Driven by an explosion in AI inference demand, SanDisk reported a 378% year-over-year revenue surge in its fiscal 2027 first quarter, leveraging NBM long-term agreements deeply tied to hyperscale cloud providers and its new HBF technology to push NAND flash into the core layer of AI infrastructure.
On October 30, SanDisk delivered a highly explosive fiscal 2027 first-quarter earnings report after U.S. market close, posting quarterly revenue of $11 billion, up 23% quarter-over-quarter and a staggering 378% year-over-year; non-GAAP gross margin reached 85.1%, generating $5.7 billion in adjusted free cash flow.
During the subsequent earnings call, management revealed that approximately 60% of the quarter's revenue growth was attributable to volume increases and 40% to price increases. Based on strong order visibility, SanDisk projected second-quarter revenue between $12.2 billion and $12.6 billion, while committing to return 100% of surplus cash to shareholders, having already deployed $5 billion for share buybacks in the quarter.
Data Center Business Soars: "Customers Underestimated the Flash Capacity Needed to Run Infrastructure"
The data center segment was undoubtedly the standout storyline in this quarter's earnings. First-quarter data center revenue reached $4.8 billion, surging 61% quarter-over-quarter.
As AI large models evolve, inference workloads are undergoing structural changes. Chairman and CEO David Goeckeler noted during the call: "Longer prompts, more complex reasoning, multimodal inputs, and persistent user context all significantly increase storage requirements. HBM and DRAM support the highest performance tiers, while flash provides the capacity needed to efficiently retain broader context and avoid costly recomputation."
This elevated strategic position is directly reflected in customers' order anxiety. SanDisk's long-term partnership model — New Business Model (NBM) — is being eagerly embraced by hyperscale cloud providers. Goeckeler stated bluntly: "We've learned from customers that they underestimated the NAND flash capacity needed to run infrastructure. As a result, we have many customers reordering, while also working to expand to new customers."
The market landscape is undergoing an irreversible shift. Management estimates that "the data center business has grown from roughly 20% of total industry volume a decade ago to nearly half today." Looking ahead, the company projects that data centers will account for more than 55% of the market by 2027, with bid demand growing approximately 40% year-over-year. Goeckeler even boldly predicted: "By the end of this decade, KV Cache will account for roughly one-third of the AI data center flash market, and the AI data center market will approach the size of today's entire NAND flash market."
NBM Long-Term Deals Lock In Future Supply-Demand Dynamics
Behind the explosive results, SanDisk's New Business Model (NBM) has become a key moat for locking in long-term profits. This contract model based on long-term commitments smooths out the strong cyclical fluctuations of the traditional memory industry.
Chief Financial Officer Luis Felipe Visoso revealed that among current NBM partner companies, "95% are investment-grade companies, and they generate approximately $130 billion in operating cash flow." Currently, approximately 50% of SanDisk's 2027 supply and about two-thirds of 2028 supply have been reserved through NBM programs.
Addressing the real demand from downstream customers, Goeckeler offered a thought-provoking remark during the Q&A session: "Overall, we've learned from customers that they underestimated the NAND flash capacity needed to run infrastructure." He noted that not only are many existing customers placing additional orders, but new customers are also continuously coming in: "We now have a strong supply pipeline extending through 2030 and even beyond."
Currently, approximately 50% of SanDisk's fiscal 2027 capacity has been locked by NBM programs, with that ratio rising to about two-thirds in 2028. Management expects the NBM project pipeline to exceed the company's supply by the end of this decade.
First HBF Chip Taped Out, SLC Sparks New Architectural Thinking
If TLC and QLC form the current foundation, then next-generation storage technologies customized for AI are opening up market imagination.
SanDisk announced a major milestone during the call: its first High Bandwidth Flash (HBF) memory chip has completed tape-out. Goeckeler explained: "HBF is a new memory architecture for inference, with read bandwidth comparable to HBM but much greater capacity... designed to complement HBM by bringing NAND-level capacity closer to the processor." First samples are expected to be delivered to customers next year.
Additionally, the market is closely watching the potential of extremely high-endurance SLC (Single-Level Cell) flash in AI architectures. When analysts asked whether this would cannibalize TLC share, Goeckeler firmly denied it: "This does not constitute cannibalization of other NAND products, but rather an expansion of TAM (Total Addressable Market). The question is: can running NAND in SLC mode achieve sufficient endurance and performance to replace some DRAM use cases? After all, the cost gap between the two is quite substantial, roughly 20x to 40x."
Edge and PC Markets: Short-Term Bottoming, Next Year's Per-Device Capacity Expected to Rise
Compared to the soaring cloud segment, edge computing — including smartphones and PCs — performed relatively steadily, with first-quarter revenue of $5.8 billion, up 7% quarter-over-quarter. The consumer business, constrained by elevated prices, declined 29% quarter-over-quarter to $397 million.
Facing short-term weakness in the PC market, Goeckeler offered an objective assessment. He acknowledged that the current two quarters represent a trough in volume, and projected that PC sales may still decline by single digits next year. However, he emphasized the logic of increasing per-device content: "We expect PC storage capacity (in EB terms) to grow next year. According to our internal models, all segments of the NAND flash market... will show positive growth next year." Meanwhile, automotive electronics is rapidly emerging and is regarded by SanDisk as one of the largest future segments in edge computing.
The following is the full transcript of the earnings call:
Operator: Good afternoon, and welcome to SanDisk's Fiscal 2027 First Quarter Earnings Call. All participants will be in listen-only mode. (Operator Instructions) Please note this call is being recorded. I will now turn the call over to Mr. Ivan Donaldson, Vice President of Investor Relations.
