Sandisk (SNDK) Q4 2026 earnings call transcript

I would now like to turn the conference over to Ivan Donaldson, Vice President of Investor Relations. Please go ahead.

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.

Thanks, Ivan. Good afternoon, and thank you for joining Sandisk's fiscal fourth quarter earnings call. As we close fiscal year 26, 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 BIC's leadership across both TLC and QLC and a 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.

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. 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 a 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.

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. Bixate 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. And 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 26, 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.

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 27, 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. Sandisk manages the entire value chain, from the design of the NANDi 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?

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.

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 five NBMs during our April Learnings call, we have signed five additional agreements, three NBMs with new customers, and two deals expanding on previously signed NBMs. These extensions reflect our customers' strengthening demand exceeding their prior estimates.

One of the five signed deals, three closed before the end of the fourth quarter and two closed after quarter end. In total, we now have NBMs with eight 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 five years with a weighted average duration of over four years. We expect our NBMs to represent more than 50% of our bids in fiscal year 2027 and approximately two-thirds of our bids 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. Pricing of our non-MBM business will fluctuate with the market. The total expected revenue from all our MBMs 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 includes 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 disagreements. These funds and financial instruments are mostly held by or provided through third-party financial institutions, with the remaining in our cash balance. For each of the existing deals, the financial guarantees are released towards the end of the agreement, so the ratio between the financial guarantees and the remaining performance obligation increases over time.

Our NVMs 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. 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 to $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 own 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. 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 bids 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 million up 195 year and consumer revenue was million up 29 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% to 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.

This compares favorably to our guidance range of $480 to $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 $29 in the prior year. This compares favorably to a guidance range of $30 to $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 NANIA 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 NANIA. During the quarter, we repurchased 2,836,000 shares of our common stock for $4.5 billion.

Moving on to free cash flow. 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 NBN 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 non-market to continue growing at an accelerated pace supported by AI inference as a tailwind. We estimate the non-market will exceed $300 billion In the last year, we will be looking forward to the Sandisk Corp earnings conference. Demand from our customers is growing faster than our supply. We therefore expect bids to remain on a location beyond calendar year 2027.

For the first quarter of fiscal year 2027, we expect revenue between $10.3 and $10.8 billion, with sequential growth driven by both bid growth and higher pricing. We expect non-GAAP gross margins between 83 and 85 percent. We expect non-GAAP operating expenses between $520 and $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 and $46, assuming 155 million fully diluted shares. Here is some additional perspective for modeling purposes. Consistent with our long-term objective of growing supply mid to high teens, our capital spending will increase year over year, primarily as we run Bigs 8 and Bigs 10.

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 bids 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 Board of Directors has authorized an additional $14 billion share repurchase program, bringing our total remaining authorization to $15.5 billion. 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.

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. And 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 are 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.

Hey, let me take the second one, and then Luis can take the first one. So we plan to be, you know, we're walking into the buyback program. 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, very deeply with our largest customers on committing demand. And we have over four years of visibility now.

So we feel very good about where the franchise is. And 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.

But Luis can talk about the margin. Yeah, Ben, not to pick a specific number, but 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. But we feel very good about the work we've done. We'll talk more about the NBMs, I'm sure, but you've seen there are not a lot. There are really meaningful deals that we did with eight very strategic customers of ours, so we feel very good about that.

Sure thing.

Thanks, Ben.

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

Sure, Mark.

So, David, sure. Sure. So, 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 kind of how you dimensionalize it. But 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. So we think there's an enormous amount of innovation happening as we scale inference.

We think it provides an enormous opportunity. 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. I mean, 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. And 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. So we know very clearly what products they're going to deploy and the intensity that they're going to deploy them in.

And it keeps us very close to the conversation as their deployment architecture changes. It lets us reflect that in our roadmap appropriately. So you know there a lot of good ideas out there a lot of you know flashing green light for innovation We think we know we a super innovative company and we think that provides nothing but opportunity Now on your second question HPF is something that you know 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, but 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. So we'll have more to say as we progress with technology on actually shipping and release dates and all of that. But 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, and we'll talk more about that next week.

Thank you.

Thank you, David.

So we want customers that grow with us, and we want attractive financials. So 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, you know, the hyperscalers, you know, and 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. 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, and we believe that these relationships will last many, many years.

So, Jim, just a few more comments on that from my perspective. So, first of all, you know, we really started this journey just, you know, two plus quarters ago. Here we are with, you know, a little bit more than 50% of our supply for fiscal year 27, which, you know, 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 FY28, 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. So we feel like we've just made incredible progress here on, you know, taking, you know, 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.

So 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. So we feel good about where we're at, but 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, but we're definitely still in deep conversations with additional customers.

Yeah. So 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. And although that's a generic statement, you've seen us do that, right, through our OPEX, through our CAPEX, through investments in NANIA, through our JV extension. So we continue to make our company more robust and more durable over time in any scenario. So 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 TLB, which is also done. So that priority number two, we feel very good of where we are. And then 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. So we started that journey very quickly in last quarter, and we'll continue that journey and we'll keep you updated. But that's the form we believe is better for our shareholders, more tax efficient, and probably the right thing for us to do at this point in time.

Thank you.

Yeah, so I'll start and Luis can add on. You know, 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, you know, a fair return for our product. I think mid-80s gross margin I would characterize as a fair return. And then we want to increase visibility and durability of the franchise. We want to get this kind of boom and bust out of it. It doesn't work for anybody. In 23, 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.

