Hi. Good afternoon, everyone. I'm Mark Newman, Bernstein's U.S. IT Hardware Analyst, great pleasure today to welcome back again, David Goeckeler, Chairman, CEO of SanDisk, who was also previously CEO of Western Digital.
Yes.
During the spin-off. Orchestrated the spin-off of SanDisk.
Yep. Fun times.
Thank you very much, David, for coming back again today.
It's wonderful to be here, Mark. Thank you for having us.
Thank you. Thanks.
Can I get started with a safe harbor?
Go ahead.
It's like it has to be done.
Sure. Go ahead.
I'm the only one that can do it, apparently. I will be making forward-looking statements in today's discussion based on management's current assumptions and expectations, including with respect to our technology and product portfolio, our business plans and performance, our capital allocation priorities, market trends and opportunities, and our future financial results. These forward-looking statements are subject to risks and uncertainties. We assume no obligation to update these statements. Please refer to our annual report on Form 10-K, our quarterly reports on Form 10-Q, 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 be making references to non-GAAP financials, and a reconciliation of our GAAP and non-GAAP results can be found in the investor relations section of our website.
Thanks very much. Okay. Now we've got that out of the way.
Yeah.
We'll start with the-
Brilliant.
Q&A. I've got a bunch of questions I'm going to ask. Just a reminder, everyone, you should have a Pigeonhole link. Feel free to put your own question in there. I've got an iPad up here. I'll look at the questions coming in. I'll try to ask a few audience questions after I get through some of my own, if that's okay. I think, I'd like to start off with demand. If we could talk a bit about demand and then we'll talk about some of the other items. First of all, on demand, can you frame this demand environment you're seeing today given what's going on with AI, but also looking at other areas, mobile and consumer? How are you seeing demand changing versus last time we talked about demand, particularly in AI?
I'll say first, this is one of the reasons I really like this market and I really like this franchise, is there is a lot of demand drivers. NAND is used in every interesting technology there is in the world. The traditional markets, smartphones, PCs, data center, which is obviously now growing significantly, but moving on to IoT devices, auto, robotics. It just kind of goes on and on. It's a very diverse market with a lot of demand drivers. Those demand drivers move at different rates, and I think it really makes it a very fun place to build a franchise like we have. What's going on right now? I don't think it's a mystery to anybody. Data center is really growing aggressively. If you go back maybe three forecast cycles, we were thinking data center this year would grow mid-20s. We upped that to mid-40s.
We upped that to mid-60s.
Now we've upped that even a little bit further , if you look at what data center is going to grow on an exabyte basis in calendar year 2026. That's happening. It's obviously a big driver of the market, a lot of stuff that's happening. The other markets, there's still robust demand across all markets, whether it's PCs, smartphones. We're still having great conversations with all those customers across auto sectors, IoT sectors. I think it's a very robust demand environment.
I guess, given how strong AI is, data center growing 60% plus, you have other parts of the market getting slightly crowded out, though. That's part of what we're potentially seeing. How do you frame that?
Look, it's a market, right? I think markets always rationalize supply and demand. They're kind of always in balance, clearly there's ways that those clear through price, there's just an enormous amount of very attractive demand environment being created in this market. That's a very exciting thing. That's always going to have impact on other parts of the market that maybe aren't as attractive from an economic perspective, that's something that happens in any market at any given time. It's a big market. It's a very liquid market. We know what the price is all the time.
In fact, it's a market that is kind of used to trading price constantly, even in the contracted part of the markets, has traditionally been set price every quarter which is really a lot of volatility. That's one of the things we're trying to move away from, quite frankly. I think this is a dynamic you're going to have in any market where there's always a significant amount of new, attractive TAM being created. Look, we were talking a little bit about this on the way in. It wasn't that long ago that I was back here in New York launching the company when we did the separation, and I got on stage and I said, "We're going to invest for mid to high teens bit growth." This was early 2025. We had a view, by the end of 2025, the market pricing was going to inflect higher.
The predominant view to the end of last summer was that was the wrong point of view. I was reading reports as late as, let's say, late summer that said, " SanDisk is going to miss their numbers in December because pricing is going to be down.''
