Morning, everyone. Thank you for coming. My name is C.J. Muse, semiconductor equipment analyst with Cantor. It's my pleasure to be hosting SanDisk, coming back from not the dead, but coming back out alive once again as a standalone entity. Today, my pleasure, we have Luis Visoso, CFO, and Ivan Donaldson, Investor Relations. Good morning and welcome, gentlemen.
Great. Thank you. It's great to be here.
I think, Ivan, you have something you want to do.
Yeah, I'll just do the ubiquitous safe harbor really quick. We'll be making forward-looking statements in today's discussion based on management's current assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends and dynamics, and future financial results. These forward-looking statements are subject to risks and uncertainties. Please refer to our most recent financial report on Form 10 and our other filings with the SEC and more information on the risks and uncertainties that could cause actual results to differ materially from expectations.
We will also be making references to non-GAAP financials, and a reconciliation of our GAAP and non-GAAP results can be found on our website.
Okay.
Thank you.
It's great to have you both. I'm almost waiting for Kipp Bedard to walk in the room, but that's a whole other story. Luis, congratulations on the completion of the recent spin. Maybe that's a great place to start with a postmortem on what you see as the biggest benefit for the separation, as well as a high-level overview of how operations may change now that SanDisk is a completely separate entity.
Yeah, I think as a separate company, we're just going to be focused on this business, right? The synergies with HDD were just not as obvious from a technology point of view, from a capital intensity point of view, from our shareholder base. I mean, it's just different businesses. I think we were trying to do this is before me, so I just spent a few months with a combined company, but we're trying to do both things. I think now we can be better at doing, you know, serving each of our customers on each of the businesses and serving our shareholders better. That's the goal.
Perfect. Maybe to start with the NAND environment, at your recent analyst, they expressed really clear confidence in a second-half recovery, or excuse me, a NAND. Curious if you can kind of expand on that. I do not know if you will or will not comment on the recent news of you raising pricing 10% as of April 1, but perhaps if you could kind of weave all of those trends into an answer in terms of what you are seeing right now from a demand perspective.
Yeah, I mean, actually, I'll talk about supply and demand because I think we're seeing both are kind of playing a role here. If you start with supply, right, what you're seeing is still an environment where CapEx spending is kind of half of what it used to be in the high years. We're seeing much lower CapEx spending. Obviously, that was a high, and we don't want to get to those levels, but everybody's planning for a much more reasonable bit growth and also on low numbers that are more affordable, right? We're making sure that nodes can live longer, and we're probably being more efficient there. That's one area on the supply. The other one is underutilization. I think what you're seeing is an industry, particularly us, you know, we're starting to underutilize the fab at much higher gross margins, right?
Because it just doesn't make sense to go to the negatives that we've seen in the past. You're seeing a more proactive management on supply. I think that's critical, right? Because supply and demand really dictates a lot of the pricing that we see in the market. On the demand side, you know, if you think about the three big markets on the cloud, we continue to see strong growth, particularly bit growth. I mean, there is a little bit of ASP contraction this quarter, but if you look at bit growth, bit growth continues to be very healthy. You guys are all reading the same reports. Everybody's spending a significant amount of money going forward because they're building their infrastructure to compete on AI, and nobody wants to be left behind. We continue to see that market super strong.
On the PC market, we expect growth this year, low- single- digits, and that's consistent with what our customers are saying. If you think about the 1.5 billion PCs out in the market, it seems like there is an estimate that half of those PCs, [Core i3, Arc A750], are more than four years old, and they need to be refreshed. And about 500 million of those are Windows 10 PCs. So there will need to be refreshed. With AI PCs coming to the market, it's a good excuse that should help us see a refresh cycle. When exactly is it going to happen? I don't know, right? Everybody's expecting it to happen kind of in the back half of this calendar year.
On the mobile market, sorry, on PCs, just one more point. We expect that growth to come on two fronts. One is on unit growth, somewhere in the low single digits, right? Somewhere around, whatever, 270 million or so to be in the market. We expect growth also on the memory content, somewhere in the 530 GB kind of average per PC. If you put all of those together, you start to see a much better growth for us. It's not just units, it's also kind of the memory in each of them. Last, on mobile, we're starting to see, or we expect to see some growth this year. Obviously, we benefit from smartphones' growth, right? Because they're still another market where they do not consume a lot of memory, but we're starting to see that market grow a little bit faster. Particularly, we expect that towards the end of the year.