Vice President of Investor Relations Ivan Donaldson:
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 our expectations regarding the company's technology, energy and product portfolio, business plans and performance, capital allocation priorities, market trends and opportunities, and financial results. We undertake no obligation to update these statements. For more information on risks and uncertainties that could cause actual results to differ materially from expectations, please refer to our Annual Report on Form 10-K and other filings with the SEC.
We will also reference non-GAAP financial measures today. Reconciliations of non-GAAP to comparable GAAP financial measures are included in the written materials posted on the Investor Relations section of our website.
I will now turn the call over to David.
Chairman and CEO David Goeckeler:
Thank you, Ivan. Good afternoon, and thank you for joining SanDisk's fiscal 2027 first quarter earnings call. We started fiscal 2027 with another strong quarter, creating value for customers and shareholders and delivering results that exceeded expectations. Our strategy is working, and our execution is delivering results.
Quarterly revenue was $11 billion, non-GAAP gross margin was 85.1%, and non-GAAP earnings per share was $49.51. We generated $5.7 billion in adjusted free cash flow and returned $5 billion to shareholders through share repurchases.
Our confidence in the company's long-term prospects stems from three core strengths: technology leadership, deep customer partnerships, and disciplined financial management. The rise of artificial intelligence and the signals customers are sending through our new business model — NBM partnerships — to extend business through fiscal 2030 and beyond further reinforce the structural growth in NAND flash demand. Together, these strengths enable us to invest confidently in our technology roadmap, strengthen and expand customer relationships, deliver sustained free cash flow growth, and generate capital returns for shareholders.
Technology Leadership
It all starts with our technology leadership. BiCS 8 is at the core of our current portfolio, setting industry benchmarks in both TLC and QLC flash performance and density. BiCS 8 introduces directly bonded to array CMOS technology — our CBA architecture — delivering the performance AI data center customers need and laying the foundation for future generations. BiCS 9 combines the proven BiCS 8 array with next-generation CMOS technology, significantly improving interface performance while maintaining the proven memory architecture. BiCS 10 upgrades the node architecture across TLC and QLC flash, introducing a 1Tb TLC chip designed for high-performance workloads and a 2Tb QLC chip with industry-leading density and read-write bandwidth twice that of BiCS 8. The convergence of these technologies will extend the BiCS 8 foundation to meet the growing performance and capacity demands of next-generation infrastructure.
High Bandwidth Flash (HBF) Progress
Beyond the core roadmap, High Bandwidth Flash (HBF) achieved a significant milestone in the first fiscal quarter — our first HBF memory chip has completed tape-out, and manufacturing is currently underway. As we outlined at Investor Day, HBF is a new memory architecture for inference, with read bandwidth comparable to HBM but much greater capacity, capable of supporting larger models, longer context lengths, and growing key-value caches. HBF is designed to complement HBM by bringing NAND-level capacity closer to the processor, and we remain on track to deliver the first HBF-based product samples next year.
HBF remains a future-facing innovation and was not included in the long-term financial model we presented at Investor Day. As customer adoption, product demand, and manufacturing readiness become clearer, we expect to provide more insights into the market opportunity.
Customers recognize the strength of our innovation and increasingly view SanDisk as a vital partner in achieving their growth objectives. Through our NBM (New Business Model), we continue to evolve customer relationships into long-term partnerships based on innovation, collaboration, and shared commitment. Our recent customer engagements with leading AI companies indicate there is room for further growth in demand for our technology. Our market-leading technology, product portfolio, and customer partnerships are the cornerstone of our strong financial position, enabling us to reinvest to maintain technology leadership and expand supply through R&D-focused capital expenditures.
AI-Driven Demand Growth
The AI boom further reinforces our strengths. As inference workloads grow, demand for scalable memory and storage continues to expand, making NAND flash increasingly important in AI infrastructure. During inference, each generated token must reference its preceding context, creating a growing key-value cache that serves as the model's working memory. Longer prompts, more complex reasoning, multimodal inputs, and persistent user context all significantly increase these storage requirements. HBM and DRAM support the highest performance tiers, while flash provides the capacity needed to efficiently retain broader context and avoid costly recomputation. We believe this is a long-term trend that is expanding NAND's role across the entire AI technology stack.
The memory hierarchy defines the role of each NAND architecture. TLC offers lower latency, higher speed performance, and greater endurance, meeting the needs of active datasets, checkpoints, and latency-sensitive key-value cache workloads. In the AI lab comparison we presented at Investor Day, systems using SSDs achieved approximately three times higher token throughput than comparable systems relying solely on volatile memory, while consuming about 75% less energy. QLC further increases storage density, suitable for capacity-intensive applications like data lakes and vector databases that power AI search and retrieval libraries. Between these layers, increasingly persistent context ensures data can be retained and recalled rather than regenerated.
As inference costs decline, we expect adoption and usage rates to continue rising, reinforcing our view that by the end of this decade, key-value caches will account for roughly one-third of the AI data center flash market, and the AI data center market will approach the size of today's entire NAND flash market.
End Market Overview
Now let's look at end markets. In the data center segment, our portfolio addresses a range of AI infrastructure needs, from high-performance enterprise SSDs to high-capacity platforms. Market demand remains strong and continues to grow, and we estimate the data center business has grown from roughly 20% of total industry volume a decade ago to nearly half today. This shift in customer mix is reshaping industry economics and is at the heart of SanDisk's ongoing transformation. This quarter, the data center business again delivered strong growth and continued to outperform the overall market, driven by our increased supply to meet growing demand in this end market.