It didn't quite work out that way. I don't think anybody could have anticipated the real intensity at which data center has come on. We've believed that this is a great market. We've been investing for growth in this market. We have to make investment decisions many, many, many years in advance of when the actual supply shows up. We're investing heavily, billions of dollars in CapEx, hundreds of millions of dollars in R&D productivity, which by the way, there's a whole theme there about R&D productivity and NAND. It's very spectacular. We can grow a lot with additional productivity, which each node we deliver. We've been very comfortable for a long time with this idea that we can grow the market, and we're committing to grow the market mid to high teens growth rate.
Just going back to demand specifically, beyond the headline numbers, what are you looking at for leading indicators such as order book depth, customer forecast revisions, qualification activity? What things are you looking at to give you the most confidence in the durability of this demand cycle right now? Because clearly demand is far exceeding supply, given where pricing is going.
Yeah. What we're looking at is what is that environment going to be for the next. For example, we just invested $1 billion a number of months back to extend our agreement with Kioxia, which is a fantastic agreement, from 2030 to 2034. We're obviously looking very far in the future on what demand is going to be. There's many different ways we go about that, to answer your question. First of all, we do a lot of bottoms-up work. We talk to our customers. We know what they're building. For example, smartphones, PCs, all these kinds of markets. We have deep relationships with our customers. We know what devices they want to launch in the future. We have a view of what the mix is going to be.
We have all kinds of bottoms-up analysis on the big markets of what kind of bit growth that's going to drive. We're obviously looking at CapEx spending. That's what's driving the data center number up. Every earning cycle, the CapEx number goes up. We have a decent idea of how that relates to growth in our part of the technology world. Those are kind of long-range things we're looking at on the demand side. We're in the market every single day. We are having conversations with our customers. They're calling us and talking about what they need currently and in the future. We're obviously having discussions about pricing continuously. It's a culmination of all those things that give us insights into where the market's going to go.
Specifically within AI, we have these different stages of AI training, early chatbot inference, more advanced inference, and now we're moving into this agentic era. How do you see those impacting NAND demand over time, as we go from the earlier stage to the more later stages of AI?
We've always believed that inference is really going to be where it's at on NAND and so had to get there. And I would say for the first two or three years of AI, I would constantly get these questions, "Is the development and deployment of AI going to impact the NAND business?" It was always, yes, it's going to, but we got to get there. You got to get the models built. You got to get them deployed. You got to get them rolled out. You got to get users using the technology. There's got to be valuable use cases that drive consumption. I think we're past all that now, or we're rapidly moving through all of that, and you're starting to see the impact. Over the last year, this has really been the story.
You're starting to see the impact of NAND on the inference architectures. I think as our customers start to build out these architectures and you're trying to figure out, how do I scale inference globally? Training, you don't really have to scale globally. You're training a lot of very smart people, a lot of infrastructure driving training. Inference, you want to drive to the masses, if you will. Billions of people are going to be using inference in some way. When you're going to go through that process and you're going to scale something like that on a global basis, it's got to be economic. Early in any kind of technology, when you're a technologist and you're doing things for the first time or you're building markets, you're kind of overwhelming your architecture with all the resources you possibly could need.
Give me all the compute, give me all the memory, give me all the power, give me all the networking, give me everything I need, and then I'm going to build a system. As you go to scale that system, you need to really kind of drill in, what exactly am I going to scale? That's got to be economic b ecause if it's not economic, obviously it's going to be too expensive. That means you're going to have to charge more for it. It means you're going to open yourself up to somebody else coming in and doing it more economically and putting you out of business. These are really, really big, very, very hard decisions.
I think what's been happening over the last year is the people that are responsible for doing this, just spectacular technology companies that have an enormous amount of expertise of scaling technology on a global basis. I think this is really the story of the last 20 years. The distribution of technology has become almost completely frictionless. Right? You just point your device to a URL, and you have the most spectacular technology in the world. It didn't used to be like that 10 or 20 years ago. We had to ship you something, or you had to upgrade your software. There was all this friction in the system. All that friction has been removed, which means we can deploy technology at scale very rapidly which is spectacular. Right? We're witnessing that happen right now.
