Sandisk Corp Q1 FY2027 earnings call

• Technology Leadership and Roadmap:

  • BICS8 remains the backbone of current production, offering industry benchmarks for performance and density.
  • BICS9 combines proven cell arrays with next-generation CMOS for increased interface performance.
  • BICS10 advances full node architecture with 1Tb TLC and 2Tb QLC dies, delivering twice the bandwidth of BICS8.
  • High Bandwidth Flash (HBF) tape-out milestone achieved; samples expected next calendar year to target HBM-class read bandwidth with greater capacity.

• Business Model Transformation:

  • New Business Model (NBM) partnerships are central to strategy, providing long-term visibility into demand.
  • Two new NBM deals closed this quarter; pipeline is strong with approximately 50% of bits contracted for FY2027 and two-thirds for FY2028.
  • Management emphasizes patience and selectivity in choosing partners, expecting the percentage of portfolio under NBM to increase further.

• AI Infrastructure Dynamics:

  • NAND is becoming integral to AI inference workloads, particularly for KV cache storage to retain context efficiently.
  • Inference costs are declining, driving adoption; management expects KV cache to represent ~1/3 of the AI data center flash market by decade-end.
  • System comparisons show SSDs deliver ~3x token throughput with ~75% less energy than volatile-memory-only systems.

• End Market Trends:

  • Data Center demand continues to grow structurally, expanding from ~20% of industry bits early in the decade to roughly half today.
  • Automotive is emerging as a key growth vector within the Edge business.
  • Consumer business provides a durable foundation and direct insight into end-user demand shifts.

• Data Center: Revenue of $4.8 billion, up 61% sequentially. This segment outpaced estimated market growth and now represents a significant portion of the company's business, driven by strong demand from hyperscalers and AI infrastructure needs.
• Edge: Revenue of $5.8 billion, up 7% sequentially. Growth was resilient in premium and mainstream markets, with strong performance in automotive and IoT segments, partially offset by contraction at the lower end of the consumer spectrum.
• Consumer: Revenue of $397 million, down 29% sequentially. The decline reflects market adjustments to higher pricing levels.

• Second Quarter Fiscal Year 2027 Revenue Guidance: $12.2 billion to $12.6 billion.
• Non-GAAP Gross Margin Guidance: 84.5% to 85.5%, reflecting modest like-for-like price increases.
• Non-GAAP EPS Guidance: $55 to $57 on a pre-split basis (approx. 151 million shares); or $6.88 to $7.13 on an 8-for-1 split-adjusted basis (approx. 1,208 million shares).
• Capital Expenditure Outlook: Gross CapEx expected to increase in the latter half of the year, targeting mid-single-digit percentage of revenue for the full fiscal year 2027.
• Market Expectations: Strong market anticipated for calendar year 2027, with Data Center representing over 55% of the market and bid demand growing ~40% year-over-year.

• Execution Risk: Managing the transition to the NBM model requires careful balancing of existing customer commitments against new partnerships.
• Supply Chain Constraints: Short-term flexibility is limited due to a ~120-day wafer production cycle, making rapid reallocation of resources difficult.
• Technology Adoption Uncertainty: While HBF and SLC NAND show promise, their integration into customer architectures is still evolving, and commercialization timelines may vary.
• Market Volatility: Cyclical pressures in PC and mobile edge unit volumes persist, though content per device is increasing.

Q: Ben Reitzes asked about the pace of new NBM signings given capacity constraints and whether PC makers are seeking NBMs amid recent guidance misses.

A: David Goeckeler stated the NBM pipeline is very strong and growing, with expectations that the percentage of portfolio committed will rise beyond the current two-thirds level for FY2028. He noted customers often underestimate NAND needs, leading to repeat engagements. Luis Visoso confirmed openness to all customers, including those in edge markets, but emphasized selective partnership criteria.

Q: Joe Moore inquired why SanDisk’s Data Center revenue grew so much faster than the market (up 61% sequentially) and if the mix will eventually match the market’s shift toward Data Center.

A: Goeckeler attributed the outperformance to the strength of the BICS8 node, CBA architecture, and timely product launches (TLC and QLC). He explained that AI inference architectures are being refined, allowing NAND to replace DRAM in specific endurance-sensitive workloads, creating sticky customer relationships. He expects the Data Center mix to continue improving throughout FY2027.

Q: Mark Newman asked about the balance between price and volume in Q2 guidance and the progress/status of High Bandwidth Flash (HBF) and other new NAND tiers like SLC.

A: Visoso confirmed both volume and modest pricing increases will contribute to Q2 revenue. Goeckeler described HBF conversations as robust, with samples soon to be delivered to customers for real-world testing. Regarding new tiers, he noted that while density (QLC) remains key, there is a growing architectural discussion around using high-endurance NAND (SLC mode) to replace expensive DRAM in specific inference tasks, viewing it as an expansion of the TAM rather than cannibalization.

Q: CJ Muse questioned how the NBM pipeline exceeding supply through the decade impacts industry supply dynamics and Capex plans, and whether deposits from these contracts can be used for buybacks.

A: Goeckeler clarified that while the process gives visibility, it hasn't yet allowed them to actively manipulate supply/demand dynamics, which remains a longer-term goal. Visoso explained that most NBM agreements involve third-party financial guarantees rather than cash deposits on the balance sheet, so they do not directly impact liquidity for buybacks, though no legal restrictions exist on using any prepayments.