Edge computing is a large and strategically important market for SanDisk, encompassing smartphones, PCs, automotive tablets, and expanding physical AI applications. The automotive industry is increasingly becoming an important growth driver for our edge computing business and represents a significant long-term growth opportunity. Our deepening collaboration with leading customers reinforces our confidence that automotive will become one of the largest markets in edge computing.
Our consumer business remains a differentiated strategic asset, combining direct brand engagement with hundreds of millions of end users and broad shelf coverage through leading global channel partners. The consumer end market provides a solid foundation for our business, and its direct connection to the market informs product development and gives us early insight into shifting end-user demand.
In summary, these results further reinforce the robustness of the business model we presented at Investor Day. We have achieved strong profitability and cash flow, and our focus going forward is ensuring consistent and stable execution across all our businesses.
I will now turn the call over to Luis to provide details on the company's latest business developments and outlook.
Executive Vice President and CFO Luis Felipe Visoso:
Thank you, David. We are executing the strategy and plans we laid out at Investor Day and delivering satisfactory financial results.
In the first quarter, we completed two NBM partnerships. Since both transactions were finalized before the fourth-quarter earnings call, we announced these partnerships on that call. We are actively in discussions with existing NBM customers evaluating extensions of their current agreements, as well as with new customers evaluating new NBM partnerships. These long-term partnerships give us greater clarity on market demand and financial performance, enabling us to build a more robust financial model. We will remain patient and disciplined in selecting the right long-term partners and determining the optimal bid allocation to NBM, which may be higher than our current levels.
First Quarter Financial Results
First-quarter revenue reached $11 billion, up 23% quarter-over-quarter and 378% year-over-year. This performance significantly exceeded our prior guidance of $10.3 billion to $10.8 billion. Both volume growth and price increases drove revenue growth, with approximately 60% from volume and 40% from price.
Data center revenue reached $4.8 billion, up 61% quarter-over-quarter, exceeding the market's expected growth rate for the quarter. Our leading products and strong customer partnerships — including with three U.S. hyperscale data center operators — underpin our continued expansion in this rapidly growing end market.
Edge computing revenue reached $5.8 billion, up 7% quarter-over-quarter, reflecting resilience in premium and mainstream markets, partially offset by contraction in the low-end market. Within edge computing, we benefited from strong growth in automotive and IoT customers. Consumer business revenue was $397 million, down 29% quarter-over-quarter, primarily due to the market adjusting to higher prices. We remain committed to serving all three end markets and continuously optimizing performance through our diversified portfolio.
First-quarter non-GAAP gross margin was 85.1%, up from 84.6% in the prior quarter, primarily driven by higher volume and prices. This performance exceeded our prior guidance of 83% to 85%. Non-GAAP operating expenses were $513 million, or 4.7% of revenue. Non-GAAP operating margin was 80.4%, up from 79.2% in the prior quarter. Non-GAAP earnings per share was $49.51, up from $39.25 in the prior quarter and $1.22 in the year-ago quarter. This performance exceeded our prior guidance range of $44 to $46. The company ended the quarter with 154 million diluted shares outstanding.
Key GAAP to non-GAAP reconciliations include: $91 million in stock-based compensation expense, representing 0.8% of revenue; and $513 million in equity securities gains, primarily attributable to our investment in Nanya.
During the quarter, we repurchased approximately 3.2 million shares of common stock for a total of $5 billion. Over the past two quarters, we have repurchased a total of 6 million shares, representing approximately 4% of total shares outstanding. Our buybacks reflect our confidence in the company's long-term value and our disciplined capital allocation strategy. We will continue to invest appropriately in the company and return 100% of surplus cash to shareholders.
Free Cash Flow
Cash flow from operating activities was $6.4 billion. Total capital expenditures were $378 million, or 3.4% of revenue. We expect total capital expenditures to increase over the remainder of the year, at a mid-single-digit percentage of fiscal 2027 revenue. During the quarter, we generated $5.7 billion in adjusted free cash flow, a margin of approximately 52%. The company ended the quarter with $5.1 billion in cash and cash equivalents and no debt.
Outlook
Our confidence in the long-term health of the market stems from the structural growth of AI infrastructure and NAND flash's increasingly important role in inference workloads.
Before turning to second-quarter guidance, I'd like to announce that SanDisk's Board of Directors has approved a 41-for-1 stock split of the company's common stock. Additional shares are expected to be distributed on November 19, and split-adjusted shares are expected to begin trading on November 20.
We expect fiscal 2027 second-quarter revenue between $12.2 billion and $12.6 billion. We expect non-GAAP gross margin between 84.5% and 85.5%, including modest same-store price increases. Pre-split, we expect non-GAAP earnings per share between $55 and $57, assuming approximately 151 million fully diluted shares. Adjusted for the 41-for-1 split, non-GAAP earnings per share would be between $6.88 and $7.13, assuming approximately 1.208 billion fully diluted shares.
As a reference point, we expect the market to maintain strong growth in 2027. Data centers are expected to again be the growth engine, accounting for more than 55% of the market, with bid demand growing approximately 40% year-over-year, driven by AI-driven capital expenditure increases. Previously, data center bid demand more than doubled in 2026. Our NBM project pipeline will exceed supply by the end of this decade.
I will now turn the call back to David.
Chairman and CEO David Goeckeler:
Thank you, Luis. We will continue executing the strategy we presented at Investor Day, which has strengthened our confidence in SanDisk's long-term prospects. With technology leadership, deep customer partnerships, and disciplined financial management, along with structurally growing AI-driven NAND flash demand, we are well-positioned to serve customers, generate sustained free cash flow growth, and deliver returns to shareholders.