The people that do that have a very difficult job because it's very expensive, and you need to do it in the most economic way. Those people have been going through that process of how do I build that architecture, and that's where NAND is becoming more and more into the picture. Why? NAND is very scalable. It's the most scalable semiconductor technology in the world. We can produce the supply. Right? As models get bigger, as context lengths get bigger, all these kinds of things are driving you to, you have to use more scalable technology if you're going to do this in an economic way o r if you're just even going to do it, there's just not enough of other things in the world, right? DRAM is spectacular technology. HBM is spectacular technology. It has unbelievable characteristics.
It doesn't have the scale to solve a global inference issue.
I think companies have been figuring out what is this architecture and starting to scale it and how we're going to scale it. That's what's been driving this kind of behind-the-scenes, more demand for NAND. I find as I work on that architecture and I dial in exactly what I'm building to, then I need more or less NAND, and you're coming out with the answer, we need more. That's what's driving the market, and that's what's driving those customers to come to us and say, "Hey, look, we're doing planning for years into the future. That's our business. We want to understand your plan for supplying us this critical technology years into the future. We don't want to just show up every quarter and try and negotiate the price and figure out if there's enough. We need to know now.
Can you supply me in 2028? Can you supply me in 2029?" This is what's leading to kind of this whole transformations we're going through.
Yeah, appreciate that. That's phenomenal demand we're seeing right now. Jensen Huang, earlier this year at CES, laid out this KV cache vision. It's something like an incremental 17 TB per GPU. Are you seeing that? Is this in your demand numbers? Do you think that's going to have a big impact, an incremental additional impact for NAND demand?
Yeah. This is exactly the process I was just talking about, where people are designing systems, and they're configuring systems. The KV cache is moving into NAND because it's got to scale. I need scalable storage technology. That's NAND. Depending on what use case you're building for, I know people want a real clear, "Hey, if I do so much of this, I get so much of that." It's not that simple. You need to figure out what use case you're building for in the future and what you're going to scale to. Once you know that, you can design an architecture to do it. When you go through that process, there's a whole bunch of variables in there. How big is the model you're using? How many tokens? What's the KV cache size? Oh, you have a cache somewhere.
What's the hit rate on that cache? You go through this very complicated equation, we've done some work on this that we've shared. Out of the bottom comes how much NAND you're going to need.
You kind of come to us, or you come to some of our peers, and you say, "How do I go acquire this much NAND over the next few years?''
Right.
We believe very much in that vision.
Yeah.
I think it's much more than a vision. It's what's happening in reality, and it's been happening in reality for quite some time now as companies need to take this brilliant AI technology, and they need to scale it so we all can use it.
Yeah. I think what you're saying is, it's about the density, right? The density of the NAND flash versus DRAM. NAND is just, in terms of how many gigabytes you can get per dollar and how many gigabytes you can get per square area.
Yeah.
It's just that it's much more.
We can just deliver more capacity. Yeah, more density. That's exactly right.
Right.
It's a different technology, solves a different use case. It's not a substitute, and it doesn't mean one's good, one's bad. That's not the issue at all. You need both. You're going to have to use this very scalable storage technology as part of that architecture, and that's why these data center numbers keep going up. Is because as people iterate through this process of how to figure out what that architecture is I need to scale, the number keeps going up.
That drives the demand higher.
Just pivoting a bit to pricing, ASPs. Not LTAs, just looking at the pricing environment in the industry. For those that haven't been following SanDisk closely, the ASP last quarter per gigabyte went up approximately 140% Q-on-Q for SanDisk. That's my estimate. I don't think you've actually given that exact number, but it's pretty much around that which is just absolutely phenomenal. My question is, how do you characterize the pricing environment right now? Clearly you can't get 100% Q-on-Q continue. It's just not sustainable. Amongst the different segments, are you seeing strength still continuing? Pricing still trend up? How do you see it?
Look, we have a forecast for what we forecast. I'm not going to get into talk about what future pricing is. The most important thing in our business is to build very valuable technology. It starts with the technology. It's always about the technology. If you find that you build great products that solve real needs, then we're on this journey of figuring out what the value of that technology is. That's our job, is to do that, and we'll continue to do that.
Got it. Okay. Price too strong. Okay. Got it. Historically, NAND pricing has been quite cyclical, and we're going to talk a bit about LTAs in a minute, but what gives you confidence that this is going to be sustainable, this level of pricing right now, besides the LTAs? We're going to get into the LTAs next.
