Sandisk Q4 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2026

Key Takeaways

  • Positive Sentiment: Record fourth-quarter results exceeded guidance, with revenue of $8.97 billion, non-GAAP gross margin of 84.6%, and EPS of $39.25. Management expects first-quarter fiscal 2027 revenue of $10.3 billion-$10.8 billion and EPS of $44-$46.
  • Positive Sentiment: AI-driven inference is accelerating storage demand, with data center revenue up 103% sequentially and representing 38% of SanDisk’s bits exiting fiscal 2026, compared with roughly 12% a year earlier. Management said customer demand is growing faster than supply and expects bits to remain allocated beyond calendar 2027.
  • Positive Sentiment: SanDisk now has eight new business model agreements covering more than 50% of fiscal 2027 bits and approximately two-thirds of fiscal 2028 bits, with a weighted average duration exceeding four years. Signed agreements represent at least $93.9 billion of expected revenue and include $16.5 billion of financial guarantees.
  • Positive Sentiment: The company repurchased $4.5 billion of shares in the quarter and authorized an additional $14 billion program, bringing remaining authorization to $15.5 billion. Management said it expects to execute the buyback program consistently, supported by confidence in future cash generation.
  • Negative Sentiment: Consumer revenue declined 32% sequentially, while smartphone and PC unit demand is expected to fall by mid-teens percentages in calendar 2026. Management expects those markets to stabilize and return to exabyte growth in 2027, but first-quarter gross margin guidance of 83%-85% is below the fourth-quarter level.
AI Generated. May Contain Errors.
Earnings Conference Call
Sandisk Q4 2026
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good afternoon, and welcome to SanDisk's fourth quarter fiscal year 2026 earnings conference 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 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. 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, Vice President of Investor Relations. Please go ahead.

Speaker 1

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, our capital allocation priorities, 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 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the written materials posted in the investor relations section of our website. With that, I'll turn the call over to David.

Speaker 2

Thanks, Ivan. Good afternoon, and thank you for joining SanDisk's fiscal fourth quarter earnings call. As we close fiscal year 2026, we believe SanDisk is in a strong strategic position to deliver for our shareholders and customers. The strategic actions we have taken over the past year have established a stronger foundation through technology leadership, longer term customer partnerships, financial flexibility, and operational capabilities, which collectively position us well for the next stage of execution, growth, and shareholder returns. Over the past year, we strengthened our portfolio with BiCS leadership across both TLC and QLC, and the continued advancement of High Bandwidth Flash. Established data center as a major pillar of growth, deepened customer relationships through multi-year partnerships enabled by our New Business Models, our NBMs, with momentum continuing to build during the quarter.

Speaker 2

We reinforced our supply chain and transformed our business model with a net cash balance sheet and a capital allocation framework designed to generate growing and durable free cash flow to reinvest in the business and return excess capital to shareholders. The fiscal fourth quarter provided our clearest proof point yet. We delivered record revenue, gross margin, and earnings per share, each above the high end of our guidance, and repurchased $4.5 billion of company stock. We are encouraged by this progress and believe the long-term earnings power, cash generation, and resilience of this business will become increasingly evident as we execute against this new foundation. Underlying our performance is the most important force in our market, the era of inference. AI is fundamentally a memory centric, storage intensive problem, and it is reshaping the demand equation for NAND.

Speaker 2

The shift to inference in agentic AI is generating data at a scale that is redefining storage requirements. Every AI interaction creates content that must be stored, retrieved, and served at low latency, and each of these steps relies on data storage products, including our high capacity enterprise SSDs. NAND is the most scalable semiconductor technology in the world, and it has become a critical component of the AI architecture. This demand is anchored in strategic long-term infrastructure investments by the world's largest technology companies, which are increasingly working with suppliers who can scale, partner with them, and secure supply that ensures performance and reliability years in advance. These enduring and mutually beneficial partnerships give customers greater confidence in long-term supply, while giving SanDisk clearer visibility into demand and a stronger foundation for planning, investment, and more durable cash flow generation.

Speaker 2

Our technology leadership is how we are capturing this opportunity. BiCS has become recognized as an industry gold standard for NAND, and this year we ramped BiCS8 to the majority of our bit production, delivering industry-leading performance, density, and power efficiency across both TLC and QLC. BiCS8 was enabled by innovations like CBA, hybrid wafer bonding, and our roadmap builds on that same fundamental approach with future generations extending performance and cost leadership through continued innovation across multiple dimensions of scaling. Our leadership is translating directly into customer adoption across our various end markets. We scaled our compute focused TLC enterprise SSDs across a broad set of hyperscale and AI infrastructure customers.

Speaker 2

This quarter, we began shipping our QLC Stargate platform for revenue, giving us a complete complementary portfolio spanning performance intensive compute workloads and high capacity AI data lakes. A year ago, data center represented roughly 12% of our bits. Exiting fiscal year 2026, it represents 38% of our portfolio and is our fastest-growing end market. Our technology leadership also extends well beyond data center. Edge remains a large and strategically important end market for SanDisk, spanning smartphones, PCs, tablets, and an expanding set of emerging use cases in the realm of physical AI, including automotive, robotics, and on-device agentic AI. Near term, both PCs and smartphones are working through a period of adjustment as demand is shifting towards AI-enabled devices and premium configurations, driving higher storage content, particularly in smartphones.