If you think, again, back to these three markets, we expect good growth to be there. Back to your question, sorry, it's a long answer, when you put the supply and demand, we expect demand to be higher than supply or a little bit higher in the back end of the year, and that should drive our prices to more reasonable levels. Maybe I'll just add on the price increase we just announced last week. We've taken all of this into account. At the end of the day, we're here to create sustainable business models, which means that we'll be able to invest for our customers and be able to deliver a return for our shareholders. When we see the dynamic of supply and demand that I just explained, we see an opportunity to bring prices up a little bit starting now.
We're acting exactly as we said we would, and that price increase is out there.
If we can stay on the pricing side, it seemed to come a little earlier, at least in my view, in that it feels like you and your peers all maybe on average cut utilization by about 15 points, give or take. That takes a good six, seven months to kind of flow through in terms of actually impacting wafers out. I guess I would have thought that the pricing would have come maybe mid-year increases. I guess what gave you the confidence to kind of increase pricing today? Is it seeing leaner inventory in the channel? Is it a focus on kind of a normalized model and just having appropriate pricing? Can you kind of walk through your experience?
Yeah, I think it's all of what you said, C.J. Muse. Frankly, as we've said, we need to avoid the lows of the past, the margins of the past. When we see the market, we see some signs. We're talking to our customers every day or at least every week, and we get enough signals on what's going on. That gives us the confidence that it was the right time to start the price increases.
Perfect. Maybe just to hit on the consumer side of your business, where do you see inventories today in terms of NAND for both PCs and smartphones?
Yeah, it's difficult to know because, I mean, we really don't have perfect data there, but we think the inventory levels are healthy. That's our best estimate based on conversations with customers that the inventory levels have come down a little bit and are now more on a healthy basis.
On the cloud side, we've heard kind of differing comments. You just talked about kind of cloud healthy. I think Micron has noted enterprise SSD softness on the margin. How do you kind of think about that variance? Is it customer mix? Is it depending on who's spending when? Any other thoughts?
Yeah, I mean, obviously, their exposure is much higher to SSDs than ours. I think what we are seeing is pressure on ASP on the cloud, right, because they were higher, but we're not seeing pressure on bits. So we continue to see good bits consumption, and it's just an adjustment from where they were relative to other segments of the market. That's what I'm seeing.
Given that comment, should we be inferring from the price increase that it's more consumer increase, not enterprise SSD?
Yeah, I mean, I think it will impact all of them at the end of the day. I think cloud was higher than the balance, and that was probably not sustainable for a long period of time. They are just coming closer to the mean, but we expect the whole market to increase from that lower level.
Perfect. Obviously, the enterprise SSD market's a major focus for SanDisk. How are you thinking about your market share evolving over time? Are there kind of milestones that you're focused on over the near to medium term?
Yeah, over the midterm, we expect our market share in the E- SSD market to be closer to our fair share of the market. That's what we've said consistently. How do we get there is it's not going to be through price, lower pricing. That's not how we compete, consistent with what I've just been talking about. Our strategy is to win through our products, right? BiCS8 is a big step forward. Now, BiCS8 is great because it basically has better latency, better speed, and better energy consumption than any of our prior versions. It's very competitive in the market. Actually, we think based on our data, it's going to be significantly better than the comparable competitive products. We feel good about BiCS8 and the ability that it brings for us to make progress on our market share in E- SSDs.
We talked about UltraQLC , which is a great product, particularly for storage. We have talked about new controllers to make progress on compute. We feel good about our portfolio that we're bringing to the market. As you know, it takes time to qualify products with these customers because everybody needs something slightly different. It just takes months to qualify. We are making progress with our conversations with the customers.
Perfect. Maybe something that's more difficult to get your arms around, tariffs, obviously tremendous geopolitical turmoil. How are you seeing the landscape evolve? Are you seeing sort of any impact to demand trends or market share shifts related to where manufacturing is being done?
Yeah, super complex topic because I guess it changes daily, right? What I'll tell you is based on the data that we know, right? We produce 100% of our NAND in Japan. Anything can change, but tariffs are not being imposed in Japan as far as I understand. I think our NAND production is in a good place. Every company has production in different places. Some have NAND production in China. We don't. We take our NAND into different back-end fabs, right? We have a back-end fab in Malaysia, which we showcased in our analyst days. It's a great fab. It has great capabilities. We have a joint venture in China, which is pretty much a twin of the Malaysia fab.