This is very much how I think about my job, is to make this sustainable. I think the cyclicality is just incredibly, the word I've used a number of times, it's just incredibly corrosive. It seems like we're either in a situation where on the supply side, we're scrambling to survive. I was in that position in 2023.
A year ago, we launched the company and everybody gave us a valuation that I thought was incredibly low. Turned out that turned out to be true. We're in a situation where we're having the previous conversation you just asked me, where everybody doesn't get what they want. To me, that's a thing where our incentives are not aligned, our business models are not aligned. I think what I'm trying to do, and what our team is trying to do is, I think if there's kind of three big things we need to do is in this technology franchise, and really any technology franchise, and what I'm constantly trying to balance. Number one is always get a fair return for what you build. Right? We're very proud of our technology. It's very difficult to do.
Not only do we invest in all the IP to build NAND, we invest in all the IP to build systems. We don't have one R&D team, we have two R&D teams.
We have a team that builds the NAND, and we have the teams that build the SSDs and all the products. Manufacturing, oh, we do that too. We have to invest all the CapEx to do the manufacturing. Oh, backend? Yeah, we do that too. We have a captive backend. We do everything. The whole process, obviously, we have a lot of brilliant suppliers that provide a lot of important technology for us to be able to do that. The number one thing is get a fair return for that investment that we've made. We've been making that investment for a very long time. That's the first thing, and I would say we're doing okay on that now. For a long time, we didn't do very well on that, quite frankly.
Again, you only have to go back a year ago.
Right.
People were basically telling us, "You're not doing a very good job on that because we don't want to invest in your company." That's the first thing you have to do. The second thing that I'm really focused on is we need to do something about the cyclicality. Right? It's just corrosive because it's either everybody's just waiting for when the downturn's going to come. You have a good quarter. Oh, you're just one quarter closer to a bad quarter or it's like kind of a crazy psychology. Either people aren't getting what they need or they have too much. It just is not helpful from my perspective at all.
We want to do that, and we're doing that through business practices. That's why we call these things new business models. How can we change the way we engage with our customers? The third thing you need to do in any technology franchise, you need to grow. Right? You got the right economics, you get the cyclicality out of it, or you deal with the cyclicality differently, and then you have to grow. In every technology franchise I've managed in my career, the third one is the hard one. It's hard to grow, right? Especially large profitable businesses are hard to grow. That's one we have taken care of, right?
We say we're going to grow mid to high teens and people say, "Well, can't you grow faster?" I'm like, "Let me get the first two taken care of, then we'll start talking about that." Balancing this equation is extremely difficult. If you start change, you can always talk about one of the three, but you have to talk about all three of them together b ecause if you start messing with one of them, a different one goes in an opposite direction. It's kind of that whole equation is what we're constantly trying to balance, and we're focused on all three. I would argue that the most difficult one to solve, the growth one, it's a huge advantage for us, right? People want to debate, should you be growing faster?
Well, maybe we could be growing faster, but at the expense of the economics, that's not a very good trade-off from a valuation perspective. Should we get more of this and live with more cyclicality? That doesn't seem like a very good trade-off. You have to do all three. That's the way we think about it. At least that's the way I think about it. That's what we're trying to balance. That's a lot of fun. I think we're seeing very significant change in the franchise in this environment to really get after those first two issues.
That's really helpful. Just drilling down on the second point, the long-term agreements, what you call new business models.
Right.
Can you just talk about what you can today, for how these agreements look in terms of durability, in terms of volume commitments, in terms of pricing structure? If you could explain what you can, like how you think about those agreements, where you are today. I know you've said on the last call over a third of volume are in these-.
Yeah.
Long-term agreements or new business models, as you call them.
Right.
Where do you expect that to get to? Would also be helpful.
Yeah. Let's talk about, you said a little bit earlier. I think everybody understands it. It's been traditionally a very volatile business, right? Literally pricing changes every quarter. That's a hard business to plan.
Right? Hard business to forecast. Traditionally, agreements, there's been-- By the way, we have spectacular customers. This is one of the things, again, that's so attractive about this franchise. Our customers are the most enviable companies in the world. They do spectacular work. Whether it's PC, smartphone, data center, whatever it happens to be across the board, it's just incredible what our customers do. The traditional view of a long-term agreement was, "I'll commit volume, and we'll discuss price later." Like, okay. Well, that's better than nothing, right? At least we understand, if we agree on price, we understand how much volume we're going to allocate to everybody. We want to get out of this volatility and so how do we think about this differently?
