that market has operated is there’s essentially been a quarterly auction for NAND that goes on that sets the price, and then we all talk about what the price was every quarter, quarter. And then on the supply side, we’ve tried to get it right on how much we supply and often get it wrong.

And when you get it wrong, the economics just completely crater. And so we’re trying to navigate out of that world. There’s a lot of reasons why we’re navigating out of that world. There’s a lot of technology reasons and all kinds of stuff we talked about in the past we could talk a lot about. But to change behavior on something you’ve been doing for, you know, a decade and just wake up and within a quarter decide to completely change the business practices of an industry is almost like really, really hard to do. So. But I do think it’s happening.

I do think that customers are starting to look, like I said, they’re starting to look further down the horizon, especially on the data center. I don’t think this can be underestimated, this idea that now Data center is the largest market in nand. I mean, this is a market that’s been dominated by, not dominated, but the primary customers, then smartphones, PCs. You know, what I talk about is I kind of view that as what traditionally been the commodity NAND market. I hate that term, but that’s what people think about it. The data center is not that market.

Like, the data center is not a commodity NAND market. The data center is. NAND is a highly strategic project product that’s part of a very sophisticated AI architecture. And I need extraordinarily high performance and I need innovation and I need, you know, a specific enterprise SSD that fits my configuration. It’s kind of way on the other side of, you know, I just need the same product and I can plug in any one from, you know, five different suppliers. That’s not, you know, so that market now becoming the primary market and especially the primary growth engine is really, I think, starting to challenge the business practices of the way the market has traditionally worked.

And, you know, again, I’m actually quite optimistic that this is happening pretty quickly now. We’ll see. How quickly. I mean, do we actually get to the point where we’re announcing contracts, we’re not quite there yet. We’ve got some that are coming along, but from my perspective, on a relative basis, it’s going pretty quick. For a market this big, we’re talking 150 billion maybe this year. For a market this big, this many players, this much business transacted every quarter. To see it change as fast as it’s changing is pretty remarkable actually.

Ivan Donaldson

Thank you for details.

David Goeckeler

Sure thing. Thanks, Mattie.

operator

Again, if you have a question, please press star then one. Please limit yourself to one question. The next question will come from Wamsey Mohan with Bank of America. Please go ahead.

David Goeckeler

Hi, it’s Ruploo filling in for Wamsi. Can I ask Luis a question?

Luis Felipe Visoso

This quarter OPEX came in lower.

David Goeckeler

You said you had a benefit from how you’re managing npi. Can you just elaborate on that, what that benefit was?

Luis Felipe Visoso

And can you talk about capital allocation plans?

David Goeckeler

How much are expecting to spend on HPF and data center expansion as well as any capital return plans or M and A plans? Thank you.

Luis Felipe Visoso

Yeah, so let me try to unpack the OPEX question because I thought somebody was going to ask. So we made a recurring change to how we sell our products, right. And basically we’re now moving into charging for our qualification units. So in the past we used to record cost as they were incurred, right? They were period costs and this is the non recurring element which is a gain of a one time gain as we move from period cost into inventories as we now selling these qualification units. Does that make sense?

David Goeckeler

Yes, that’s clear.

Luis Felipe Visoso

So we’re going to get an ongoing saving as we charge our customers for disqualification units and there is a one time benefit as we do the transition and we go through inventory. On the capital allocation question, as I said earlier, our capital allocation strategy is unchanged. We will continue to invest in the business. We will build prudent cash reserves which are very helpful for this business, particularly given still where we are. We believe we need to continue to build our cash reserves and we’ll continue to reduce our debt. So we’ve gone from 2 billion to $650 million.

So we’re making great progress and we’ll continue to make progress there. And we’re fully funding the business. We’re funding the business from a BICC transition. We’re funding our OPEX where we feel that we’re properly funding the business itself.

David Goeckeler

Are there any underutilization charges in the guide?

Luis Felipe Visoso

No, not on the guide and not on actuals either.

Ivan Donaldson

All right, thank you.

operator

So much. The next question will come from Vijay Rakesh with Mizuho, please go ahead.

David Goeckeler

Hi there.

Luis Felipe Visoso

And Louis, awesome quarter here. Just a phenomenal numbers.

David Goeckeler

Just wondering on the 20, 26, 27.

Luis Felipe Visoso

What is looking at in terms of bit growth and obviously ASP pricing has been on a tear but just wondering how the price trends have been across different segments from the data center to retail to consumer SSDs. If you can give us some color. Thanks. Yeah. So the bids growth that we’re seeing across 2728 is consistent with what we talked, you know, at the very beginning of February. We’re still talking about mid to high teens bids growth every single year. And unless we see that that demand is there, sustainable and profitable, not going to change our assumptions.