And so, you know, we're executing what we said we were going to do last quarter. 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, you know, we guided to about 80% gross margin. And then, you know, the rest of the portfolio floats. And then there's, you know, all kinds of things that happen in their mix and all different kinds of things influence it. It's a, you know, fairly complicated business. So when you put that on top of half the supply is committed for FY27, you get to kind of the numbers we're talking about, which we're thrilled with, quite frankly, because the amount of, you know, the operating leverage, operating profit, and free cash flow that drives is very substantial.

And again, we'll go into why that's the case a little more next week. So why do we have conviction that these, you know, customers are going to hang in there with us? You know, there's lots of reasons for that. 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, you know, 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. But if some black swan event happens, companies have to do what's in their interest, and maybe something happens.

But more importantly, we're dealing at a very different level with our customers than we were a year ago. I mean, 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 7x24. The business has turned into a highly strategic, you know, Sandisk has incredible products that allow them, our customers, to build incredible infrastructure to serve the world with, you know, things like inference, which is, you know, 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. And so 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. And so that gives us an enormous amount of conviction that this franchise is set up for the long term. We have over four years of visibility now at economics, which are extremely attractive. And we're really looking forward to executing this business over the next several years.

You talked a little bit about gross capex coming up a little for the VIX8 and VIX10 transitions. Can you just talk about how you think about that and the fact that, you know, 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?

Yeah, so Joe, basically we continue to be committed to grow bids mid to high teens, right? And 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, right, or the cheapest transitions, and then you would go on and do the more expensive ones, particularly when we had, you know, underutilized the FAPs in the prior year. We had some tools that could be reused, and we were in a good place on that spending. So we're very good. We continue to execute the plan that we had. We believe that's the right plan to do it, you know, that allows us to provide the bid growth that we believe is sustainable in the market, and we haven't changed that position.

Now, this year, as I mentioned in my prepared remarks, it will be a little bit lower. I mentioned mid-teams 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. So that mid to high teens, which is our ongoing number, will be a little bit lower for 2027.

Yes, that is correct. That's always our goal, Joe. Okay.

Thank you.

Let's do the consumer one first, Carl, and then we'll come back to you. Sure. Consumer is a business that just doesn't move at the 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, but 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. So there's no doubt we're seeking where is the right equilibrium point for pricing and the amount of products shipped and all these kinds of issues in consumer, And that's a little longer process than in some of the enterprise markets.

Luis, do you want to add anything to that?

Yeah, I mean, 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.

If you are questioning whether the new business models were taking bits away from the consumer market, is that what you are asking, Carl? Oh, no. 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 sign their commitment. So 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.

So I'm curious, with that and kind of your thoughts on supply growth, when do you see industry supply and demand converging, and kind of how has that view changed relative to three months ago? Thank you.

Well, 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 is supply going to increase so everybody gets everything they want at the price they want, that's a much more complicated question. Look, I think this is really, there's a lot into the question you're asking, and I don't need 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, ten years from now. And when the business is transacted on a quarterly basis, it's very difficult to do, and it's very difficult to get wrong.

And if you get it wrong, the implications are kind of tragic. We saw that in 23. You know, right now we're seeing, you know, 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. I mean, 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. But it's going to get matched with customers and suppliers having deep discussions about supply and demand and how do we get those aligned. And 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. So I think we're making incredible progress on this, and we're going to follow our customers. That's the simplest way to kind of run a business, right?

We have customers. We now have relationships with eight customers that are just incredibly large customers, and they're going to give us visibility of what their demand is. You know, as I say sometimes, they need NAND, we build NAND, right? It's a match made in heaven. 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.

The markets that will be down over the next few quarters. Yeah, I mean, they're great markets, first of all. Again, 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, 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, but we still see in smartphones, we see average capacity up significantly. Mid-teens and PCs, we see it flat. But then next year, we see units flattening out in both businesses, both markets, and then average capacities going up.

So we see the market adjusting this year, and then next year return to overall exabyte growth across both. So again, the market's adjusting to kind of the reality of the way the industry works now, and I think it's happening pretty quickly.

Yeah, I would not assume that our new business models are a drag 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. So 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. Now, if you look at some of the reasons on the math that you're questioning, there's some mix.

The high end of the guide is 85, so it's a little bit off versus what we just printed. We're making some prudent assumptions, if you wish, on component costs and other things. When we factor all of that in, we believe that the right guidance to give you is somewhere between 83% and 85%. So slightly down, slightly off from what we printed this quarter, driven by all these factors.

You know, we want to grow with the market. We plan to grow with the market. I mean, WAMSI, we're transitioning our business into a more predictable business. We're working on, you know, pricing and predictability and duration. And so, you know, 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 27 and into 28. Again, customers are giving us demand signals for all the way out to the end of the decade at this point. So, 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.

And, you know, we've got our bid growth plans. 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. But 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.

Thank you. Yeah, 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 KVCash is going to be, how it's going to be used, how much NAND is a part of that equation, how do you configure the system. And we continue to do an enormous amount of research in this area. And 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. So we continue to get more bullish on the requirements for NAND.

And again, this is why I'm going to keep going back to the same theme. This is why it's so important to stay close to our customers, because I am a very, 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. Now we're talking about scaling inference globally, and that is very, very difficult. And 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. So, 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, and the demand continues to get stronger. 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. So it continues to be, you know, it's quite a complicated calculation. We're going to try and demystify it a little bit next week with how we think about it. And it continues to be a very strong story and getting stronger.

Thanks. I think it's a little early to talk about pricing on some of those nodes just yet, right, and some of that technology, but we'll keep you updated on that. We're certainly very proud of the technology. Big Ten 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. So 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, BJ, 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. So that's the way we grow. 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 kind of always stay in line with where the market's at.

I would like to turn the conference back over to Ivan Donaldson for any closing remarks. 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.