That's why we, this idea of long-- There's a lot of terms that have been thrown around in the industry, long-term agreement, NCNR, take or pay. There's all these different things. When you bring up one of those terms, in my experience for the last two years, as soon as you bring up one of those terms, the person across the table from you starts telling you all the reasons they won't work.
We studied that very deeply, and we said, look, what we want to do is we want to get our business model aligned with our customers' business models, right? More and more, we have customers coming to us saying, especially as we got through these data center qualifications. You think about the data center business we've been developing. We build an enterprise SSD. That takes like years to do that. It's a very arduous process. You start engaging with a customer, and that can take two years. Understanding what you're building, giving them samples, putting thousands of units in a lab, letting them run for a year to qualify. This is a very difficult process. At the end of that process, you get to the point where a customer says, "Okay, you've built a great product. We've invested a lot in this.
We've built a great product. I want to buy it. Great. Right? I want to buy it for a long time. I want to buy it for the next five years b ecause go back to the first thing where we started. I'm doing all this work. I'm building this new technology. I have a lot of demand for your product. I don't just want to buy something this quarter. I want you to tell me that you can supply me for the next five years.'' Okay, well show me what your demand is? Then we start the conversation. This is kind of new, right? Because usually it's like, I'm going to tell you what my demand is for the next 12 months, and we'll talk about price four times a year.
It's like, no, I don't want to talk about just the 12 months. I need to know two, three years from now. Four years from now, can I get from you what I need? What I'm building, what they're building is spectacular, again, incredible technology. We get into a conversation which is, how do we align our business models, right? You want to consume NAND. I want to produce NAND. The way I produce NAND happens to be a business model that is probably quite different than yours. I have to invest 10 years ahead of time. I have to build this huge fab. You see the thing from space, it's enormous. I have to plan years in advance for my capacity. The good news is I've done all that. We have the fabs, we have the R&D.
We know what our technology's road map's going to be for years in the future. Now I've done all that and I turn the fab on, right? Now I'm investing for growth, right? I'm going to grow mid to high teens. Now my fab is running and there's more wafers tomorrow than there were yesterday. That's true every single day. Every day the wafers come out of the fab and I've got to sell them. Can't put them in inventory, can't let them fall on the floor. Somebody's got to take them. That's an unnatural business model for your typical consumer. They have big businesses that are growing too, but gosh, do I have to buy something every single month, right? Do I have to buy more than last month? The answer is yes. How do we align? You're going to need this supply.
I'm going to produce that supply. How do we align our business model so that I have confidence that you're going to be a strategic partner of mine and you have confidence I'm going to deliver to you? How do we put a contract around that? That's where we came up with these new business models. How did we think about that? Number one, we need partners that are going to consume a significant amount of product, right? Because this is going to be a big contractual arrangement. Number two, we need you to grow your demand as fast or faster hopefully faster than our supply. If I'm investing for mid to high teens bit growth rate, and you come to me and say, "I want the same amount for four years in a row," that really doesn't help me. Right?
You need to consume faster than I'm supplying, than you're a big strategic partner to me. The next thing you need to do is you need to consume predictably. Remember, the fab runs every single day. The wafers are coming out. If you're my strategic partner, you need to consume every week, well, let's say every month, every quarter. You've got to be predictable in your demand. The more insight you can give me to what that demand is, the better off. What's your mix going to be? How much of this product? How much of that product? We got to get all that figured out. Then we have to put an incentive structure in place because, look, you're a public company. I'm a public company. Something may happen where you have to exit this contract. I understand that, right? Stuff happens.
Yeah. There's a Black Swan event happens. The whole economy goes up and down. Let's say we have a global pandemic. Let's just imagine an event that may impact the whole world. At that moment, I need an incentive structure where you're incented to stay into the contract. If you don't stay in the contract, that I get a benefit. All right? I'm going to ask you to put an amount of money aside up front, and we're going to let a third party hold that for us.
Right? We're not going to argue. I'm not going to sue you. That's never going to happen, right? You don't sue your customers. We're partners, right? Something happens, you have to exit the contract. Ahead of time, let's have a third party hold an amount of money that you have-
Escrow.
