Operator:

Good afternoon and thank you for standing by. Welcome to Western Digital's Fourth Quarter and Fiscal 2024 Conference Call. Presently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. Peter Andrew, Vice President, Financial Planning and Analysis and Investor Relations. You may begin.

David Goeckeler:

Thanks, Peter. Good afternoon, everyone and thank you for joining the call to discuss our fourth quarter and fiscal year 2024 performance. Western Digital delivered strong results with fiscal fourth quarter revenue of $3.8 billion, non-GAAP gross margin of 36.3% and non-GAAP earnings per share of $1.44. For the fiscal year 2024, revenue totaled $13 billion. We have maintained our strategic focus on aligning our portfolio of industry-leading products with growth opportunities across a broad range of end markets to mitigate volatility while structurally improving our through-cycle profitability for both Flash and HDD. Before we discuss our performance, I want to provide our views on where the storage market is heading and how we are well positioned to capitalize on these growth opportunities. Our diverse portfolio, coupled with the structural changes we have made to strengthen our operations, is enabling us to benefit from the broad recovery we are beginning to see across our end markets. In addition, the AI Data Cycle is increasing the need for storage and creating new demand drivers across both Flash and HDD. These AI systems process and analyze existing data, generate new data and require substantial storage for training, operating in a continuous cycle of increasing data consumption, processing and generation. As AI technologies advance, data storage systems must deliver the capacity and performance necessary to support the computational demands of large sophisticated models while managing vast volumes of data. Given this landscape, we expect Flash to benefit from both AI training and inference while HDD is poised to benefit at both the input and output stages of these AI models. To address the growing performance, power and capacity requirements, we have developed our Flash and HDD product road maps to meet our end customer storage needs across the entire AI Data Cycle. We introduced the industry-leading high-performance PCIe Gen 5 SSD to support AI training and inference. A high-capacity 64 terabyte SSD for optimizing the build-out of rapid AI data lakes in the world's highest capacity ePMR UltraSMR 32-terabyte hard drive for cost effective and deep content storage at scale. These new offerings demonstrate our continued commitment to innovation and market leadership. As we enter fiscal year 2025, we are well positioned to capture the long-term growth opportunities in data storage and believe the AI Data Cycle will be a significant incremental growth driver for the storage industry. Before I dive further into business updates, I want to update you on our separation plans. I am pleased with the progress our team has made as we continue to drive to completing the work required to separate the company at the end of the calendar year. As part of the ongoing preparation for the separation, we anticipate beginning to incur separation dis-synergy costs in the second half of the calendar year. Wissam will briefly discuss the anticipated impact of these costs. I'll now turn to business updates. Starting with Flash, the growth in revenue was driven by the recovery in cloud and a shift of our client mix to gaming and mobile, partially offset by a decline in consumer. Our focus on driving higher through-cycle profitability is reflected in our results as we proactively mix bits across our end markets. Our innovative offerings remain at the forefront of the market, reinforcing our competitive position and bolstering our growth prospects. For example, our new QLC-based client SSDs which grew 50% on a sequential exabyte basis, offer significantly better performance than our previous generation TLC products. Combining this high-performance node with our in-house controller development, enable us to provide a portfolio of client SSDs that deliver unmatched performance and value. We believe these products will lead the industry's transition to QLC flash. During our New Era of NAND webinar last month, we introduced the world's highest capacity BiCS8 2-terabyte QLC memory die, specifically designed to meet growing data center and AI storage