Speaker 2

In the PC market, OEMs are growing revenue and expanding margin on a more profitable mix, reflecting demand for higher-end devices. We expect these markets to return to growth in calendar year 2027, and over the longer term, on-device AI, richer content, and entirely new form factors will continue to expand the role of high-performance flash at the edge. Our ability to deliver high performance, density, and power efficiency positions us well as these platforms evolve, and we expect increases in content per device through future refresh cycles. SanDisk's global consumer presence remains a meaningful differentiator within the industry, giving us a unique connection with end users and channel partners. We continue to invest behind the brand, sharpen our go-to-market capabilities, and innovate around the products, capabilities, and experiences that consumers value. Our ability to innovate at this level is enabled by our operational excellence.

Speaker 2

SanDisk manages the entire value chain, from the design of the NAND die through front-end wafer manufacturing at some of the largest fab complexes in the world with our JV partner, to system-level design, including our world-class controllers and final back-end assembly and test, all the way to the hands of our customers. This end-to-end integration, combined with our R&D depth, proprietary BiCS systems expertise, and the market diversity that gives us the optionality to direct our technology where it delivers the most value, is what enables us to serve customers at attractive returns. Just as important, we grow supply primarily through nodal transitions rather than wafer additions, delivering mid to high teens bit growth from the productivity of our technology roadmap, with capital intensity that continues to decline as a percentage of revenue. This is a structural advantage and what makes this franchise such a powerful cash generator.

Speaker 2

With that, I'll turn the call over to Luis for an update on our new business models and a deeper dive into our financial performance and guidance.

Speaker 3

Thank you, David. Fiscal year 2026 was a transformational year for SanDisk. We exited the year significantly stronger than when we entered it. We believe that we're well positioned to create sustainable value for customers and shareholders. Our new business models, or NBMs, reflect the stronger and longer-term partnerships that we're building with our most strategic customers, the value they place on our technology and products, and the confidence that they have in their demand. Our revenue growth, margin expansion, and asset efficiency enables us to deliver leading free cash flow per share, and therefore generate an attractive return to shareholders. Since announcing 5 NBMs during our April earnings call, we have signed 5 additional agreements, 3 NBMs with new customers and 2 deals expanding on previously signed NBMs. These extensions reflect our customers' strengthening demand exceeding their prior estimates.

Speaker 3

One of the 5 signed deals, 3 closed before the end of the fourth quarter, and 2 closed after quarter end. In total, we now have NBMs with 8 diverse data center and edge customers and reflect the conviction our customers have in their long-term demand and the value they place on SanDisk. The length of our NBMs varies, extending up to 5 years, with a weighted average duration of over 4 years. We expect our NBMs to represent more than 50% of our bits in fiscal year 2027 and approximately two-thirds of our bits in fiscal year 2028. NBMs are quickly becoming our predominant way of doing business. We will continue supporting our non-NBM business with uncommitted supply. Pricing for our NBMs include both fixed and variable elements, with a variable portion subject to floors and ceilings. We expect attractive margins even at floor pricing.

Speaker 3

Pricing of our non-NBM business will fluctuate with the market. The total expected revenue from all our NBMs we have signed is a minimum of $93.9 billion, assuming floor pricing. We believe actual revenue will be above that minimum. The remaining performance obligation, or RPO, at the end of the quarter was $59.8 billion, and would be $91.1 billion, including the two NBMs signed after the quarter closed. The difference between the total NBM revenue and the RPO is the revenue that has already been recognized. Each one of our NBMs include financial guarantees through a combination of cash deposits and financial instruments totaling $16.5 billion, which are intended to protect Sandisk if a customer fails to satisfy its purchase obligations under these agreements. These funds and financial instruments are mostly held by or provided through third-party financial institutions, with the remaining in our cash balance.

Speaker 3

For each of the existing deals, the financial guarantees are released towards the end of the agreement. The ratio between the financial guarantees and the remaining performance obligation increases over time. Our NBMs are built on clear and detailed supply and demand agreements defined by year and by quarter. These features provide clear visibility for our operations and additional financial protection. Overall, we're pleased with the eight customers we have signed as they strengthen our strategic partnerships. We expect these relationships to last for many years and to enable our customers to continue building exceptional products for their end customers. Going forward, we will remain highly selective in evaluating additional NBMs.

Speaker 3

The key characteristics we look for are strategic customers that value our products, duration of around five years, growing volume requirements, and attractive financials that enable us to invest in the business while generating a sustainable return to our shareholders. We will be patient in these evaluations. With that update, I will turn to the results for the quarter. Revenue for the fourth quarter was $8,965 million, up 51% sequentially and 372% year-over-year. Revenue came in above the guidance range of $7,750 million-$8,250 million that we provided on our prior earnings call. Sequential revenue growth came approximately one-third from higher volumes and two-thirds from higher pricing. Turning to our end markets. During the quarter, data center revenue reached $2,977 million, up 103% sequentially. Edge revenue reached $5,432 million, up 48% sequentially. Consumer revenue was $556 million, down 32% quarter-over-quarter.