Yeah, you can use that word if you want. Some third party is going to hold an amount of money. The easiest thing was you just give me all the money up front. That's kind of impractical, right? This is a five-year relationship. That's a big check for anybody. That's not realistic for all kinds of reasons. We had to come up with something different.
Let's have a third party hold that money, and they'll have the contract, and they'll be able to say, "You walked away from the contract" or "You didn't walk away from the contract." If that happens, that third party's going to release the money to me, it shows up on my balance sheet, and we part friends. At that moment, the contract is over. I keep everything from that point on. You keep everything you paid for. We all go about life, right? We think that aligns our incentive system. You're now incented to stay into the contract. You may think, "Oh my gosh, I need to exit this contract." Well, do you really want to exit this contract? There's going to be some amount of money you're going to have to forgo, billions. You better be sure.
If you do, if that has to happen, I get a bit of a soft landing. I get some cash, which helps. If it's a Black Swan event or something, let's say I want to get rid of the 64, let's say it's a huge down cycle. What do you need in a down cycle? You need cash. We've insulated ourselves, and we both move on down the road, and we're both fine.
We can do business again some point in the future. That's a rough idea of the contract structure we've put in place.
Is that the $12 billion financial commitment?
Yeah. Let's decompose the numbers. We talked about this. We have RPOs now. That's something you would think about. I've run a lot of software businesses, right?
Yeah.
That's a metric from there. That's really an accounting metric, right? We didn't wake up and say, "Oh, we need to use this metric." That's what the industry does when you have contracts, and they have future obligations. We signed three contracts before the end of the quarter. The number we had, the $40-whatever billion , $42 billion number, was the remaining purchase obligation. It's the minimum amount of purchasing obligations on those three contracts for their life. Life of those contracts.
There was another number we talked about which was a little different, so it was a little complicated. We signed two contracts after the end of the quarter, so they're not in our numbers. Of the five contracts we signed, that amount of money that's been set aside in case people walk away was in aggregate $11 billion.
Okay.
Those are how the two numbers kind of all tie together.
Got it.
Honestly, we don't ever expect to see that money. I don't ever want to see that money. I think we have great partners. I think these contracts are going to run to the end. I think that our interests are aligned, and everything's going to be great. We live in the real world. There's got to be some incentive system and I think we've aligned those incentives. I think we have willing partners that want to go down that path with us because they value the commitment of supply.
You said five customers. Those are all hyperscalers or can you not?
No, we haven't said that. We're not going to say that.
You can't say. Okay
It was very smooth the way you. No, look, we want a diversity of customers, right? We want a diverse. The same thing we do about, I've talked a lot about portfolio. We want a diverse portfolio with a lot of optionality across our products we sell. Where I started this, why do I love the NAND market? Lots of reasons I love the NAND market. It's a very diverse market. Lot of great customers. Lot of places you can sell your product. You have to have technology to do that. You don't just sell them raw wafers. You got to build products. If you're selling into the consumer market, you got to have a team of people building that. You got to have a backend that's creating all that stuff. You want as diverse a portfolio as possible and that gives you the most optionality possible.
The same thing is true for these new business models. We want a variety of term lengths, right? You don't want them all to end on the same day.
You want some that are a year, some that are three years, some that are five years.
You want a diversity of customers.
That ideally will cover as much of your portfolio as possible.
Because that's what keeps the portfolio alive and keeps that optionality going.
Makes sense.
We've made the first step, right? That's what we announced on our earnings call. Go back to the three things I talked about, get a fair return, deal with the cyclicality, and grow. Fair return, I think we're okay. We can do better, but we're pretty good. We've now got five in the middle column of starting to address that.
More than a third of the portfolio. Visibility, instead of visibility being three months at a time or maybe 12 months at a time, now we're talking about visibility two years, three years, five years. Wildly different. The grow piece, remember the grow was always there. That box is always checked, right? That's always the one that's like, "That's what's so great about this market. It's going to grow." We got the growth box checked. We got the first box. We're in a good spot. Now we need to keep it. That's the second part. That's why we call them new business models, because it is a different business model of how to do this.
That 33%, do you hope that to get to 50, 60, 70, or?
Well,
Is that unrealistic?