Over the past year, we have significantly improved the company's profitability and cash flow and laid a solid foundation for continued growth. We will continue to focus on disciplined execution, sustained value creation, and achieving our long-term financial objectives.
Ivan, let's open the call for questions.
Q&A Session
Vice President of Investor Relations Ivan Donaldson:
We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Ben Reitzes of Melius.
Analyst Ben Reitzes:
Hi everyone, thank you very much. David, I have two questions. First, regarding NBM. You signed two contracts before the last bid. I'm wondering, will there be many more? Because it seems your capacity is already limited and you can't sign them all. Also, if there are any changes to the contracts, could you remind us of the specifics over the coming years? I have a follow-up. Thank you.
Chairman and CEO David Goeckeler:
Thank you, Ben. I'll comment on NBM, and then Luis will add.
We have a very strong NBM pipeline. As portfolio subscriptions and commitments continue to increase, we've already completed half this fiscal year and two-thirds for next year. Now is a good time to advance the next batch of projects, and our pipeline is very robust. We said last quarter that we would be patient and carefully consider the next batch of customers, and that's exactly what we've done. We expect more customers to join over the next few months and even quarters as we continue allocating the remaining portfolio. Our pipeline is very strong and growing, and this has become our primary way of serving customers. I expect the committed portfolio percentage to continue rising in the coming quarters.
Luis, please add.
Executive Vice President and CFO Luis Felipe Visoso:
David has covered most of it. I'll just add a few points. We are very pleased with our progress on NBM. We have been very careful and highly strategic in selecting partners. We reviewed existing partner companies, and 95% of NBM partner companies are investment-grade, generating approximately $130 billion in operating cash flow. We believe we made the right choices. We will continue to be patient and selective, and our pipeline is very robust.
As I mentioned in my prepared remarks, we expect these projects to continue growing. We've shared before that approximately 50% of our 2027 projects are NBM and about two-thirds of 2028 projects are NBM, and we expect that number to rise slightly from two-thirds.
Chairman and CEO David Goeckeler:
Ben, let me add one more point. We are indeed working to balance demand from customers who are reordering. Overall, we've learned from customers that they underestimated the NAND flash capacity needed to run infrastructure. As a result, we have many customers reordering while also working to expand to new customers. There's a lot to manage — these are very complex, large agreements — but we are very confident in our pipeline and portfolio, and the product response has been positive. We will continue to update everyone on the NBM portfolio's progress in the coming quarters.
Analyst Ben Reitzes:
Great, thank you. One follow-up. You may have seen that Intel lowered its guidance for the next quarter due to a PC business decline, and the memory impact was greater than expected.
I'm just curious whether you've noticed increased interest in NBM from the PC market. And if so, do you think this could develop into NBM for some device manufacturers, or actually become more attractive because they're willing to pay higher prices? Given they seem to be short on product and underperforming in this area, how should we think about this?
Executive Vice President and CFO Luis Felipe Visoso:
We can't discuss specific customers. We've said before that we do have NBM in our data center business, centered on data centers, but we also have edge computing customers. We offer this model to any customer that needs it and initiate the process where appropriate. We're not trying to limit any customer — we welcome collaboration.
Chairman and CEO David Goeckeler:
On that point, our own analysis confirms this as well. We know volumes have declined this year and are expected to decline slightly next year, in the single digits. The current two quarters represent the trough with the largest year-over-year declines. In terms of volume, we're seeing the largest year-over-year market change. Nevertheless, we expect PC storage capacity (in EB terms) to grow next year. According to our internal models, all segments of the NAND flash market — including PC, smartphone, and data center — will show positive growth next year, as per-device content continues to increase, partly driven by premium product adoption. The market has adjusted. In terms of volume, we're at a year-over-year trough, but we expect conditions to improve.
Analyst Ben Reitzes:
Thank you everyone.
Operator: Our next question comes from Joe Moore of Morgan Stanley.
Analyst Joe Moore:
Great, thank you. Beyond the strong market conditions, it seems there's a deeper reason related to your positioning in the data center. Your market share grew nearly 20x year-over-year and 61% quarter-over-quarter. Clearly the market is strong, but your market share also seems to have increased significantly. Is this due to BiCS 8 certification? Or is it simply market conditions changing? What exactly enabled you to achieve such high market penetration? And if data center traffic accounts for half of total traffic in the future, can you achieve that same proportion in your own portfolio?
Chairman and CEO David Goeckeler:
Joe, we are very pleased with our current position in the data center. The growth we've reported annually is the result of multiple factors. First, it comes down to the fundamental node of NAND flash. BiCS 8 is an excellent node, and the CBA process provides very pure CMOS, enabling extremely high interface speeds. We built the right products — our TLC products have been on the market for several years; just a few quarters ago we started selling QLC products profitably, and we expect its volume to grow rapidly, which is indeed happening. So we brought the right products to market at the right time based on the right technology.
Over the past quarter or so, AI inference architectures have been further refined. As we observe the market and segment it internally, customers have a more refined understanding of how to use NAND flash, TLC flash, and QLC flash technologies across various stages — from key-value caches to scratchpads to fast data lakes — and all sub-segments of these markets, such as inference in agent orchestration, model pre-training, and model post-training. Overall, we're seeing more refined ways of applying NAND flash.
In the past, QLC flash was very suitable for certain use cases, and we could even see some QLC sub-customers applying it to key-value caches where technology allowed. On the other hand, we see SLC flash being incorporated into architecture designs — it's not really in volume sales yet, more in the architectural discussion phase, and that discussion is not focused on performance but rather on endurance under agent workloads and whether NAND flash can replace DRAM.