Speaker 3

We're pleased with this evolution of our portfolio and remain committed to serving all three end markets to maximize long-term value creation. For the full fiscal year 2026, revenue reached $20,248 million, up 175% year-over-year, with bits growth in the mid-teens in line with our plan. By end market for the full year, data center revenue reached $5,153 million, up 437% year-over-year. Edge revenue reached $12,160 million, up 195% year-over-year. Consumer revenue was $2,935 million, up 29% year-over-year. Non-GAAP gross margin for the fourth quarter was 84.6%, up from 78.4% in the prior quarter and 26.4% in the prior year. This compares favorably to our guidance of 79%-81%. Non-GAAP operating expenses for the fourth quarter were $484 million, representing 5.4% of revenue, down from 7.5% of revenue in the prior quarter as we generated additional operating leverage.

Speaker 3

This compares favorably to our guidance range of $480 million-$500 million. R&D represents close to 65% of our operating expenses. Non-GAAP operating margin was 79.2%, up from 70.9% in the prior quarter. Non-GAAP EPS was $39.25, up from $23.41 in the prior quarter and $0.29 in the prior year. This compares favorably to our guidance range of $30-$33. We closed the quarter with 157 million diluted shares outstanding. Key GAAP to non-GAAP reconciliation items include a gain of $807 million from our investment in Nanya and $67 million in stock-based compensation expense. We also recognized a tax benefit of $175 million from higher stock prices related to the vested employee equity, which was offset by $170 million of taxes recognized on the gain from Nanya. During the quarter, we repurchased 2,836,000 shares of our common stock for $4.5 billion. Moving on to free cash flow.

Speaker 3

During the quarter, cash flow from operations came in at $7,126 million, partially offset by $153 million from net cash capital spending. Gross capital expenditures totaled $562 million, representing 6.3% of revenue. We generated $5,035 million in adjusted free cash flow, which represents 56% margin. This excludes $1,938 million in NBM prepayments and deposits, which are included in cash flow from operations. We closed the quarter with $4,762 million in cash and cash equivalents on our balance sheet. With that, let's move on to guidance. We expect the NAND market to continue growing at an accelerated pace, supported by AI inference as a tailwind. We estimate the NAND market will exceed $300 billion in revenue calendar year 2026, up 3x year over year. Looking further ahead, we estimate that the NAND market will approach $500 billion in revenue in calendar year 2027.

Speaker 3

Within this timeframe, we expect data center share of total TAM to expand from approximately 30% in calendar year 2025 to approximately 50% in calendar year 2026, and to continue outpacing the market in 2027. Demand from our customers is growing faster than our supply. We therefore expect bits to remain on allocation beyond calendar year 2027. For the first quarter of fiscal year 2027, we expect revenue between $10.3 billion-$10.8 billion, with sequential growth driven by both bit growth and higher pricing. We expect non-GAAP gross margins between 83%-85%. We expect non-GAAP operating expenses between $520 million-$540 million, as we continue to invest in innovation and R&D and have higher expenses related to taxes on employee stock compensation. We expect first quarter non-GAAP EPS between $44-$46, assuming 155 million fully diluted shares. Here is some additional perspective for modeling purposes.

Speaker 3

Consistent with our long-term objective of growing supply mid to high teens, our capital spending will increase year over year, primarily as we ramp BiCS8 and BiCS10. Yet our investment relative to revenue will come down to approximately 6% for the full year. We plan to operate at higher inventory days, consistent with current levels, to support our NBMs and account for higher component costs. The higher inventory levels reduce sellable bits to mid-teens for the full year, fiscal year 2027. Moving on to capital allocation. Our priority remains to invest in the business to support long-term growth and durability. We will continue returning cash to shareholders. SanDisk's board of directors has authorized an additional $14 billion share repurchase program, bringing our total remaining authorization to $15.5 billion.

Speaker 3

We look forward to seeing many of you at our Investor Day in New York next week, where we plan to review the business in greater detail. We're encouraged by the progress made and remain committed to creating value for customers and shareholders. With that, let me turn the call back to David.

Speaker 2

Thank you, Luis. In summary, fiscal year 2026 was the year SanDisk redefined what this franchise can be. We delivered record financial results, established data center as a major pillar of growth, secured our manufacturing and supply base through the next decade, and fundamentally restructured how we transact with our largest customers. The value of our technology, built on decades of R&D and tens of billions of dollars of cumulative investment, is increasingly being reflected in our financial results. As we enter fiscal year 2027, we do so with a balanced, well-structured portfolio spanning data center, edge, and consumer, one that has served customers across every part of the storage market for decades and gives us flexibility to move wherever demand grows next. We have industry-leading NAND technology across TLC and QLC, with a roadmap of continued innovation extending our leadership.

Speaker 2

We are investing beyond traditional NAND in emerging technologies like High Bandwidth Flash that carry the potential to change the AI memory storage hierarchy entirely. Combined with our NBMs, a net cash balance sheet, and an active capital return program, the result is a durable growth model, a valuable franchise, and a business built to generate substantial increasing cash flow. We're proud of what the team accomplished this year and believe we are still in the early innings of this opportunity. With that, Ivan, let's open it up for questions.

