Sandisk Corporation (SNDK) Q1 2026 Earnings Call Transcript

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Overview

The earnings call reveals optimistic guidance with strong growth expectations in enterprise SSDs and data centers, driven by AI demand and BiCS8 technology. Despite caution on seasonality, gross margins are improving due to pricing and cost reductions. Management's strategic customer engagements for long-term agreements and potential market share gains in data centers also signal positive sentiment. However, some details remain vague, slightly tempering enthusiasm. Overall, the positive outlook on growth and strategic initiatives outweighs uncertainties, suggesting a positive stock price movement.

Key Financial Performance

Revenue $2.3 billion, up 23% year-over-year. The increase was driven by higher-than-expected bit growth and mid-single-digit pricing increases.

Non-GAAP Earnings Per Share (EPS) $1.22, up from $0.29 in the prior quarter. The increase reflects higher-than-expected revenue, gross margins, and a more favorable tax rate.

Adjusted Free Cash Flow $448 million, representing a 19.4% free cash flow margin. This was driven by $488 million in cash from operations and $10 million from Flash Ventures activities, offset by $50 million in investments.

Net Cash Position $91 million, achieved approximately 6 months earlier than planned due to strong cash focus and robust market conditions.

Edge Revenue $1,387 million, up 26% sequentially. Growth was supported by a PC refresh cycle, Windows 11 adoption, and increased NAND content in devices.

Consumer Revenue $652 million, up 11% quarter-over-quarter. Growth was driven by strong seasonal demand and partnerships with companies like Nintendo.

Data Center Revenue $269 million, up 26% sequentially. Growth was driven by increased demand from hyperscalers and OEM customers.

Non-GAAP Gross Margin 29.9%, up 350 basis points quarter-over-quarter. The increase was due to incremental revenue and higher pricing.

Non-GAAP Operating Expenses $446 million, higher than guidance due to increased variable compensation from revenue over delivery.

Inventory Days Reduced from 135 to 115 days, driven by demand exceeding supply.

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Operating Highlights

BiCS8 Technology: BiCS8 accounted for 15% of total bits shipped and is expected to reach majority of bit production by the end of fiscal year 2026. It delivers industry-leading capacity, I/O performance, and energy efficiency, supporting high-capacity SSDs for data centers and edge markets.

Stargate SSD Product Line: Growing demand with two hyperscaler qualifications underway and additional qualifications planned for calendar year 2026.

HBF Technology: High-bandwidth flash technology is gaining interest for AI inference storage solutions in data centers and edge applications.

Data Center Business: Revenue increased 26% sequentially, driven by partnerships with hyperscalers, neocloud, and OEM customers. Active engagements with five major hyperscale customers.

Edge Market: Positive momentum from PC refresh cycles and premium smartphone launches. PC unit shipments and smartphone capacity per device are expected to grow in 2025 and 2026.

Consumer Market: Strong seasonal demand expected during holidays. Partnerships with Nintendo and gaming sector expansions, including new microSD products for gaming devices.

Revenue Growth: Revenue for Q1 2026 was $2.3 billion, up 21% sequentially and 23% year-over-year.

Gross Margin Improvement: Non-GAAP gross margin increased to 29.9%, exceeding guidance.

Free Cash Flow: Generated $448 million in adjusted free cash flow, achieving a net cash position of $91 million.

Technology Roadmap: Focused on advancing NAND technology and strengthening customer partnerships to meet demand and secure long-term commitments.

Capital Allocation: Achieved net cash position six months ahead of target. Plans to invest in BiCS8 transition and return cash to shareholders.

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Risk or Challenges

Supply and Demand Imbalance: Demand for NAND products is outpacing supply, and this dynamic is expected to persist through the end of 2026 and beyond. This could lead to challenges in meeting customer needs and potential revenue loss if supply constraints are not managed effectively.

Strategic Allocation of Resources: The company is making strategic allocation decisions to maximize long-term value creation, which could pose risks if these decisions do not align with market demands or customer expectations.