needs. Built on a chip bonded to array architecture, BiCS8 reinforces Western Digital and Kioxia's leadership in cost and capital efficiency as well as superior I/O performance by integrating wafer bonding in advanced 3D manufacturing to establish a ground-breaking foundation for future scalability of 3D NAND. In addition, our 64 terabyte enterprise SSD is now being sampled with plans for volume shipment later this calendar year. Furthermore, our PCIe Gen 5 based enterprise SSD delivers best-in-class read performance as well as power efficiency. We are seeing significant interest in this product which is currently qualifying at a hyperscaler with ramp expected in the second half of this calendar year. We'll talk more about our Flash road map at the upcoming Flash Memory Summit in early August. Turning to the Flash outlook. Throughout the fourth quarter, our product mix was dynamic as we proactively mix bits between our end markets in response to the softness we are seeing in the more transactional markets such as consumer and channel. Our success in identifying the most profitable approach to allocating bits is reflected in the growth of both our revenue and gross margin. As we look into the first quarter, in addition to the mix environment we saw in the fourth quarter, we expect the continued ramp of our new enterprise SSD offerings and seasonal strength in mobile to drive mid- to high-teens bit growth on a sequential basis. For the full fiscal year 2025, we expect enterprise SSDs to represent a double-digit percent share in our portfolio mix. The new era of NAND is driving a period of change and we are going to remain disciplined in managing our capital spending. The layers focus race is behind us. The emphasis is now shifting towards strategically timing the economic introduction of new longer-lasting nodes. Innovation now means enhancing power efficiency, performance and capacity within these nodes, while capital decisions increasingly prioritize opportunities for margin expansion and revenue growth. Turning to HDD; revenue growth was driven by strength in nearline demand and improved pricing. By leveraging our SMR leadership and lean cost structure, we have surpassed our target gross margin range, underscoring our ongoing commitment to improve future profitability. The HDD business has undergone a remarkable transformation in recent quarters, marked by strategic initiatives aimed at introducing the most innovative, high-capacity products to market. We have increased our profitability meaningfully by restructuring our manufacturing footprint and optimizing our cost structure to drive operational efficiency. All while qualifying and ramping our SMR technology. We continue to structurally change the way we are operating our HDD business. With better visibility into future demand, operational excellence and a commitment to sustaining supply-demand balance, we are poised to continue our trajectory of bringing highly innovative products to market while increasing profitability into the future. On the technology front, we ship samples of our 32-terabyte UltraSMR/ePMR nearline hard drives to select customers. These drives feature advanced triple-stage actuators and OptiNAND technology which are designed for seamless qualification, integration and deployment in hyperscale cloud and enterprise data centers while maintaining exceptional reliability. With this in mind, we are well positioned to deliver the industry's highest capacity hard drives and the best TCO. Turning to the HDD outlook. As we look to the fiscal first quarter, we expect further growth driven by greater demand and more favorable pricing. Our cloud customers continue to transition to SMR and we anticipate a third major cloud vendor to begin the ramp of adopting SMR in the fiscal first quarter. Our leading products and lean cost structure have supported ongoing profitability improvements in our HDD business. We remain focused on driving higher margins to reflect the significant innovation and TCO improvements we deliver to our customers. Our strategic approach to commercializing ePMR, OptiNAND and UltraSMR technologies has proven to be the winning strategy, enabling us to surpass our gross margin target for HDDs in the midst of AI's emergence as another pivotal growth driver for the industry. Let me now turn the call over to Wissam, who will discuss our fiscal fourth quarter results.