Operator

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 two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ben Reitzes with Melius Research. Please go ahead.

Speaker 4

Hey, guys. How are you?

Speaker 2

Good.

Speaker 4

Thanks for the question. I wanted to ask maybe two things. Last quarter, you talked about the NBMs were being signed in this 80% margin range. I know there's a lot of puts and takes with regard to pricing. I was wondering if you can talk about whether it's in that ballpark or if it's kind of trending actually more towards the guidance for the next quarter. I would think it's more in the 80 ballpark. My follow-up is with regard to buybacks. If we just round up to $5 billion per quarter I know the authorization isn't this big, but if you commit to buying $5 billion a quarter, and you do that over the next four quarters, that's about 10% of your market cap. Is that the kind of buyback magnitude we should be thinking of, or is it too early to call the pace? Thanks.

Speaker 2

Hey, let me take the second one, and then Luis can take the first one. We're walking into the buyback program. We're our second authorization now. You saw we had a $6 billion authorization. We executed $4.5 billion in the first quarter of that. Now we've reauthorized another $14 billion. We expect to be very consistent in our execution of this program. We have a lot of confidence in the cash generation of the portfolio. Ben, to your first question, and Luis will talk about the margins, but we spent a lot of time over the last two or three quarters really working very deeply with our largest customers on committing demand. We have over four years of visibility now. We feel very good about where the franchise is.

Speaker 2

I'll just speak personally as somebody that's been managing this franchise since March of 2020. I am thrilled to be at this point where we're recognizing the true value of this franchise and really ramping up the shareholder returns. Luis can talk about the margin.

Speaker 3

Yeah, Ben, not to pick a specific number, we do expect to be around 80% for the new business models. As you know, there is some upside. As prices continue to go up, we'll capture some of that upside as well. We feel very good about the work we've done. We'll talk about more about the NBMs, I'm sure, you've seen they are not a lot. They are really meaningful deals that we did with eight very strategic customers of ours. We feel very good about that.

Speaker 4

Thanks a lot, guys. Appreciate it.

Speaker 2

Sure thing. Thanks, Ben.

Operator

The next question comes from Mark Newman with Bernstein. Please go ahead.

Speaker 5

Hi, thanks for taking the question. For your Q4, obviously Q4, strong results. I don't think you've given the breakdown yet on the volume growth. You've given some numbers for the year, so we've got some pretty good estimate. I wonder if you could give some clarity on what's in there for Q4 for volume, and also in the Q1 guide. Particularly for the Q1 guide, it seems a bit lighter compared to expectations. I see share price been down a bit last time I checked in the post-market. I just wondered if that is volume related or if that is because the locking in of pricing and so less price upside, or perhaps a bit of both, or is it a bit of conservatism? Really appreciate it. Thanks.

Speaker 3

Yeah. In Q4, Mark, what we mentioned is that about one-third of the growth came from incremental bits and two-thirds came from pricing. You have that split there. Obviously, as you compare us versus others, there is a different timing on when price increases were taken. You have to look at things over several quarters to really understand where we are, because as you know, we took significant pricing the prior quarter. If you look at Q1, we expect both the other growth to come from both bits growth and modest price increases. We expect both of them to be contributing to our revenue growth.

Speaker 5

Okay, great. Thanks very much.

Speaker 3

Sure, Mark.

Operator

The next question comes from David Gibson with MST. Please go ahead.

Speaker 6

Thanks very much. Great quarter. Two questions. Just wondering if NVIDIA's context memory CMX standard and their plans for Storage NEXT are opportunities for you with products to come. The second, you announced the other day the global standard with SK hynix for HBF. Just wondering how far out are we talking about for samples of such a product? Are we one, two, three years away? That's my question. Thank you.

Speaker 2

David, sure. Look, there's a ton of innovation going on right now in inference memory architectures, which we think is fantastic, very healthy. There's a lot of different ideas. We're going to dive into this a little deeper next week at our Analyst Day, where we'll actually go into how we think about the problem and how you dimensionalize it. Yes, all these are opportunities for us. We think, especially inference is a memory bound problem. Storage is extraordinarily important to the equation. We showed some stuff in our FMS keynote just a couple of hours ago about how, when you use HBF, how we simulate performance and maybe break through some bottlenecks. We think there's an enormous amount of innovation happening. As we scale inference, we think it provides an enormous opportunity.

Speaker 2

The way we're thinking about this is staying very close to our customers, because they're going to be the ones that define what the architecture is in the future. All of us as suppliers will provide a lot of good ideas to that. We'll work with them closely on which ones are going to be the predominant ones for what they're optimizing for. These are really where our NBMs, we think they're extremely important in that we have NBMs with several of the largest hyperscalers in the world They've given us forecasts years into the future that include quarter by quarter, month by month mix. We know very clearly what products they're going to deploy and the intensity that they're going to deploy them in. It keeps us very close to the conversation as their deployment architecture changes. It lets us reflect that in our roadmap appropriately.