As you can imagine, what we've been doing is to make sure that Malaysia can support the U.S. and that therefore the tariffs imposed, the cost of the tariffs, is minimal to us. We have a lot of flexibility in doing that. Will there be a cost? Yeah, there is still a cost, but it's not something very meaningful for us as far as we can tell based on available information. I guess if you really push the thinking forward, the question is, will there be an impact on consumers and the markets themselves? That I think is something still to be seen. Is there a potential recession in the U.S.? We don't know that, right? I'm not factoring that in.
Based on the tariffs and the financial impact to us and our ability to move products around between Malaysia and China, we feel that we're very competitively positioned there.
Makes sense. Sticking on geopolitics, how are you thinking about U.S.-China relations? I guess a couple of thoughts there. One, it sounds like you have kind of the back-end manufacturing kind of footprint where you can build locally in China to support local demand in China. At the same time, you have YMTC, obviously, pushing ahead and being aggressive. How do you see things kind of playing out over the kind of one, three, five-year timeframe?
Yeah, we think YMTC is a China for China play. We will see how that evolves. As you said, we continue to do well in China, but it will be interesting to see how that evolves over the next few years. The good thing is we're operating in a growing market, a market that's growing. I mean, we said kind of bits in the high teens. We expect that growth to continue, and that should enable us to offset any local China impacts that YMTC would have there. Obviously, a lot of the products manufactured in China are produced for another country. We believe that business is a business we can continue to serve.
Makes sense. This might be before your time, but in November, I think the vision for bit growth for NAND this year was +20%, and then pretty quickly over kind of four to six weeks, that evolved to kind of mid-teens. I guess, do you have a view on kind of what led to that change statement?
Yeah. I mean, our teams have built a case for much faster growth, but I do not think it is the right thing to plan with the best-case scenario. We are being more conservative in our planning. I think some of our peers are even talking about lower numbers, which is great because then the CapEx situation and the amount of capacity installed will be more reasonable. We actually believe it is healthier for us as a company, for our investors, that we are more conservative. If we get it wrong on the high side and we have too many bits, I think we know what the price is, right? We end up not generating a ton of cash. If we get it wrong and we are a little bit tight, ASP will be healthier and we can respond.
One of the things we've been doing is instead of approving big chunks of CapEx, we're now approving smaller chunks of CapEx more often. That allows us to turn the dials more often depending on what we see in the market. There is still a lead time, don't get me wrong, right? There is still a lead time of maybe a year depending on tools and so on, but we're able to read the market and adjust more often than we used to do in the past.
Makes sense. As you think about kind of this slowdown in CapEx, and one of your competitors kind of talked about in the world of 3D NAND and in a lower bit environment in the kind of mid to high teens, you really only want to kind of do shrink or next transition every three years instead of every two to mitigate oversupply. I guess within that, as the context, and if everyone kind of does not do that as a backdrop, historically, SanDisk has been the kind of cost leader in NAND. Considering kind of the slowdown in CapEx that you and your partner, Kioxia, have kind of done over the last kind of three years, can you speak to the ability to maintain that cost leadership?
Yeah, I mean, we haven't been cost leader just for a little while. If you look at our history, we've been cost leaders for a long period of time. I think it really comes to two reasons. One is our CapEx efficiency. We showed some charts in analyst day where we clearly stand out as being a lot more efficient than our peers. The second thing is this lateral scaling. You just can't put more bits in a single layer, and therefore you don't need as many layers, which is the least efficient way of adding bits. We believe that our lateral scaling has been a key advantage. I know some of our competitors are bringing new innovation and new technologies, as you can imagine. We're also working on new innovation and technology so that we can continue to drive costs down.
I mean, it's difficult to know where competition is going to go, right? We'll see. But we are very focused on driving costs down to be competitive and continue to have that cost advantage.
Is there a target for cost down that you have over kind of the next five-year period or whatever time frame you want to discuss?
I actually want to move away from internally, we'll talk about cost a lot, as you can imagine. I want to focus on gross margin because I mean, those are the two variables. Because if I get a lot of cost savings and I don't get the right ASP, what is the value of that cost savings? It's going to be very little. We are driving costs down, but we are going to be focusing externally on gross margin. How do we get to that 35% that we talked about?