No, that's not unreal. It's TBD, right? Again, we're not done yet. We took the first step, and maybe we took the first five steps. Maybe that's the way to say it. We're still having more discussions, and it depends on this portfolio thing I said earlier. Look, we have spectacular customers. Just spectacular customers. They're great companies, great people. They build unbelievable technology. Some of them like the business model we had before. They like the quarterly. "Hey, let's just do it quarterly." Great. Fine. We're good with that. We're absolutely fine with that. We know how to do that. If that's what they want to do?
We're all in for that.
Are those customers going to get enough supply, though, if they don't sign up?
I can't run their business. They have to run their business, right? Again, I'm not the only supplier in the market. What I want to do is get a portfolio of these agreements that give me the diversity I talked about, can cover a fairly wide swath of my portfolio. It doesn't have to be all of it. It'll never be 100% because there's a whole bunch of customers out there that just aren't big enough, that are great customers and great business to engage in. We'll see. I think it's a bit TBD, maybe a bit unsatisfying for you right now.
It's a bit TBD what the final landing point is. I think if we have the opportunity, we will continue to drive it higher.
Okay. That's great. That's a lot of clarity, much more clarity than we've got from your competitors so far in long-term agreements, so really appreciate that.
I mean, Those are all great companies. They really are.
Just pivoting to supply and capacity, just given how strong pricing is and how strong demand is. A lot of your competitors, Samsung, Hynix, Micron, these companies, they just don't have space to add capacity because they've given all their fab space to DRAM, which has also been tight. SanDisk, Kioxia together, you're one of the only ones that actually has some space that you could add capacity. I'm not encouraging you to do that. I'm just asking.
You're asking for a friend. Is that what's going on?
I'm asking you, how do you think about that? I'm asking, how do you think about that, considering that you have the potential to add capacity? Pretty much no one else is except for possibly YMTC in China. Could you add more capacity, or are you just really trying to optimize pricing at the moment?
Okay. It's probably a more complicated answer than you think. First of all, we're always adding capacity. I think that's where we need to start. We are always adding capacity. Remember, we're growing. We're growing mid to high teens. This is a very big market, growing volume mid to high teens. That's amazing, first of all. Right? Number two, it's normal course to be adding capacity. Just is.
That's the business we decided to enter. Number two, we have to make decisions far in advance.
What demand is next quarter has no impact on my capacity decision. I had to make that decision three years ago.
We have a fab plan that's years into the future. It's very complicated to move tools around, what nodal trend. You're not just running one node in the fab. You're running many, many, many different nodes at the same time. You're transitioning. Really sophisticated. You've got to make those decisions far in advance. Also, again, I don't want to harp on this too much but reflect back, it was only 12 months ago when everybody told me that we were investing too much.
Right? We were saying, "No, no. We think mid to high teens growth rate is the right number." People were saying, "Well, that's not the right number.
Less than 12 months ago.
Yeah, less than 12 months ago, right? We can't whipsaw that much. How do I think about that? What I think about is we're investing for mid to high teens growth rate, and we have a great partner in Kioxia. It's a great relationship. It's gone on for a very long time, for a very good reason, because it's very productive and it's very valuable. We're good at planning. We're good at planning and making sure that we have what we need at the right time to continue to grow the business. Now, one thing I will say that's very important to understand. We can grow through nodal transition. What I'll call R&D productivity.
The number of bits per wafer continues to go up.
Right.
Faster, at a compounded rate, faster than the mid to high teens rate I'm talking about. If we just went from node to node with the same number of wafers, we would oversupply the market. We are constantly adjusting this equation. Remember, each node requires more clean room space. Each node, more complicated, more steps, more tools, more clean room space. This dynamic is extremely important, that if you look at our CapEx as a percent of revenue, it continues to go down as revenue goes up.
Because we still have all this R&D productivity. For all of you that are here that are investors, this is very important. What it says is I can get the growth without an enormous amount of incremental CapEx.
Right.
Again, go back to the model I had, right economics, get rid of the cyclicality and grow, what you find at the end of the day, what are we in business to do? We're in the business to generate Free Cash Flow. What you'll find is this franchise is very good at that.
Because we're very efficient. With the CapEx we spend, we're very efficient of getting incremental output from that.
I've got a few questions from the audience. Just one more from me if I can, before I go to the audience questions. HBF, High Bandwidth Flash.