David Goeckeler:

Thanks, Wissam. Today's results and guidance underscore Western Digital's strong execution with promising growth opportunities ahead. We delivered solid results as we doubled down on our strategic initiatives and product road map, capitalizing on robust growth prospects for both Flash and HDD. The emergence of the AI Data Cycle marks an incredibly exciting transformation in our industry, driving fundamental shifts across our end markets. Looking ahead to fiscal year '25 we are well positioned to leverage our leadership positions to spearhead innovative technologies and deliver unparalleled value for our customers. Peter, let's begin the Q&A.

C.J. Muse:

I guess I would like to focus my question around HDD gross margins, truly impressive outlook in the actual results. I was hoping you could speak to your contracted supply today, your pricing visibility into the second half of the calendar year and whether that extends into calendar '25. And as part of that, how we should think about the progression of HDD gross margins as we go into September, December and beyond.

Operator:

And our next question today comes from Joe Moore at Morgan Stanley.

David Goeckeler:

As you know, Joe, it's a very dynamic market. So we're still seeing -- in the negotiated markets, we're still seeing good pricing increases, especially enterprise SSD and that's something we're very excited about. We see -- we saw really good sequential growth in enterprise SSD and we're expecting very good sequential growth in the next quarter. Some of the more transactional markets where you have more players involved and frankly, some players that don't produce their own raw NAND, pricing is a little more dynamic and demand in general in consumer is a little bit weak. So in those markets, we see a little more demand headwind, a little more -- not quite as aggressive as pricing moves but in the negotiated markets, we still see good pricing. And then, you put mix all on top of that to come up with a quarter-by-quarter number where you got quite a bit of variability. But as we go through the back half of the year, we continue to see strong demand in Enterprise SSD. We see the PC market really kind of maybe a little bit of an inventory rebalancing here going on in the next quarter but we see that improving as we go throughout the year. I think that's a normal process given a couple of really strong quarters here in the first part of the recovery of NAND pricing. So we still see demand outstripping supply through the second half of the year. And quite frankly, our modeling shows throughout next calendar year as well.

Grant Joslin:

This is Grant Joslin on for Tim Arcuri. I was hoping you could talk a little bit about how you view the balance sheet and how you want to prioritize the free cash flow generated between now and the separation? And any updated thoughts on the appropriate leverage for each of the 2 segments?

Operator:

And our next question today comes from Aaron Rakers with Wells Fargo.

David Goeckeler:

I'll take the second part of the question. Kind of remember the first part now.

David Goeckeler:

Yes. And Aaron, on the NAND pricing, I think you kind of answered your question as you went through there, just to confirm it. There's a huge mix dynamic. So we've got -- like everybody else, we're seeing some weakness in the consumer. And so that's -- consumer is 1/3 of our Flash portfolio. So that's a big business and that has very we've always talked about higher than average through-cycle margins. So that's a bit of a headwind. And then we -- it's a seasonally strong quarter for mobile. So that's -- there's a big mix dynamic there as well. So that -- but you're thinking about it the right way.

Karl Ackerman:

One clarification question and a question, if I may. For my clarification question, is the PCIe Gen 5 Enterprise SSD at a hyperscaler separate or in addition to your sampling of 64 terabyte SSDs in the second half of this calendar year? I guess as you address that question, could you speak to the breadth of customer design wins you have on enterprise SSDs which are indicative of your growing share of SSD relative to your overall portfolio mix.

Operator:

Our next question today comes from Krish Sankar with TD Cowen.

David Goeckeler:

We know -- we think that the share in our products is because they are great products, right? We're delivering the highest TCO products. We've had this road map for a long time. None of our customers are surprised by our road map. They know about our road map, quite frankly, years in advance and we work with them very closely. So we believe we're providing the highest capacity -- well, we are providing the highest capacity drives at scale. They're easily qualified. The architecture is well known to our customers. and they deliver absolutely the best TCO. And if you're building a data center architecture at the scale our customers do, TCO is incredibly important. And now we've delivered a 32-terabyte drive. First time anybody has crossed the 30 terabyte at scale, that's sampling really great TCO. And then the UltraSMR side of it, these drives can deliver 20% more capacity with UltraSMR versus a typical SMR drive which is 10% more capacity that's great for our customers. They get more capacity per unit. It's great for us because we get 20% more capacity or the incremental 10% without adding any COGS to the system, so that's margin accretive. That's very nice. And we're seeing now the third hyperscaler starting to adopt our UltraSMR technology starting in the second half of the year. So we just feel really good where the portfolio is. We think this portfolio has been in development for decades to get to this point. These were decisions that were made a long time ago given the lead times in this business. And so we believe we're -- customers are just responding to great products. And the TCO increases in the supply-demand balance allow us to also work on the pricing side of it as well. So as far as capacity, look, I mentioned it earlier, we got to this 52-week lead time that was really important because now we're starting to get forecast from our customers a year out. It gives us the ability to plan for capacity. So as we get -- as those forecasts come in and we roll them up and we work with our customers and we look at that, what that picture looks like, then we'll be in a position to address this issue of do we add capacity. But we don't want -- we're not going to add capacity for a 2-quarter increase in volume. We think this is much more sustained than that. As I talked about, AI is going to be a big driver -- the AI Data Cycle will be a big driver for HDDs as well. We see sustained demand into the future. But we want to see the commitments from our customers and them to give us that visibility and we now have that in place. And as we get the whole market, all of our customers looking at that over the next quarter or so, we'll have a better I think a better way to answer that question of do we plan to add capacity. But for right now, we're happy with where our capacity is. and what we're able to ship and mix keeps going up and we're able to ship more exabytes per quarter based on mix.