Makes sense. In, I guess, the CapEx world, while WFE and I'm modeling up $1 billion this year, which is, I think I'm going $7 billion -$8 billion, which is incredibly low overall. We are seeing Samsung be more aggressive in terms of upgrading. I guess, do you get the sense that everyone is kind of playing appropriately in this NAND sandbox, or do you worry at all about one player becoming more aggressive?
I mean, we look at the total CapEx in the industry, and it looks very healthy. Obviously, everybody has different node transitions and timings, but the total numbers that we're seeing are very consistent with what we're doing. Even for us, we said as we transition to BiCS8, there should be a little bit of a blip. It is all node transition. It is all innovation. I do not think, well, we are not adding wafers. We are taking wafers out of the market.
Yeah, and I think just to add to that, I mean, if you look at the financial incentive to grow overall bit supply well above demand, it's just changed. The math has changed from historical periods, right? Where if you could add vis-à-vis node transitions and get 20%-25% annualized cost reductions, you could make an argument for doing that in some cases from whether it was us or our peers historically. I think now we're all in the same boat of, okay, if the industry is getting 10%-11% cost per bit reductions, the risk of driving price down to gain a little bit of share on the margin is much, much higher than it has been historically. I think we can't control what our peers do, but you look at what's the financial incentive.
Right now, the incentive is to try to gain leverage on price and to get price back to a healthy level where we can generate returns that sustain this business. I think that's kind of what you're seeing in the industry right now.
Makes sense. Is there any reason to be more aggressive on adopting Molly or upgrading to cryochambers from a cost perspective that perhaps might not add that many bits?
Yeah, I mean, I'm not going to go into specific tags. I'm probably not qualified to do that, to be super honest. But we're looking at lots of technologies that will continue to drive innovation to reduce cost and also create value for our customers.
The other one I would add to that, though, C.J., is QLC, right? Which is just the fundamental cell technology that we've already touched on it a little bit, but that obviously is basically capital-free cost lever too. The key is getting the right performance with QLC, and that's our Ultra QLC product that we talked about. We are able to get TLC-like performance on speed and do some things on endurance to improve the performance of the product as well. That is another lever on cost and on the product portfolio to address those higher storage needs, both in E-SSD and PC.
Perfect. Maybe just kind of sticking on the topic of technology leadership, can you kind of walk through BiCS8? What are some of the new advances, such as CBA, that get you excited around your tech portfolio?
Yeah, CBA is a big one, right? What you can now do is you can produce the cell arrays separate than the CMOS. There are different technical elements, temperature, and different characteristics that are needed to optimize them. You are not sacrificing by building them together and finding kind of a middle ground. You are actually doing what is best for each of the two arrays or the two wafers, and then you are bonding them together. We feel very good about that. Really, the improvements are across the board, latency, speed, and energy efficiency, as I was saying earlier. They are very competitive in the market. We feel very good about where BiCS8 is and where it will put us relative to our peers. Very, very happy with BiCS8.
Maybe a bit of a longer-term technology focus. At your Analyst Day, you talked about high-bandwidth flash, 3D matrix memory. Can you kind of speak to what are the key milestones? When you see kind of broader adoption, when we'll hear more from a technology progressive perspective?
Yeah, I don't think we've been in a single meeting where they didn't ask when this is going to happen, right? It's super exciting. I think what you know from SanDisk is we've always been an innovation leader, and that's part of our lifeblood. That's what we like to do. I think that's one of our roles in the industry. We'll keep on innovating. Where we are is we're still working on all of these projects where we're engaged with customers, getting feedback, and really understanding which of the workloads we're going to be able to solve with these products. It's a little bit premature to talk about dates.
Okay. Maybe move to your financial model. At the Analyst Day, you talked about ASPs increasing high single digits to low double digits in the July kind of December timeframe. Obviously, the price increase you just discussed is a great start. Is that enough to get us kind of where we're going, or are we going to need further increases in that timeframe?
Yeah, I mean, let's see how the market evolves. We are very serious about what we said, and we see the supply and demand in the right place. We need ASPs to be at a reasonable place for us to be able to continue to innovate and create value for our customers while getting a return for our shareholders. We will see how much progress we make. We continue to believe that we should see a significant improvement in the back half. You are seeing the actions we are taking to deliver that not in six months or a year, but now, right? We are moving ahead.
From a mixed perspective, how do you see that evolving as part of your overall NAND portfolio kind of first half, second half?
