Summary of SanDisk Corporation Conference Call Company Overview - **Company**: SanDisk Corporation (SNDK.O) - **Industry**: Semiconductors - **Market Cap**: $30,011 million - **Price Target**: Increased from $230.00 to $263.00 Key Financial Highlights - **Recent Performance**: - Revenue for the quarter was $2.308 billion, up 21.4% quarter-over-quarter and 22.6% year-over-year, exceeding expectations of $2.152 billion and $2.105 billion respectively [14][19] - Non-GAAP EPS was $1.22, significantly above the Street estimate of $0.88 and the prior estimate of $0.85 [14][19] - Non-GAAP gross margin was 29.9%, ahead of the Street's expectation of 29.0% [14][19] Market Dynamics - **NAND Market Strength**: - The strength in the NAND market is expected to continue, driven by enterprise demand, with guidance for pricing to increase by double digits quarter-over-quarter in December [3][9] - SanDisk anticipates mid-40s percent year-over-year growth in enterprise SSD in 2026, aligning with previous growth expectations of 40-50% [4][10] Supply and Demand Outlook - **Supply Constraints**: - SanDisk confirmed that its investment plans remain unchanged, indicating supply growth will lag behind demand in 2026 [11] - The company is positioned to be selective with its product mix, focusing on high-margin markets due to limited inventory in the NAND sector [12] Future Guidance - **December Quarter Outlook**: - Sales are guided to $2.6 billion, above the Street estimate of $2.362 billion, with a non-GAAP gross margin expected at 42.0% [15][16] - Non-GAAP EPS for the December quarter is projected at $3.20, significantly above the Street estimate of $1.82 [15][16] Investment Thesis - **Positive Market Conditions**: - The current memory upcycle is expected to last, with both demand and supply conditions favorable for pricing increases [17] - SanDisk's stock is viewed as undervalued with a single-digit P/E multiple on peak earnings potential, suggesting significant upside as enterprise SSD demand grows [17][18] Risks and Considerations - **Potential Risks**: - Risks include the possibility of NAND industry growth disappointing and potential loss of market share if SanDisk fails to gain traction in the datacenter segment [33] - The balance sheet is improving, with SanDisk moving into a net cash position, which could lead to future capital returns [13] Conclusion - SanDisk Corporation is positioned for strong growth in the NAND market, with robust demand from enterprise SSDs and a favorable pricing environment. The company's recent financial performance has exceeded expectations, and future guidance remains optimistic, supporting an increased price target and an overweight rating.

Core Viewpoint - SanDisk's shares are trading lower despite positive fourth-quarter financial results, primarily due to analyst concerns over weaker third-quarter margin forecasts [1][2]. Financial Performance - SanDisk reported second-quarter revenue of $1.90 billion, exceeding Goldman Sachs' forecast of $1.84 billion and the Street's estimate of $1.80 billion [3]. - The company guided third-quarter revenue to $2.15 billion at the midpoint, surpassing Goldman Sachs' $2.09 billion and the Street's $2 billion [4]. Margin Guidance - Gross margins for the second quarter were reported at 26.4%, aligning with Goldman Sachs' expectations but above consensus [3]. - For the third quarter, SanDisk projected a gross margin of 29%, which is below Goldman Sachs' estimate of 29.6% and significantly under the Street's 31.2% [4]. Earnings Per Share (EPS) - Adjusted EPS for the second quarter was 29 cents, beating Goldman Sachs' estimate of 12 cents and the Street's 5 cents [4]. - EPS guidance for the third quarter is set between 70 cents to 90 cents, with a midpoint of 80 cents, which falls short of Goldman Sachs' estimate of $1.16 and the Street's 95 cents [4]. Analyst Outlook - Analysts from Wells Fargo, Cantor Fitzgerald, and Goldman Sachs have raised their price targets for SanDisk, with Goldman Sachs maintaining a Buy rating and a target of $55 [2]. - Despite the positive revenue outlook, analysts express concerns over the company's gross margin guidance, attributing it to ongoing fab startup costs and underutilization charges [5]. Market Conditions - The NAND market is expected to be about 5% undersupplied by late 2025, which could lead to significant margin expansion for SanDisk if competitors maintain disciplined supply behavior [5][6]. - SanDisk's stock was down 3.73% at $44.94 at the time of publication, indicating market reaction to the mixed financial outlook [6].