Dependence on Key Customers: The company is heavily reliant on strategic engagements with major hyperscale customers. Any disruption in these relationships or failure to meet their expectations could adversely impact revenue and market positioning.

Technological Advancements: While investments in BiCS8 technology are expected to drive growth, delays or failures in technology development and deployment could hinder competitive positioning and financial performance.

Economic and Market Conditions: The company’s performance is tied to broader economic conditions, including investments in data centers and AI infrastructure. Economic downturns or reduced investments in these areas could negatively impact demand for the company’s products.

Operational Costs: Higher-than-expected operating expenses, including variable compensation and start-up costs, could pressure margins and reduce profitability.

Regulatory and Compliance Risks: The company operates in a highly regulated environment, and any changes in regulations or failure to comply could result in financial penalties or operational disruptions.

Seasonal Demand Variability: The consumer business is subject to seasonal demand fluctuations, which could lead to revenue volatility and inventory management challenges.

Capital Expenditures: Significant capital investments are required for the BiCS8 transition and other initiatives. Any inefficiencies or delays in these investments could impact financial performance and strategic objectives.

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Guidance & Outlook

Demand for NAND products: Demand for NAND products is expected to outpace supply through the end of calendar year 2026 and beyond.

BiCS8 Technology: BiCS8 technology is expected to account for the majority of bit production exiting fiscal year 2026, enabling growth in the data center business and strengthening positioning in edge and consumer markets.

Data Center Business: Revenue is expected to grow with ongoing hyperscaler qualifications and strategic engagements with five major hyperscale customers.

Edge Market: PC unit shipments are expected to grow low single digits, with mid-single-digit growth in capacity per device in calendar years 2025 and 2026. Average smartphone capacity per device is expected to grow high single digits in the same period.

Consumer Market: Strong seasonal demand is anticipated during the holiday period, supported by refreshed consumer portfolio and gaming partnerships.

Revenue Guidance for Q2 FY2026: Revenue is expected to be between $2,550 million and $2,650 million, driven by double-digit price increases and mid-single-digit bit growth.

Non-GAAP Gross Margin Guidance for Q2 FY2026: Non-GAAP gross margin is forecasted to be between 41% and 43%, supported by higher pricing and cost tailwinds.

Non-GAAP Operating Expenses for Q2 FY2026: Expected to range between $450 million and $475 million, driven by data center business expansion and HBF innovation.

Non-GAAP EPS for Q2 FY2026: Forecasted to be between $3 and $3.40.

Fiscal 2026 CapEx Plans: Plans remain unchanged, with a focus on growing supply in line with market demand, assuming bit demand CAGR in the mid- to high teens.

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Shareholder Return Plan

Capital Allocation Priorities: The company has achieved a net cash position through strong cash generation. Going forward, the capital allocation strategy remains unchanged, focusing on investing in the business and returning cash to shareholders.

Free Cash Flow: The company generated $448 million in adjusted free cash flow during the quarter, representing a 19.4% free cash flow margin. This includes cash from operations and other activities.

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Key Q&A

Q:Are you seeing similar trends in NAND as in the HDD world, and how are you allocating the bits you can produce?

A:Management noted two phases of customer engagement: multi-quarter volume and price deals for supply certainty, and proactive visibility from data center customers through 2027. They are prioritizing strategic customers and evolving their portfolio to focus on data center growth.

Q:How are you thinking about bit shipment growth opportunities in calendar '25 and '26?

A:Management aims to maintain market share and sees strong growth in data center business. They are optimistic about innovation with BiCS8 and plan to grow along with the market, supported by capital plans assuming mid- to high-teens demand growth long-term.

Q:What is your view on the supply situation over the next couple of years, and what would make you decide to add wafer capacity?

A:Management sees an undersupplied market through 2026 and beyond, with no immediate plans to add wafer capacity. They are focused on increasing productivity and bit supply through technology advancements like BiCS8, and would only consider adding capacity if long-term demand is evident.