So still our planning is our plan of record is that kind of high teens number for bids growth year over year on pricing across what we call end markets. It’s very interesting. Right. What you see is prices are moving not identically, but pretty much at the same pace. We’re seeing what happens is that NAND can flow to any market at the end of the day. So NAND will naturally flow to the markets that are most attractive. So when prices go up in data center they do have an impact in other markets. To give you an example.

Right. So that’s what we’re seeing across markets. Prices go up pretty much across the board.

operator

The next question will come from Carl Ackerman with BNP Parapas. Please go ahead.

Carl Ackerman

Hi, thank you for taking my question and congratulations for the very good quarter product roadmap. I think there are.

Carl Ackerman

Now your data.

Carl Ackerman

Center mix has reached 15% and nanoflash is now increasingly being attached to AI compute. So I think it’s creating new requirements for performance. So are you, can you update with us your product roadmap to meet its new requirements? Like I think there are high ops SSDs and you have engagements with on the HBF so how those new products look like.

David Goeckeler

Yeah, so I think this is a very good example of the amount of innovation that’s going on and being driven out of data center. Kind of what I was referring to before. So you’re right. What we call the compute focus, the TLC high performance drive is what’s been driving the portfolio at this point. As I said, we just saw 64% sequential growth. So we continue to see, you know, really strong pull for those high performance products. As I said, we’re, you know, we feel like we’re extremely well positioned as we start to migrate those to BICs.

8 But there’s a whole bunch of new innovation going on. As you said. There’s, there’s, you know, I think the, the innovation engine is alive and well across the whole industry, which is how are we going to satisfy the demands for the storage of AI models get bigger, more tokens get generated, caches get bigger. This is naturally a thing where you start to think about NAND and its tremendous scaling properties. And you’re right, there’s a lot of innovation there. There’s the high Iops enterprise ssd, which is of course something you could imagine we’re working on.

You know, we had our own ideas about this two years ago and we talked about it at our investor day that we believe that, you know, there was a chance to re architect nand, to bring it into AI. We trademarked that high bandwidth flash. I think over the last year that’s become a more recognized path forward and there’s now lots of folks working on that and we continue to work on it. By the way, we’re very, very happy with the progress. We’re deep in conversations with customers on use cases. We’re designing the Nandi, we’re building the controller.

So that continues to go forward. Obviously we’ll have more to say about it as we go forward and plans firm up. But I think all of this is just an example of there is just tremendous opportunity for innovation as the AI architecture continues to scale. And you know, it’s just incredibly exciting that we are just in the very early innings of driving this technology and scaling it around the globe. And we have, you know, the industry, you know, the technology industry maybe writ large is like incredibly well positioned to do that. They’re some of the most, largest, most capable technology companies in history.

They’re obviously putting an enormous amount of resources about how about how they drive this technology and scale it around the world at a very rapid pace. And I think that is incredibly exciting. I think this is going to go on. I think we’re super early in this and I think this is going to go on for a very long time.

operator

The next question will come from Aaron Ragers with Wells Fargo. Please go ahead.

Michael Fednoff

Hi guys. Thank you. This is Michael Sudinoff. On behalf of Aaron, I wanted to go back to the LTA discussion.

Jim Schneider

Have you guys finalized any of these agreements yet?

David Goeckeler

And if so, have partial or full prepayments been a part of, I guess, any finalized agreements or is that something that we should expect moving forward? I know you kind of alluded to it.

Luis Felipe Visoso

Yeah, we’ve signed and closed One agreement so far we’re not disclosing the terms. There was a prepayment component of it which we think is important in this type of agreement. But that’s what I would say, Michael. So we have one and several in the queue.

operator

The next question will come from Asia Merchant with Citigroup. Please go ahead.

Michael Fednoff

Great, thanks for taking my question and great results here. David, Last quarter I think you shared some thoughts on how you thought about the edge market, PCs, smartphones, maybe even the consumer market. Just given the fact that memories on allocation people are talking about PC and smartphone units being down. Just how you’re thinking about what signals your customers, your OEM customers are providing to you regarding those markets and how that changes demand outlook through probably the back half of 26 and into 27. If I can squeeze one in for Luis as well. Structurally, NAND is going through this dynamic where obviously highly strategic product.

How are you thinking about your true cycle margins, gross margins? Seems like that was quite a long time ago when you were hitting those levels. But how are you thinking about gross margins here structurally? Thank you.

David Goeckeler

Okay, thanks Osia. So look, a couple of thoughts on this. So first of all in the consumer market, I think we’re very happy with where the consumer portfolio is. As I said, we just turned in over 50% year over year growth. I think the work we’re doing there on how we’re thinking about the branding, the innovation, the portfolio, you know, that’s been a long term market for us. It will be a long term market for us. We think we’re, we’re able to drive value there with the value of the sandisk brand. So you know, we think that’s a great business and will continue to be and we’ll continue to invest in it, you know, in some of the other markets like you know, I think this is one of the things I look at.