Speaker 2

There's a lot of good ideas out there, a lot of flashing green light for innovation. We know we're a super innovative company, we think that provides nothing but opportunity. On your second question, HBF is something that we announced almost a year and a half ago now. It was very much targeted at this whole idea that inference was going to require a different storage and memory architecture. We feel very good about where that product is at. We'll tell you a little more about where we're at specifically next week, we feel very good about deep conversations with customers. This week, you saw additions to our advisory board. At FMS, you saw some very significant customers talking about the technology and how they could use it.

Speaker 2

We'll have more to say as we progress with technology on actually shipping and release dates and all of that. From where we were a year and a half ago, that this was an idea and a lot of research and some work that we thought it was a great idea to where we are now, we've come an enormous distance, we'll talk more about that next week.

Speaker 6

That's great. Thanks very much.

Speaker 2

Thank you. Thank you, David.

Operator

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

Speaker 7

Good evening. Thanks for taking my question. When you think about the composition of NBMs you've already signed and the ones you may intend to sign, how are you thinking about the mix of desired customers you'd like to see across edge hyperscalers, AI data centers, and so forth? Maybe can you talk about whether you're pursuing additional agreements with large hyperscalers beyond the ones you've already signed?

Speaker 3

Yeah. Jim, we're open to signing deals with companies that really meet the criteria that we talked, right? One is they need to be customers that are highly strategic, that they really value our products, and they're creating amazing products with those. We want customers that are looking at several years, ideally five years of agreement with growth, year-over-year growth. That's very important because every year, we're producing more bits as we introduce new nodes. We want customers that grow with us, and we want attractive financials. That's the criteria, but we're not close to any segment. As I mentioned, we sign deals with customers across data center and edge, and we feel great about that. In terms of the hyperscalers, talking about specific agreements, I think it's not in our interest to be disclosing specifics about contracts, but we feel great about each of them.

Speaker 3

They are, as David said, long-term relationships that are getting to a level of details that we've never had before from a technology, from a commercial point of view, we believe that these relationships will last many, many years.

Speaker 2

Jim, just a few more comments on that from my perspective. First of all, we really started this journey just two-plus quarters ago. Here we are with a little bit more than 50% of our supply for fiscal year 2027, which we're a month in now, is already committed. We understand the financials. We understand exactly where it's going. We already have POs for the year from those customers. In FY 2028, that steps up to two-thirds. Roughly two-thirds of our supply is already committed. We understand what the mix is. We understand what the economics are.

Speaker 2

We feel like we've just made incredible progress here. A year ago, we were talking about visibility in this business of three months, and now we're talking over four years of committed financials and understanding the mix and working with, as Luis said, some of the most enviable companies in the world. We feel really good about where this is at, and we'll continue to talk to customers. I think one of the most interesting dynamics is some of our biggest customers are already coming back and wanting more, from just what they thought they needed three months ago. It's a very, very robust demand environment, especially in the data center. We feel good about where we're at. We're getting a lot of the portfolio spoken for at this point, and we'll be selective from here about how we add to it.

Speaker 2

We're definitely still in deep conversations with additional customers.

Speaker 7

Thank you. Could you maybe address capital allocation at a somewhat more holistic level? It's great to see the buybacks you've already executed in terms of the authorization, but how should we be thinking about your ability to do sort of more programmatic buybacks on sort of an ongoing basis, and maybe talk about the idea of a dividend, if you've considered that?

Speaker 3

Yeah. Our priorities continue to be the same as what we've talked since day one, which is to first continue to invest in the business. Although that's a generic statement, you've seen us do that, right, through our OpEx, through our CapEx, through investments in Nanya, through our JV extension. We continue to make our company more robust and more durable over time in any scenario. We'll continue to do that, and I've talked about some of the numbers, some of the requirements to continue to invest in the business. Priority number two that we've talked, which is frankly completed, was to get a good cash balance, which we've done, and to get rid of our TAB, which is also done. That priority number two, we feel very good of where we are.

Speaker 3

Really our role as a company is to return cash to our shareholders. We believe that at this point in time, and things may change as time goes on, we believe that the best way to do it is to return cash to investors via share buybacks. We started that journey very quickly in last quarter, and we'll continue that journey, and we'll keep you updated. That's the form we believe it's better for our shareholders, more tax efficient, and probably the right thing for us to do at this point in time.

Speaker 7

Thank you.

Speaker 2

Thanks, Jim.

Operator

The next question comes from CJ Muse with Cantor. Please go ahead.

Speaker 8

Yeah, good afternoon. Thank you for taking the question. I guess two questions. First, with pricing up modestly sequentially, can you help me understand why gross margins are guided lower? Bigger picture, the challenge for semi investors is moving less of a focus on margin and EPS revisions, but rather buying into the durability of this cycle. Can you focus on why you're so confident in the securities of NBMs, and that today's supply is limited, and that will drive a durable and elongated cycle? Thanks so much.

Speaker 2

Yeah. I'll start, and Luis can add on. CJ, I think you answered your first question with your second question, which is we're focused on multiple things here, not just one. Durability is a big piece of it. We want to get a fair return for our product. I think mid-80s gross margin, I would characterize as a fair return. We want to increase visibility and durability of the franchise, right? We want to get this kind of boom and bust out of it. It doesn't work for anybody. In 2023, we were having very different earnings calls than we're having now, and we want to get more consistent and deeper relationships with our customers so we can plan better and they can plan better. We're executing what we said we were going to do last quarter.