Q:What is the update on your enterprise SSD qualifications and market share ambitions?

A:Management is happy with the progress, with products like Stargate and 128T drives under qualification. They expect increasing sales in this segment through FY '26 and aim to achieve their fair share of the market, supported by BiCS8's performance and density.

Q:How do you assess the enterprise SSD market opportunity relative to hard disk drives?

A:Management views enterprise SSDs and HDDs as complementary technologies, with SSDs growing faster due to AI-driven demand. They see a major inflection in the NAND market, with data center becoming the largest segment by 2026, driving better visibility and growth.

Q:What should we expect in terms of seasonality and start-up costs in the March quarter?

A:Start-up costs are expected to be negligible going forward. Management cautioned about seasonality, with historical bit declines of 12-14% in Q3, though data center strength may offset this. They advised careful modeling of seasonality impacts.

Q:What is the demand for QLC in the enterprise SSD market, and how does BiCS8 enable growth?

A:QLC is expected to grow from 20% to 40% of the market by FY '26. BiCS8's energy efficiency and performance position it well for this growth, with strong demand for both QLC and TLC products in the enterprise SSD market.

Q:How does underutilization expense and fab capacity affect your view of '26?

A:Management has moved to 100% fab utilization and sees supply growth of 17% in '26, meeting constrained demand of mid-teens growth. They believe unconstrained demand could reach mid-20s growth, supported by full fab capacity and productivity improvements.

Q:What portion of your contracts are shorter-term versus longer-term?

A:Currently, very little volume and price commitments extend beyond a quarter. However, strategic customers are initiating conversations for longer-term agreements to ensure supply, which is a welcome development for the company.

Q:What is the road map for high-bandwidth flash (HBF)?

A:HBF memory is expected later in '26, with controllers in '27. Management is engaging with customers to identify use cases in edge and cloud markets, and remains optimistic about the technology's potential.

Q:How are you approaching wafer capacity allocation for enterprise SSDs?

A:Management does not plan to add capacity for specific markets but will adjust mix for the best financial return. BiCS8's higher bit density allows for increased supply without additional wafers.

Q:What are the factors driving gross margin improvement?

A:Gross margin improvement is primarily driven by double-digit pricing increases and cost reductions from the BiCS8 ramp. Management expects continued gross margin expansion as pricing trends higher and costs decline.

Q:What is the update on UltraQLC 256TB and 128TB products?

A:The 128TB drives are under qualification with multiple customers and expected to ramp mid-2026. The 256TB product is anticipated to hit the market mid- to late-2026, with broader adoption expected thereafter.

Q:How are you thinking about bit growth across different markets in the second half?

A:Management expects stronger growth in the data center market, with continued progress in consumer and edge markets. Data center growth is expected to drive higher exabyte growth in the second half.

Q:What is the confidence in edge device growth for calendar '26?

A:Management expects slight unit growth in phones and PCs, with double-digit content growth in phones and mid-single-digit capacity growth in PCs, contributing to healthy exabyte growth across edge markets.

Q:How are long-term agreements with customers evolving?

A:Strategic customers are proactively reaching out for multiyear supply agreements, reflecting the growing importance of data center customers. Management is in early stages of these discussions, which are expected to provide better visibility and support long-term investments.

Q:What is the growth potential for high-bandwidth flash (HBF)?

A:Management sees significant potential in the inference market, particularly in edge devices, but is not ready to discuss market sizing or competitive advantages publicly.

Q:Are you gaining share in the data center market?

A:Management believes they are growing faster than the market, indicating potential share gains in the data center segment.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the following: 1) Exact split between QLC and TLC demand in enterprise SSDs. 2) Specific terms or values in long-term customer agreements. 3) Detailed market sizing and competitive advantages for high-bandwidth flash (HBF). 4) Precise cost decline percentages for BiCS8 ramp. 5) Breakdown of AI versus traditional cloud demand in data center growth.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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