I was looking at the numbers obviously as we were preparing. You look, just look at 26, we’ve got PCs at 285 million units. I don’t think we would have, anybody would have picked that number at the beginning of the year. So just continued very strong results in these markets in unit growth, content growth across those markets. So look as we go into 26 or we’re in 26 now, we’re going to see some base effects of that, of some declines in units. I think we’re still getting very strong signals from our customers in those markets of wanting supply.

I mean very strong signals on a continuous basis and we’re working with them as closely as we can. I think in this, in this period of the market, it’s extremely important to stay close to our customers and we’re doing that. But you’re going to get some base effects there on units. I mean, there’s been a lot of discussion on mix in the market. I just think that’s normally how this market works. Of course configurations are going to change as components change. Quite frankly, we saw it in 23. All of a sudden component mix went way up because prices went way down.

And all of a sudden one terabyte drive became quite inexpensive and all of a sudden it started showing up everywhere. And as the market goes a little bit in the other direction, you’re going to see that change. I think that’s just a natural way this market works. I don’t think it’s something to be overly concerned about. So those are still strong markets. Customer relationships are very good. You know, I expect us to still be heavily engaged in those markets. We’ve had a strong edge presence for a long time and we’ll continue that. And you know, just big picture, this is one of the reasons why I think this business is so valuable is because we just play across every single device, every single piece of technology.

operator

We.

David Goeckeler

Touch it or sell NAND into it. And now with just the AI deployments in the cloud and that market becoming the largest market in NAND is just changing the dynamics the way this whole industry works. And as we said in the prepared remarks, we’ve invested an enormous amount of R and D over the last 25 years to get to where we are. And we’ve invested an enormous amount of capital to get to where we are that we can manufacture all this front end and back end. And I think we’re finally starting to get to the point where the value of that intellectual property, the value of that intensity is being recognized in our own results.

Luis Felipe Visoso

Yeah. And I think the way I would answer your question about through cycle margins is similar to what David left it, which is In a high CAPEX, higher industry or company, frankly, 35 is not where we would like to be. Right. So we’re not going to give you a new number today, but clearly that’s not where we want to be. What I’ll tell you is this is the first quarter that we are above 35% with 51, we’re guiding, call it midpoint of 66. So we’re making progress and we’re getting to a place where we believe we can justify the CapEx, we can justify the investments in R and D that the business requires.

operator

The next question will come from Tom o’ Malley with Barclays. Please go ahead.

David Goeckeler

Hi, this is Matthew Panon for Tom o’.

Tom o’ Malley

Malley.

operator

Just a quick one for me.

David Goeckeler

Apologies if you mentioned it. Just hopping around, wondering if you said the ESSD percentage of total bits in the quarter. I don’t think we said that, but you know, it’s like in that high teens range.

operator

The next question will come from Blaine Curtis with Jefferies. Please go ahead.

Tom o’ Malley

Hey guys, congrats and thanks for squeezing me in. I just want to talk about the model, obviously. I mean doubling sales over two quarters. I want to just make sure I understand how you’re going to handle opex. I think the percentage of revenue is now in half. Are you going to accelerate the way you look at investing in R and D and then tax rate as well with this just dramatically higher profitability? Is there anything to think about in terms of the tax rate? I think you were talking about it maybe going to 20 at some point.

Is that sooner than later?

Luis Felipe Visoso

Yeah. In terms of opex, the first thing you should know is about 75% of our opex is R and D. Right. So that’s where we’re putting our money. And why do we do that? Because this is a technology company where innovation is our lifeblood. So that’s what we believe and that’s where we’re putting our dollars. So you should not look at this quarter’s OPEX as an indication of where we should be because that, as I mentioned earlier, has a non recurring benefit. If you want to quantify that number is around $35 million. So you can use that number for your modeling.

We think OPEX should not go significantly higher from where it is today. We believe that the run rate is healthy. We will always be looking at where we need to invest and make sure that we fund innovation. But we’re also on the other side looking at efficiencies all the time and how do we make sure that there is no waste in the system. So a long way of saying the level of spending we had last quarter what we’re getting this quarter, those are kind of more sustainable levels for now. The tax rate is kind of interesting.

Right, because we had a lot of prior year losses, particularly accumulated in Malaysia, which we’ve consumed very quickly. That’s what happens when you start generating profits. So I think you should see our tax rate to Hoover around a little bit above where it is today. Maybe in the 14, 15 kind of percent on an ongoing basis. That’s what I would model for.

Ivan Donaldson

Now.

operator

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

David Goeckeler

All right. Thanks, everybody, for joining us. We’ll talk to you throughout the quarter. Have a great day. Thank you.

operator

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