Speaker 2

We're committing supply to customers that are willing to commit for years in advance at the economics we guided to last quarter, which Ben said earlier. We guided to about 80% gross margin. The rest of the portfolio floats. There's all kinds of things that happen in their mix and all different kinds of things influence it. It's a fairly complicated business. When you put that on top of half the supply is committed for FY 2027, you get to the numbers we're talking about, which we're thrilled with, quite frankly, because the amount of the operating leverage, operating profit, and free cash flow that drives is very substantial. Again, we'll go into why that's the case a little more next week. Why do we have conviction that these customers are going to hang in there with us? There's lots of reasons for that.

Speaker 2

Number one is we put a contractual structure in place where we align our incentives. They're making financial commitments to us that if they don't follow through on their commitments, that I think $16.5 billion in aggregate would flow to us on our balance sheet. We don't ever expect to see that money, quite frankly. It's just to align interests. If some black swan event happens, companies have to do what's in their interest, and maybe something happens. More importantly, we're dealing at a very different level with our customers than we were a year ago. We are literally talking to the CFOs, the CEOs of the largest companies in the world. This used to be, quite frankly, just a supply chain conversation every quarter in a price negotiation, seven by 24.

Speaker 2

The business has turned into a highly strategic. SanDisk has incredible products that allow them, our customers, to build incredible infrastructure to serve the world with things like inference, which we're just getting started on scaling. As somebody that's been in the technology industry for 35 or 40 years now at, quite frankly, a very high level, the level of customer engagement we have is as high as any technology franchise I've ever been a part of. It's incredible. We believe that we have pivoted to a highly strategic supplier to our customers. Their demand continues to grow. I think one of the more interesting things, again, I think I said it before, we already have customers coming back for the second round of NBMs a quarter in. That gives us an enormous amount of conviction that this franchise is set up for the long term.

Speaker 2

We have over four years of visibility now at economics, which are extremely attractive. We're really looking forward to executing this business over the next several years.

Operator

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

Speaker 9

Great. Thank you. You talked a little bit about gross CapEx coming up a little for the BiCS8 and BiCS10 transitions. Can you just talk about how you think about that and the fact that the guys who also make DRAM seem to be focused more there? Any thought of spending more to accelerate those technology transitions? Or just how should we think about your decision-making process on CapEx?

Speaker 3

Yeah. Joe, basically we continue to be committed to grow bits mid to high teens, right? We're spending to that level. The reason why our dollar increases from one year to another is because obviously as you transition from one node to another, you will first take the easiest or the cheapest transitions, then you would go on and do the more expensive ones. Particularly when we had underutilized the fabs in the prior year, we had some tools that could be reused. We were in a good place on that spending. We're very good. We continue to execute the plan that we had. We believe that's the right plan to do it, that allows us to provide the bit growth that we believe is sustainable in the market. We haven't changed that position.

Speaker 3

This year, as I mentioned in my prepared remarks, it will be a little bit lower. I mentioned mid-teens as we continue to build capabilities for the new business models. We need to build a little bit of inventory just to make sure that we're always delivering on time. That mid to high teens, which is our ongoing number, will be a little bit lower for 2027.

Speaker 9

Okay. If we think about a $500 billion kind of industry number for next year, do you think you would, between the different puts and takes, kind of hold segment share relative to that?

Speaker 3

Yeah.

Speaker 2

For sure.

Speaker 3

That is correct.

Speaker 2

It's always our goal, Joe.

Speaker 9

Okay. Great. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Speaker 10

Yes. Thank you. I have two related. I'll ask at the same time. Consumer revenue is down a bit this quarter. Is that allocation choice or demand driven? How should we think about the dollar commitments of these contracts relative to the perceived consumer customer demand through 2028? In the absence of LTAs, how do we gain greater visibility on end market consumer demand? Thank you.

Speaker 3

I'm not sure if I got the last portion of that. Would you mind repeating that one, Karl?

Speaker 2

I'll take the consumer one first, Karl, then we'll come back to you.

Speaker 10

Sure.

Speaker 2

Consumer is a business that just, it doesn't move at a pace that the transactional markets move at. It's kind of an interesting business, because in normal times, you can move pricing and consumer around much more quickly than some of the other markets. In these kind of markets where the other ones are moving so fast, it's hard to move the consumer up as much as possible. There's no doubt we're seeking at where is the right equilibrium point for pricing and the amount of product shipped and all these kinds of issues in consumer, and that's a little longer process than in some of the enterprise markets. Luis, you want to add anything to that?

Speaker 3

Yeah. As you can imagine, prices on the consumer market have also come up, and there has been some impact on the TAM itself. We're very happy with that business. It's going super well. We're very happy about our market share within that market, and we continue to be committed to drive that business. Do you mind going through your second question, Karl?