We believe these types of architectures will become very popular over time. Once the transition is complete, given the price difference, users will stick with it. These NBMs enable us to have deep strategic conversations with customers about how they use our products, and also deep discussions with our engineers about solving specific problems for different use cases. All of this has greatly advanced our product portfolio development. As I mentioned, we've signed a second batch of NBMs with our largest customer and are in discussions with others. The overall architecture is very strong, and we're pleased with it.
Analyst Joe Moore:
How do you see this product portfolio mix evolving in the long term?
Chairman and CEO David Goeckeler:
We are working to catch up and align our portfolio composition with the overall market. We will continue this work throughout 2027. We'll see if we can truly achieve the target by the end of this quarter, but if you look back at fiscal 2026, our portfolio composition will be much higher than it is now. We will continue to make progress in this area.
Operator: Our next question comes from Mark Newman of Bernstein.
Analyst Mark Newman:
Thank you very much. First, I'd like to discuss your guidance on price and volume. In the first-quarter results you just reported, you mentioned that 60% of revenue growth came from volume and 40% from price. I'd like to ask how you expect this ratio to change in your guidance? Is there anything to add on the pricing side? I know NBM now accounts for a high proportion of volume, but I still want to understand the pricing situation — I recall you mentioned a slight improvement in second-quarter pricing. Could you elaborate further?
Then I have a follow-up on HBF and some new NAND technologies.
Chairman and CEO David Goeckeler:
Let me address the first question. You're right — we reported that approximately 60% of first-quarter revenue growth came from volume and 40% from price. We expect both to contribute in the next quarter. We typically don't break out this number, but as stated in our prepared remarks, we expect a modest price increase. So we expect both volume and price to contribute this quarter, and we expect prices to continue rising modestly throughout the year.
Analyst Mark Newman:
That's very helpful and clearly explained. My follow-up is about HBF and other new NAND technologies in the data center. Someone mentioned earlier that HBF has made some progress, which is great, but I'm wondering if there's any additional information about progress and discussions with partners and customers?
David, you mentioned some other new NAND technologies in the data center, such as Storage Next and CMX context memory. What are your thoughts on these emerging NAND technologies in the data center? Do you think they will all ultimately succeed? If you could share some views on the interplay between these technologies, their respective roles, SanDisk's role in them, and timing, that would be great. Thank you.
Chairman and CEO David Goeckeler:
Of course. Mark, our communications with potential customers about HBF are very in-depth and ongoing — we will continue engaging with them until we deliver product samples for them to use and understand how the product fits into their systems. We will continue to update on this, but it's almost an endless communication process.
Regarding your second question, I think this is very positive for the development of AI inference, because as it scales, architectures must continuously optimize to improve economics. This leads NAND flash to be used in more parts of the architecture, because NAND is the most scalable semiconductor technology. A few years ago, everything revolved around increasing density, from TLC to QLC, and we're still doing that — it remains an important part of the strategy. But now some directions have even shifted: how can NAND flash be used to improve endurance in specific parts of the architecture? Is NAND flash's endurance and performance sufficient for specific application scenarios in the architecture? In certain scenarios, does it offer advantages over competing technologies that are more expensive and harder to obtain?
I think this is a very active area of discussion with many ideas currently, and I think there should be many ideas. I believe all of these ideas will be adopted. The most important thing is to stay closely connected with those who are investing capital to expand infrastructure, because ultimately they will make the decisions that best suit their needs based on the large-scale application scenarios they need to solve and where they're directing their capital.
We are actively participating in these conversations, and I expect them to continue deepening, with many different ideas emerging about how to extend our technology in different directions to adapt to more and more application scenarios. In the product development process, the constant principle is: deliver the right technology at the right time, at the right intensity, at the right cost — no more, no less. That is the core of product development, because only by delivering products at the right price can you achieve the right returns. In the AI inference architecture space, we work closely with customers to advance this process comprehensively.
Analyst Mark Newman:
Great, thank you for the information.
Operator: Our next question comes from David Gibson of MST Financial.
Analyst David Gibson:
Thank you everyone, truly a great quarter! I have a brief question. I'd like to ask whether you're considering accelerating the transition of BiCS from 8 to 9, 10, and beyond, to accelerate bit growth in the short term and meet some very strong customer demand?
Chairman and CEO David Goeckeler:
No, we remain committed to the capacity growth targets previously discussed — in the teens to twenty-something percent range. These key node transitions require extensive planning, equipment procurement, and production line setup. We have factory plans in place to address the capacity growth we've been discussing for a long time. There is no change to the plan at this time.
Analyst David Gibson:
OK, thank you. One follow-up. You mentioned earlier that you would allocate more resources to the data center in the first quarter. Are there any constraints on allocating more resources to the data center?
Chairman and CEO David Goeckeler:
In some respects, yes. After coming out of the fab, you get a certain proportion of TLC, QLC, specific chip combinations, etc., so we need to continuously adjust to get the right products to the right customers. Additionally, there's a lot of operations research work in Luis's organization — he works closely with the sales team to understand existing inventory, fab output, product mix, and where the final sales are directed.
Luis, would you like to add a few words?
Executive Vice President and CFO Luis Felipe Visoso:
The only thing I would add is that this obviously varies depending on the time frame we're considering. In the short term, it's almost impossible to do anything — producing a wafer takes about 120 days. But if you look at a longer horizon, there's much more room for maneuver.
Analyst David Gibson:
OK, thank you very much.