Financial Data and Key Metrics Changes - Revenue for the third quarter was $1.7 billion, down 10% sequentially and down 1% year over year [8][17] - Non-GAAP EPS was a loss of $0.30 per share, at the high end of the guidance range [19] - Cash and cash equivalents increased from $1.3 billion to $1.5 billion [19] Business Line Data and Key Metrics Changes - Client revenue was $927 million, down 10% sequentially [17] - Consumer revenue was $571 million, down 5% quarter over quarter [17] - Cloud revenue was $197 million, down 21% sequentially [17] - ASPs were down high single digits, reflecting continued oversupply in the market [9][18] Market Data and Key Metrics Changes - Analysts estimate cloud CapEx from major hyperscale providers grew over 50% to approximately $240 billion in calendar year 2024, expected to reach approximately $330 billion in 2025 [14] - Bit allocation to enterprise SSD applications represented 12% of total bits this quarter, up from 8% in the same quarter of the prior year [15] Company Strategy and Development Direction - The company aims to create value for customers and shareholders while reaffirming leadership in the NAND market [5] - Focus on capital discipline and driving higher returns on invested capital [7] - Plans to reduce wafer production to align supply with demand and enable sustainable pricing [9] Management's Comments on Operating Environment and Future Outlook - Management sees an undersupplied market through the end of next year, with expectations for pricing to start increasing [29] - Positive signs include strengthening transactional markets and encouraging customer engagements [21] - The company expects demand to strengthen throughout the year, driven by various factors including the Windows 10 end of life and post-pandemic PC refresh [21] Other Important Information - The company recorded a non-cash impairment charge of $1.83 billion for goodwill, reducing the goodwill balance to $5 billion [19] - Non-GAAP gross margin for the third quarter was 22.7%, with expectations for the fourth quarter to be between 25.5% and 27% [18][22] Q&A Session Summary Question: Can you discuss the supply-demand situation and the actions taken? - Management sees an undersupplied market through the end of next year and is taking prudent actions to balance supply and demand [29][30] Question: How is the enterprise SSD market performing? - Demand has been consistent, with expectations for significant revenue growth in the enterprise SSD segment [35] Question: What are the expectations for NAND bit shipments? - The company expects NAND bit volume to grow low double digits this calendar year, with good visibility across various markets [57][60] Question: How does the company view pricing trends? - Management believes the market is turning, with price increases expected due to improved demand across the board [82] Question: What is the impact of the yen exchange rate on costs? - The front end is exposed to the yen, but not all costs are yen-denominated, which should be considered in modeling [85]

Financial Data and Key Metrics Changes - Revenue for the third quarter was $1.7 billion, down 10% sequentially and down 1% year over year [7][15] - Non-GAAP EPS was a loss of $0.30 per share, at the high end of the guidance range [18] - Cash and cash equivalents increased from $1.3 billion to $1.5 billion [18] Business Line Data and Key Metrics Changes - Client revenue was $927 million, down 10% sequentially [16] - Consumer revenue was $571 million, down 5% quarter over quarter [16] - Cloud revenue was $197 million, down 21% sequentially [16] - ASPs were down high single digits, reflecting continued oversupply in the market [8] Market Data and Key Metrics Changes - Analysts estimate cloud CapEx from major hyperscale providers grew over 50% to approximately $240 billion in calendar year 2024, expected to reach approximately $330 billion in 2025, a 40% increase [13] - Bit allocation to enterprise SSD applications increased to 12% this quarter, up from 8% in the same quarter of the prior year [13] Company Strategy and Development Direction - The company aims to create value for customers and shareholders while reaffirming leadership in the NAND market [5] - Focus on capital discipline and driving higher returns on invested capital [6] - Plans to reduce wafer production to align supply with demand and enable sustainable pricing [8] Management's Comments on Operating Environment and Future Outlook - Management sees an undersupplied market through the end of next year, with expectations for pricing to start increasing [26][27] - Positive signs include strengthening transactional markets and encouraging customer engagements [20] - The company expects revenue for the fourth quarter to be between $1.750 billion and $1.850 billion, assuming bit shipments to be flat and ASP to be up mid to high single digits [19] Other Important Information - The company recorded a noncash impairment charge of $1.83 billion, reducing the goodwill balance to $5 billion [18] - The company is beginning to move away from providing explicit guidance on cost per bit due to industry cost reductions from technology migrations [22] Q&A Session Summary Question: Can you discuss supply and demand dynamics? - Management sees an undersupplied market through the end of next year, with expectations for pricing to start increasing [26][27] Question: How is the enterprise SSD market performing? - Demand has been consistent, with expectations for a tripling of enterprise SSD revenue from FY 2024 to FY 2025 [34] Question: What are the expectations for gross margins? - Headwinds include underutilization charges and fab startup costs, but higher ASPs are expected to help gross margins overall [38] Question: How is the company managing capacity and bit growth? - The company is carefully managing capacity to avoid oversupply while ramping up higher layer count and more density per wafer [41] Question: What is the outlook for NAND bit shipments? - The company expects NAND bit volume to grow low double digits this calendar year, with good visibility across various markets [56][58] Question: How does the yen exchange rate impact costs? - The front end is exposed to the yen, but not all costs are yen-denominated, which should be considered in modeling [81]