Yes.
Any updates on that that you can touch on?
We've been very excited about this technology from, again, when we announced it, when we launched the company in February of last year. We've believed for a very long time that once we got to inference, that NAND was going to be a very important technology. You don't need to convince us that the memory architecture needs to change for inference to scale. That's essentially a little bit around what HBF is about. It doesn't mean HBF is going to take over for enterprise SSD. It doesn't mean that HBF is going to be a substitute for DRAM, any of those kinds of things. What it says is there's an enormous opportunity for innovation as inference scales. People that have new ideas, like when I see AI right now and the amount of huge scaling going on, I see a giant green light for innovation.
If you got new ideas, bring them. The world is trying to figure out how to scale this spectacular technology. The faster we can do it, you know what I said earlier, now we can scale technology in a completely frictionless way. It's amazing how fast technology can be made available to everyone if you get the economics right.
HBF is a strategy for how we can deliver a lot of density to inference which is predominantly a read-based activity.
A deterministic read-based activity. We're very excited about the technology. It's new. We're building the NAND die now. We expect to have that by the end of the year. Sometime next year, we'll have the system. We're building the controller on top of it. We've got a lot of work to do. We're working with customers on how they would integrate that into their architecture. It's not plug and play.
This is not we take our component and plug it in, you take something else out. It's a system play. You got to get your customers to adopt it into what they're building, and we're going through that process. We'll continue to update as we go.
Okay. That's great. Questions from the audience. First one, will the shift to edge or on-device compute be a benefit or a risk to SanDisk's growth projections?
No. Anywhere that you're shifting, you say AI?
AI, basically AI on the edge, meaning in your device, in your smartphone.
Yeah. Okay.
In your PCs.
No, this is just more of the same theme, that NAND is everywhere. As you start to scale technology, you need more capacity, and we have the scalable technology. We see this as this is why we're committed to that mid to high teens growth rate, and we were even last year, is because there's like this evergreen nature to this market. Like the world is just constantly innovating and thinking of new ways to use our technology.
That's a wonderful thing.
I've got a great question here from the audience that says, "Can I ask the audience to put your hands up if you own SanDisk stock?" Could I ask you to put your hands up if you own SanDisk stock? Okay. All right.
Thank you. We're working very hard on your behalf.
Next question here from the audience. Can you expand on lessons learned from prior boom busts? How have management incentives evolved across the industry, similar to oil and gas or not, to avoid repeating history?
I don't know about oil and gas, but I've been in the technology business now for probably longer than I should admit. Like 40 years building global technology. I started at Bell Labs a long time ago. I managed a lot of different technology franchises. Hardware, software, SaaS, at very large scale. I was somewhat surprised when I really came in as CEO of this industry about just the way it works. It's just kind of really this whole idea of, like you said, boom, bust. I've said it many times, I just think it's corrosive.
Right.
There's somebody that always feels like they're not getting what they want. Either the suppliers are doing what I was doing in 2023, where I'm scrambling to survive, or we're in a situation where people are saying, "I can't get everything I need." I think it's because of the way we go about this. Now, there's some reasons for that, I said earlier. We have to make long investment cycles. Supply is more of a step function. Demand is more of a curve. Getting these things aligned is not easy. I don't think it's something we should just give up on. I don't think it's something that is our fate or something like that. I think that just because it's been this way for a long time, it doesn't mean it needs to be that way in the future. Maybe I'm arrogant, but that's what we do.
We're innovators. We invent new things, and that can apply to business models as well. That's essentially what we get paid to do, and I think the world is very good at it. I think if we think about this business model, what do we learn from the boom and bust? Yeah, let's not do that again.
It would be really good if we don't do that again.
How do we not do that again, the bust part of it? How do we get to a point where we get a fair return for our technology that we build? Again, it's very difficult. It's very difficult technology. It's not easy. It's 3D semiconductor technology. People dedicate their lives to doing this. It's very expensive to do. It requires an enormous amount of CapEx. Fabs are very difficult things to build and run. Let's get a fair return for that, and let's put a business model in place where we can smooth this out. I think that's very possible, and I think we've made a couple steps down that path and we're going to keep going.
Great. With that, we are out of time. Thanks very much, David.
Thank you.
Thanks, everyone.