Operator: Our next question comes from CJ Muse of Cantor Fitzgerald.
Analyst CJ Muse:
Good afternoon, thank you for taking the question. I'd like to ask about your comment on the slide that NBM pipeline supply will exceed supply by the end of this decade. Could you elaborate? How does this change your view on industry bit supply over the next few years? Are you adjusting your capital expenditure plans, and by how much? I know you mentioned mid-single-digit increases, which implies total capex of roughly $2.5 billion to $3 billion — that's quite low. I'd love to hear how this visibility affects your view on bit growth and supply?
Chairman and CEO David Goeckeler:
On that point, the first thing I'd say, CJ, is that this process is working. Just two or three quarters ago, we were discussing whether to establish this business model. We had some like-minded customers and made very good progress. Now, several quarters later, we discussed this after Investor Day, and customers are proactively coming to us for NBM services — and this is no longer our only business model. We have many customers with different volumes and products, and we want to be able to serve customers according to their needs — that's without question.
What's encouraging is that we now have a strong supply pipeline extending through 2030 and even beyond — we have many customers willing to provide us with their demand signals and financial commitments. As for the earlier question about whether these factors could give us flexibility if we ultimately choose to change the supply-demand relationship, we're not at that stage yet. We still need to negotiate all these issues, obtain commitments, and get everything aligned.
The process is progressing well, and we are very satisfied with the current situation, which gives us clearer visibility into future planning. The process is still ongoing, and we will continue to update everyone on our progress in the coming quarters.
Analyst CJ Muse:
Luis, I have one follow-up. Regarding these contracts, given that some have deposits, can these deposits be used for buybacks? Or is there a restriction on how this capital can be used?
Executive Vice President and CFO Luis Felipe Visoso:
Theoretically we could, CJ. But as we explained at Analyst Day, the vast majority are financial guarantees held by third-party financial institutions, so they're not on my balance sheet. The only thing included on the balance sheet is advance payments, and that amount is minimal. But there are no legal restrictions on this.
Analyst CJ Muse:
Great, thank you very much.
Operator: Our next question comes from Karl Ackerman of BNP Paribas.
Analyst Karl Ackerman:
Thank you. It's encouraging to see NAND flash capacity per XPU and AI server increasing to meet key-value cache demand. I think this contrasts with reduced memory capacity and scaled-back server SKUs. David, could you discuss how you see enterprise SSD capacity per server trending in 2027 amid AI proliferation? Because AI is undoubtedly playing an increasingly important role in your portfolio.
Chairman and CEO David Goeckeler:
Karl, this is indeed a big question. What we're doing right now, without question, in inference with agent orchestration, our products are closely tied to the CPU demand for these types of applications. We have a very clear understanding of the expected demand per CPU — approximately 60 to 90 GB per CPU for these applications. I haven't calculated the elasticity relationship between the server TAM and these two, but we can follow up.
As I said earlier, we're seeing more and more NAND flash being applied in various ways across different parts of inference architectures. TLC, QLC, and as I mentioned, those seeking high-endurance solutions want solutions that meet the needs of certain parts of the workload — where they don't need DRAM and can use this type of NAND flash. So all of this is very encouraging, and we will continue to monitor closely while also analyzing the market size of these two types of NAND flash and the trade-offs between them.
Analyst Karl Ackerman:
If I may, one follow-up. Do you have any updates or outlook on your enterprise SSD market share target? Given your impressive results, can you achieve the 10% to 15% market share target in 2027? Thank you.
Chairman and CEO David Goeckeler:
Many years ago, we set some share targets, but I've always tried to avoid setting share targets because it can sometimes lead to unreasonable portfolio choices. We want to maximize portfolio value across all time horizons — short, medium, and long term — so we want to maintain a balanced portfolio.
Clearly, we will increase our data center allocation, as you've seen. We discussed earlier that I believe we achieved 17x year-over-year growth — you rarely see 17x growth in a business of this scale. I expect this number to continue climbing in 2027. To some extent, the balance point will depend on what we observe each quarter and the NBM agreements we sign, which will give us clearer visibility into how the market landscape will evolve over the next few years. So this number will certainly continue to climb, but I won't set a specific target.
Analyst Karl Ackerman:
Thank you.
Operator: Our next question comes from Vijay Rakesh of Mizuho.
Analyst Vijay Rakesh:
Hi David, truly a great quarterly report and guidance. Regarding the data center, you mentioned demand will grow 40% in 2027, which is remarkable. Do you think the BiCS 9 and BiCS 10 transitions will help drive some of this demand growth? I'd like to ask about the supply situation in this regard. I have a follow-up.
Chairman and CEO David Goeckeler:
BiCS 8 and BiCS 9 are important parts of our data center strategy — they enable us to achieve faster interface speeds within the same memory cell, and CBA is what gives us this flexibility, which we discussed at Investor Day. In that sense, yes, they are important parts of the strategy, without question. The key is delivering the right products to the right customers. Our TLC products have consistently performed well, and now QLC is ramping up, and BiCS 9 will ramp up too, but it will be some time before real adoption. We announced BiCS 10, but we're still ramping up, and we have a long way to go before real deployment on future BiCS nodes.
Analyst Vijay Rakesh:
Understood. On the endurance side, as you mentioned, some peers are discussing SLC NAND flash. How do you think the market will develop next year? Beyond the overall demand growth you're observing, could the emergence of SLC NAND flash also intensify competition in the NAND market? Thank you.