Speaker 10

Yes, Luis. I was asking, you gave some very substantial numbers with respect to long-term agreements across your customer base, and I was wondering how we should think about the dollar commitments of these contracts relative to the perceived consumer customer demand of these LTAs, and in absence of LTAs, how do you gain greater visibility on end market demand for consumer? Thank you.

Speaker 3

Yeah. The LTAs or the new business models are not related to the consumer business. If you are questioning whether the new business models were taking bits away from the consumer market, is that what you are asking, Karl?

Speaker 10

Oh, no.

Speaker 3

Yeah. I think we feel very good about the demand that our customers with NBMs have. Otherwise, they wouldn't be increasing their demand to us just a few months after they signed their commitments. If the question is on their demand, I feel very good about their confidence, their conviction on their demand as these numbers. I think they are actually being conservative as they make commitments to us, as they come in and increase their numbers just a few months after signing the deals.

Speaker 10

Great. Thank you.

Speaker 2

Thanks, Karl.

Operator

The next question comes from Aaron Rakers with Wells Fargo. Please go ahead.

Speaker 11

Thank you, guys. This is Mike Wells filling in on Aaron's behalf. I wanted to ask, it sounds like you guys have significantly improved your visibility. You keep mentioning greater than four years. I'm curious with that and kind of your thoughts on supply growth, when do you see industry supply demand converging? How has that view changed, relative to three months ago? Thank you.

Speaker 2

Well, I mean

Speaker 3

Convert to every quarter.

Speaker 2

I mean, industry supply and demand converges all the time, I guess, right? I mean, that's the way the market works. I think if you're saying when does supply going to increase so everybody gets everything they want at the price they want? That's a much more complicated question. Look, there's a lot into the question you're asking, and I don't mean to make light of it at all, because we take this very seriously, and this is really a big part of the NBMs. I think the thing that we've struggled with is to understand what is demand five, 10 years from now. When the business is transacted on a quarterly basis, that's very difficult to do, and it's very difficult to get wrong. If you get it wrong, the implications are kind of tragic, right? We saw that in 2023.

Speaker 2

Right now we're seeing, maybe people didn't anticipate that things were not going to be as available as they thought, and the market's reacting to that. I am actually extraordinarily optimistic that the market is reacting at an incredible pace. Again, if you just think three quarters ago, four quarters ago, this whole market was transacted quarterly, and now we're sitting here saying we have four plus years of visibility, and we have customers signing up for five years of demand. That is exactly how supply and demand is going to get matched. It's not going to get matched at quote, the industry level. Like we keep saying, industry this, industry that. It's going to get matched with customers and suppliers having deep discussions about supply and demand, and how do we get those aligned.

Speaker 2

I think we've taken two very big steps down that path over the last couple of quarters. As I said earlier, the level of strategic engagement with our customers, it is difficult to comprehend how advanced it is versus where it was two or three quarters ago. I think we're making incredible progress on this, and we're going to follow our customers. That's the simplest way to run a business, right? We now have relationships with eight customers, they're just incredibly large customers. They're going to give us visibility of what their demand is. As I say, sometimes they need NAND, we build NAND, right? It's a match made in heaven.

Speaker 2

We just need to get the economic model figured out, and we are making extraordinary progress on doing that, and I expect that that's going to continue, and we're going to continue to have those discussions, and that will inform our investment decisions.

Speaker 11

Thank you.

Operator

The next question comes from Blayne Curtis with Jefferies. Please go ahead.

Speaker 12

Hey, good afternoon, guys. I have two questions. I want to ask on Edge. Obviously, the PC, smartphone markets are probably going to be down for most people in the back half of the year. How are you thinking about that segment? I guess, can you just speak to the strength you're seeing? I know it's broader than just those end markets. What is going well, and how do you think about the markets that'll be down over the next few quarters?

Speaker 2

Yeah. They're great markets, first of all. Again, as I've said this before, this is one of the great things about the NAND business. It's got tremendous diversity of markets, smartphones, PCs, very important. There's no doubt those markets are adjusting this calendar year. We said it in the script, we expect them to stabilize next year. We see units down mid-teens for both smartphones and PCs this year. In smartphones, we see average capacity up significantly, mid-teens. In PCs, we see it flat. Next year, we see units flattening out in both businesses, both markets, and then average capacities going up. We see the market adjusting this year, and then next year, return to overall exabyte growth across both. Again, the market's adjusting to the reality of the way the industry works now, and I think it's happening pretty quickly.

Speaker 12

Thanks. I just wanted to go back to a prior gross margin question. I'm trying to understand, the margins are down modestly. Pricing's up. I just want to understand, is it the impacts of these new business agreements that's leading to the modest growth in ASP? Even with that, is there any other factors that are contributing to gross margin in September?

Speaker 3

Yeah. I would not assume that our new business models are a drive on gross margin. They are good margins. If you look at where we come from, right? The last five quarters, we've expanded gross margin every single quarter, starting with 22.7% all the way to 86.5%. We feel that we're driving gross margin. We believe it's one of the most important metrics to drive the financial health of the company. If you look at some of the reasons on the math that you're questioning, right? There is some mix. The high end of the guide is 85%, right? It's a little bit off versus what we just printed. We're making some prudent assumptions, if you wish, on component cost and other things.