Yeah, I mean, we're very happy if you mean mixed within our portfolio, right? If you think about consumer, right, just to start there, we have a very nice market share, right? We've been making progress on that market share. We feel good about where we are on that market. If you think about client, we've also been making progress. We're somewhere around 25% market share. We feel good about our position there. It's really in E-SSDs, as we talked earlier, where we expect to get our market share up relative to the market. Our blended market share is going to depend on where each of these segments fluctuate. Overall, where we expect to see is an increase. The cloud segment should be a larger percentage of our total than what it is today.
Because we expect to maintain our market share in consumer, maintain our market share in client, and expand, get our market share to fair share in the cloud.
Would you view that kind of share shift as margin accretive?
Yeah, I mean, yeah, at least it should be neutral to margin, right? I think over time, we've talked about this before, and some of you have asked, which is the best margin segment? And frankly, it depends when you ask the question, right? If you look at longer periods of time, consumer has been the more stable gross margin, right? Because the price volatility is lower. I think E-SSDs can be a great margin or a terrible margin depending on where you're in the cycle. But over longer periods of time, we expect that the gain on E-SSD market share is important for us, and it should be flat margin, right?
I guess maybe more technical question just around coming out as a new public entity. Are there kind of one-off kind of expenses or whatnot that we should be thinking about impacting OpEx or gross margins in the March quarter and progressing into the June quarter?
Yeah, I mean, it was in the year that I talked a lot about these synergies, right? Once the separation is done, I do not think about these synergies anymore because they are part of my cost structure, right? You can name them whatever you want. What we are doing is, as you know, we are really looking at all the costs and driving efficiencies across the board. There are a few one-time costs. Yeah, I mean, some of the costs, particularly on the COGS side, we have underutilization charges, which obviously we do not expect to be there for a long period of time. They will be there for a few quarters, but not every quarter. We do have some startup costs related to Kioxia and some of the clean room expansions because you need more clean room as you go to newer nodes because new nodes need more space.
On OpEx, I wouldn't say there are big one-time costs.
Maybe just to isolate on OpEx, I believe they're just because of kind of, I don't know, sale rules that more of the OpEx in the March quarter will accrue to Western Digital versus SanDisk. Optically, OpEx will look lower in March and then push higher in June. Is that accurate?
For us, I mean, when we talked in Analyst Day, we expect to make sequential progress on OpEx. We are driving efficiencies. What we said we were going to do is we are going to prioritize our investments in R&D because that innovation is what drives this company. Even within R&D, we are looking at spans and layers and location strategy and all the obvious things to make sure that we are as efficient as possible. We are even being more strict on G&A and sales and marketing. How do we make sure that all our investments make sense? I would not say that we are not guiding OpEx now for the following quarter, but I would not expect, I do not see a reason why OpEx would be higher in the June quarter than the March quarter.
Yep. Just going back to gross margins, can you comment, I guess, in a little more detail around kind of how you're thinking about when underutilization rolls off? Is there a way to quantify the startup costs related to Kioxia?
Yeah. Underutilization is going to be a decision we're going to be making. We look at it every other week, right? We're constantly evaluating supply and demand. It's very important we get that equation right. It's going to be there until we think it's not needed. We want to err on the side of being conservative there. We're driving that. We'll talk about startup costs in the earnings call in a few weeks. We'll give you that view there. Yeah, there were some startup costs related to clean room, as I said earlier.
Okay, perfect. Cognizant of time, maybe let's hit on kind of the balance sheet and capital returns. I guess when do you expect to be kind of, in your view, kind of optimal capital structure in terms of gross debt? Or are you there already?
No, I mean, at the end of the day, we want to minimize our weighted average cost of capitals, right? There will always be a level of debt, right, gross debt. As we said in Analyst Day, we need to bring that net debt to be, we need to be in a net cash position in this business. We want the debt to be reduced versus the levels that it is today, the $2 billion TLB that we have. We will keep on making progress. When will we get there? It will really depend on market dynamics, right? I would expect there to be, if it plays out the way we expect it to play out in the next four to six quarters, we should see significant changes versus where we're today.
Perfect. Maybe last question in terms of capital returns. Philosophically, how are you thinking about dividends versus buybacks?
I think if I had to make a decision right now, I would favor buybacks over dividends, right? I think it's a much more efficient structure for shareholders. It will also depend on many different factors: interest rates, stock price, and so on. We'll figure that out when we get there.
Perfect. I think we've run out of time. Thank you both.
Thank you very much. I appreciate it. Thank you.
Yep.