Chairman and CEO David Goeckeler:
It's too early to form a very definitive view. We are in discussions with some customers who have revealed some SLC demand signals. It's clear that once you start mixing in SLC, there will be an obvious conversion ratio from TLC or QLC, roughly three-to-one or four-to-one. Therefore, the volume and actual deployment of SLC will affect overall market supply. But it's too early to make specific predictions now.
I think this is an architectural discussion where customers want to better understand this technology and how it applies to the various use cases in their inference architectures. We will continue to update on progress in the coming quarters to see how things develop, but it's definitely worth watching.
Analyst Vijay Rakesh:
OK, thank you.
Operator: Our next question comes from Jim Schneider of Goldman Sachs.
Analyst Jim Schneider:
Good afternoon, thank you for taking my question. I'd like to understand from a more specific strategic perspective — your consumer business clearly had seasonal fluctuations in the first quarter, as did the PC business, but the data center business is currently in a long-term growth phase. Luis, based on the information you have now, could you roughly predict whether you think third-quarter results will grow, decline, or be flat quarter-over-quarter?
Executive Vice President and CFO Luis Felipe Visoso:
You mean the third fiscal quarter? Historically, the third quarter is typically our weakest quarter. For example, last quarter our bid declined 19% quarter-over-quarter. While we don't provide third-quarter guidance, for modeling purposes, I would be conservative about the quarter-over-quarter growth from the third quarter to the second quarter.
Analyst Jim Schneider:
Thank you. Also, regarding share buybacks, it's great to see the program continuing. I'm a bit curious — as the authorization period approaches, do you expect the Board to renew the authorization quarterly? Or, given the current stock price is well below expectations, could you elaborate on how you plan to execute the actual buybacks? Thank you.
Chairman and CEO David Goeckeler:
We have a very clear strategy: 100% of surplus cash will be returned to shareholders. We will execute this strategy actively and effectively, and we know how to communicate with the Board. We meet every quarter, and I don't foresee any obstacles in execution. I expect we will continue to stay true to this strategy of returning 100% of surplus cash to shareholders. Over the past few quarters, we've gotten off to a good start — we've repurchased shares equivalent to 4% of our initial market cap or shares outstanding, and we will continue to execute this program properly.
Analyst Jim Schneider:
Thank you.
Operator: Our next question comes from Krish Shankar of TD Cowen.
Analyst Steven (on behalf of Krish):
Hi everyone, thank you very much for taking my question. This is Steven calling on behalf of Krish. My first question is for David. I'd like to understand the demand situation for TLC and QLC flash chips among your CSP customer base. As NBM becomes more prevalent, will the ratio of TLC to QLC flash chips change significantly in the latter part of this decade?
Chairman and CEO David Goeckeler:
The current TLC to QLC ratio remains around 70:30. TLC has been the primary driver of the portfolio. We're also increasingly hearing from customers who want to reaccelerate QLC development and explore different use cases. We'll watch how this develops toward the end of the decade. The current 70:30 ratio is quite good, with some fluctuation each quarter, but it's basically maintained at this level, and we expect this to continue at least for the remainder of this fiscal year. We've set this time frame and will continue discussing with customers to see their views on QLC.
I should also mention that the Stargate product — our QLC product — is ramping very well. Just a few quarters ago, we were discussing product qualification, and now qualification is fully complete, and customers are gradually increasing orders. This product has been very well received and is a very critical part of our portfolio.
Analyst Steven:
Understood. One more question about the mobile edge computing market. Given that this market also saw double-digit volume declines this year, although the decline was mainly concentrated in the entry-level and mid-range segments. I'm curious — based on demand signals from some of your customers in this market, can your mobile business still achieve overall growth next year?
Chairman and CEO David Goeckeler:
Let's talk about the market first. The low-end market is indeed under pressure, which leads to volume declines, but per-unit content increases. Overall, we expect the market's data volume in exabytes to grow next year — even as volumes decline slightly. As for our portfolio, this is somewhat like the data center — I don't want to make predictions about individual markets. We will manage the portfolio with flexibility and agility. We've been very clear that we want a balanced portfolio, but we will optimize short-, medium-, and long-term financial results and integrate these factors for the best outcome. We will keep you updated on the mobile business composition.
Analyst Steven:
Great, thank you very much!
Operator: Our next question comes from Wamsi Mohan of Bank of America.
Analyst Wamsi Mohan:
Thank you very much. You mentioned on the slide that leading AI companies may signal future demand growth. I'm wondering if these companies refer to AI labs? Also, are there any credit issues with Neo Clouds currently affecting you? I have a follow-up.
Chairman and CEO David Goeckeler:
We haven't seen any such situation. On the contrary, we're seeing very strong customer demand. If we look at our largest customers, they are basically all investment-grade companies with abundant cash flow. Therefore, we haven't seen any impact from credit issues, even if such issues do exist in the market, and our customers' demand has strengthened compared to last quarter.
Analyst Wamsi Mohan:
Luis, you said "leading AI companies" on the slide — are you referring to AI labs?
Executive Vice President and CFO Luis Felipe Visoso:
We sell products across all business segments — we sell to hyperscale data centers, we sell to model builders, we sell to everyone.
Analyst Wamsi Mohan:
OK, thank you Luis. Regarding this quarter, accounts receivable seems to have ticked up slightly. Is this because payment terms have improved as more bids adopt NBM payment methods, and should we expect this to continue? Or were there other factors this quarter?
Executive Vice President and CFO Luis Felipe Visoso:
We basically saw some changes in customer mix, which had some impact on our accounts receivable — just a little bit — but primarily it was customer mix changes.
Analyst Wamsi Mohan:
OK, thank you very much.
Operator: Our next question comes from Amit Daryanani of Evercore.