Speaker 3

When we factor all of that in, we believe that the right guidance to give you is somewhere between 83%-85%. Slightly down, slightly up from what we printed this quarter, driven by all these factors.

Speaker 12

Thank you.

Operator

We ask that you please limit yourself to one question. The next question comes from Wamsi Mohan with Bank of America. Please go ahead.

Speaker 13

That was kind of timely to go to one.

Speaker 2

I mean, Wamsi, you got stuck with the one question, man.

Speaker 13

Well, I will ask a two-part single question.

Speaker 2

Okay, there you go.

Speaker 13

You have an industry forecast here of the NAND industry growing to $500 billion in 2027 from $300 billion in 2026. We know that your bit growth is really not meaningfully accelerating for the industry. Just is the assumption that there is going to be any price normalization that we expect in 2027 or not? That's the first part of it. The second part is, in that growth of the industry, is your expectation that you would outgrow the industry in line or undergrow the industry as you think about that market growth? Thank you so much.

Speaker 2

We want to grow with the market. We plan to grow with the market. Look, I mean, Wamsi, we're transitioning our business into a more predictable business where we're working on pricing and predictability and duration. We expect to grow with the market as it goes and increase our visibility. We continue to see very robust demand through the end of 2027, and into 2028. Again, customers are giving us demand signals for all the way out to the end of the decade at this point. I don't know what more to say about it. We're going to grow with the market, and as we grow with the market, I think we're turning in market leading profitability. We've got our bit growth plans.

Speaker 2

As Luis said, we're going to be carrying a little more inventory as we go into these NBMs, which will have an impact on growth in the near term. We continue to see a very robust market, and it gives us this opportunity to both continue to drive significant profitability of the business and increase the duration of our visibility very significantly.

Speaker 13

Okay. Thank you, Dave.

Speaker 2

Thanks, Wamsi.

Operator

The next question comes from Asiya Merchant with Citi. Please go ahead.

Speaker 14

Oh, great. Thanks for squeezing me in here.

Speaker 2

Of course.

Speaker 14

David, I think in the past, Sandisk has talked about the KV cache opportunity. Can you just remind us how you're thinking about it? Clearly, agentic AI is gaining a lot of traction here. I'm here at FMS, and seems to be a lot of discussion around there. Has your views or dialogue changed over the last quarter as it relates to and how you're thinking about this KV cache opportunity into 2027 and beyond? Thank you.

Speaker 2

Yeah, it continues, Asha, it continues to mature, I would say, and that's with staying close to the customers, because it's use case dependent on how much KV cache, how it's going to be used, how much NAND is a part of that equation, how do you configure the system. We continue to do an enormous amount of research in this area. You'll hear more of that next week, but we just continue to get more optimistic on the requirements for NAND as AI gets more sophisticated, models get bigger, context lengths get longer, and then agentic is just a big multiplier on top of that. We continue to get more bullish on the requirements for NAND. Again, this is why I'm going to keep going back to the same theme.

Speaker 2

This is why it's so important to stay close to our customers, because I am a very big believer now that the customers are driving the requirements in this market. It's not what the suppliers are coming up with on different architectures and those kinds of things. We're talking about scaling inference globally, and that is very difficult. To do that and understand exactly how that system is going to work, you need to really understand the use case, and that's different for each provider. Again, it's the reason why we're staying so close to our customers, why we're increasing our visibility, because we're going to need to stay very close to those architectural discussions. They're evolving very quickly, the demand continues to get stronger.

Speaker 2

Again, witnessed by, we have customers coming back after only one quarter and wanting to increase their demand for the next three to five years based on what they've learned in the last quarter. It continues to be quite a complicated calculation. We're going to try and demystify it a little bit next week with how we think about it. It continues to be a very strong story and getting stronger.

Speaker 14

Thank you.

Operator

The next question comes from Vijay Rakesh with Mizuho. Please go ahead.

Speaker 15

Hey, David and Luis. Just a two-part question here, too. When you look at the BiCS10 and High Bandwidth Flash, wondering if you're seeing any price premium on that, and how should you look at the price premium versus conventional NAND, I guess. You mentioned that 2027 growth, you should be in line with industry. What would drive the upside for you, I guess, versus the industry growth? That's it. Thanks.

Speaker 2

I think it's a little early to talk about pricing on some of those nodes just yet, right? Some of that technology, but we'll keep you updated on that. We're certainly very proud of the technology. BiCS10 is a great node. We just announced it, I think, last week or last couple of weeks, and it's been in development for a long time, and it's great. Again, Alper's going to show you more about that next week as well. In High Bandwidth Flash, we continue to have deep engagements, both with cloud customers and device customers, about using that technology as an inference platform. Look, Vijay, we grow through nodal transitions, right? I mean, our technology is so productive. We can grow in excess of the market rates we're talking about just through nodal transitions. That's the way we grow.

Speaker 2

If we're going to speed up or slow down nodal transitions, that still takes a significant amount of time, but that's something we always look at and allows us to always stay in line with where the market's at.

Operator

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

Speaker 1

Yeah, I'd just like to say thank you to everyone for joining the call today, and we look forward to speaking with everyone throughout the quarter.

Operator

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

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