Analyst Amit Daryanani:
Thank you very much. David, I'd like to start with capital allocation. As you transition to a more predictable NBM-driven business model, does this change your view on capital structure? Historically, memory chips have been perceived as more cyclical, so balance sheet flexibility is crucial. But as your business becomes less cyclical, does this make you more willing to increase leverage to accelerate capital returns? Or are you still comfortable with the $5 billion quarterly buyback program? I'm just wondering when you think we could increase leverage to take advantage of reduced business cyclicality?
Chairman and CEO David Goeckeler:
We have already published a financial model at our Analyst Day, where we spent three and a half hours discussing this and committed to executing the financial model through the end of 2030. We plan to execute this model, and we are very confident in our strategy of maintaining zero debt, having a very strong balance sheet, and investing earnings in our own business. Our business is growing, and there are many opportunities for internal innovation. We will continue to invest in projects like HBF and 3D matrix memory, in addition to the BiCS roadmap and all the excellent products we're developing. After that, we will return 100% of cash flow to shareholders — that's our plan, and we will continue executing it for the foreseeable future unless we announce a change. I don't expect any changes in the near term.
Analyst Amit Daryanani:
OK. Regarding HBF, rather than asking about the potential TAM size, could you discuss what the scaling variables are as inference models and context windows expand? Should we think of HBF capacity growing in line with GPU compute power, or faster? Also, you mentioned starting initial sample testing in 2027 — what are the key milestones from then to achieving meaningful revenue growth? Thank you.
Chairman and CEO David Goeckeler:
On your first question, it's too early to assess. On the second: after we get the chip and complete base chip tape-out, we will integrate the controller with the base chip, then deliver it to customers for them to begin evaluating the product's actual performance in their infrastructure.
We've done extensive modeling work, but after actually delivering physical products to customers and conducting integration work, customer feedback will help us gradually answer questions everyone cares about, such as: how big is the market opportunity, how fast will scaling progress, what is the TAM, and in which scenarios will the architecture be deployed. We will follow the direction of customer demand.
The key next step is truly getting the product into customers' hands. This will open a series of new conversations — we will no longer rely on simulation but directly observe the product's actual performance in their infrastructure and whether it meets customer expectations. This will also help continuously expand product application scenarios.
At the current stage of the development process, we need to exercise some restraint to avoid overwhelming the engineering team with a flood of customer application ideas. When we truly have a deliverable physical product, we can open the window for dialogue, which will bring more application scenarios. But these remain to be determined.
Overall, when we reach the key milestone of "having a real product," many things will progress — customers can begin actual use and evaluate the product's contribution to their goals. Their goal is to build world-class inference architectures at optimal cost, and we believe HBF is an excellent technology for achieving this. But the specifics remain to be verified.
Amit Daryanani (Analyst): Thank you very much.
David Goeckeler (Chairman and CEO): Thank you.
Operator: Our next question comes from Mehdi Hosseini of SIG.
Mehdi Hosseini (Analyst):
David, I'd like to go back to a point you mentioned earlier — you said AI inference is continuously optimizing and has impacted SLC demand, requiring more SLC. My question is, does this adversely affect TLC adoption or growth? Or is SLC demand additional to TLC and QLC market demand?
David Goeckeler (Chairman and CEO):
I think this does not constitute cannibalization of other NAND products, but rather an expansion of TAM — the market is beginning to need storage technologies with different characteristics, including higher endurance and stronger performance. Our products are flexible enough to run wafers in SLC mode. Customers are gradually discovering and understanding how to flexibly apply this technology based on the characteristics of the problems they need to solve. This is simply a more refined understanding of architecture, not cannibalization of NAND at various levels.
Going further — of course it's still early and requires careful judgment — the question is: can running NAND in SLC mode achieve sufficient endurance and performance to replace some DRAM use cases? After all, the cost gap between the two is quite substantial, roughly 20x to 40x.
Wamsi Mohan (Analyst):
Mehdi, I think this is a very positive signal in many ways. From the perspective of what architecture scaling actually looks like, when you scale an architecture —
David Goeckeler (Chairman and CEO): You have to do it in the most cost-effective way. NAND is the most scalable semiconductor technology, so it's not surprising that people keep finding more use cases. In a sense, scalable technologies tend to attract and expand TAM, and that's exactly what's happening — as these architectures become increasingly refined and mature.
Mehdi Hosseini (Analyst): OK. Let me ask from a different angle: given the market's demand for higher-endurance SLC and the period while customers wait for HBF commercialization, how much flexibility does the joint venture (JV) have in increasing SLC capacity to meet short-term demand?
David Goeckeler (Chairman and CEO):
I wouldn't think about this from the perspective of "SLC capacity." Our memory cells are flexible enough to run in SLC, MLC, or TLC mode as needed. Therefore, we can use existing wafers to supply market demand — that's our basic approach.
I understand you want to go directly to the supply level, but it's really too early. At this stage, it's mainly customer conversations exploring technology applications and forming preliminary demand estimates. This is a direction worth watching and will undoubtedly impact the market — after all, a small amount of SLC corresponds to a large amount of QLC. But more details, Mehdi, we'll share with everyone later.
Mehdi Hosseini (Analyst): OK, understood. Thank you for the detailed information.
Operator: Ladies and gentlemen, that concludes today's Q&A session. I'll now turn the call back to management for closing remarks.
David Goeckeler (Chairman and CEO): Thank you all for joining this call, much appreciated. Today's discussion was very productive, and I look forward to meeting with everyone again this quarter. Thank you.
Luis Visoso (Executive Vice President and CFO): Thank you.
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