Amit Daryanani:

I guess maybe just focusing on the HDD side again. I think the fear everyone is going to have is, are you sitting at close to peak performance at this point, both from how much exabyte you are shipping versus the last week which I think within 10 exabytes of that? And where the gross margins are. So maybe if you can just focus on gross margins up. Can you just talk about what is the right way to think about HDD gross margins assuming exabytes keep growing and your conviction that pricing can remain favorable on the HDD side or through the back of this year and potentially into '25?

Amit Daryanani:

Maybe just help me clarify this. Is the performance on the HDD side, more a reflection of your peer has not had HAMR come out yet. And once that comes out, perhaps market share and gross margins normalize, I guess, the feel would be, is this all durable? Or does it go away from a margin perspective once Seagate has HAMR in volume production with the hyperscalers.

Operator:

And our next question comes from Vijay Rakesh with Mizuho.

David Goeckeler:

I think in the -- look, so next quarter, margins in both business are going up which is what we want. And I think as long as we continue -- in the NAND business, we -- again, we have to continue to innovate and bring great products to market and I think our portfolio is as strong as it's ever been. And we've always -- we've been strong for a long time in consumer. I mean that's been a stalwart of the business for a very, very long time. We have a very strong client portfolio. We have a very strong gaming portfolio. We've always been good in mobile and now we have enterprise SSD, where we're building out the portfolio right at the time where the AI Data Cycle is really driving a significant amount of demand. So I think from a technology perspective and where the portfolio is positioned, we're in very, very good shape. At that point, we look at long-term supply-demand balance of the business. We all know it's a cyclical business. You have to add CapEx in very large increments to bring on capacity, nodal transitions give you more capacity. We talked about this in our new era of NAND. I think this idea that the layer race and let's just put bigger and bigger nodes on the market and count on elasticity to soak up all the bits. Like I think that era of NAND is in the past, the era of NAND in the future is more strategic introduction of new nodes that add capacity, more innovation within the node on performance, power, capacity and so that, I think, is something that says the way we're going to manage our business is different than it has been in the past. And then, we look at just the overall supply-demand balance. And there's been not a lot of CapEx spending in NAND coming out of the downturn. And so we see a good supply-demand balance. So we expect to see continued positive momentum in the portfolio. On HDD, this is a business that is, like I said in the prepared remarks, we think it's gone through a remarkable transformation over the last year, really. We're starting to see the -- we're starting to see the results of this transformation that's been going on, quite frankly, for a long time. One is about getting through this client to cloud transition. Industry has been in that position for 15 years probably. So we're kind of through that now. Client is just a much, much smaller percent of the portfolio. Even if you look back to the past peak of our business, client was a much bigger percent just 3, 4, 5 years ago than it is today. So it's a cloud business now. We continue to deliver really strong TCO gains with our technology road map. And I think the business has a long road map on continuing to be able to drive better TCO for our customers. And then on the demand side, you've got -- again, you've got AI now the AI Data Cycle where HDD is going to be a big part of that on the input side, all of this data is stored on HDDs. And on the output side, people producing a lot more content to be stored on HDD. So we see a good demand environment, good business practices of getting the right visibility into how we should add capacity, so we don't end up in an oversupplied market. So I think the HDD business has structurally changed. I see the margins going higher and going higher in a structural way that will be maintained at a higher point. It's not a value proposition question. The value is really there. And like I said, we continue to drive TCO lower. We're going to continue to drive margins higher.

Wamsi Mohan:

I was wondering maybe you could square your comments a little bit on proactively mixing bits across end markets in a quarter where your bit shipment declined below what you had originally expected. But at the same time, you also had inventory build in the quarter. And as a clarification from a prior question, could you just help us think through in the September quarter, what is the like-for-like ASP trajectory for NAND as well.

Wissam Jabre:

Yes, in the fourth quarter, it's how do we proactively -- how we proactively mix the bits to generate better profitability.

Wissam Jabre:

Yes, the -- so on the -- maybe on the comments on the inventory, Wamsi, it's not unusual for exiting the June quarter for us to have inventory builds as we get prepared for the second half that tends to be more consumer oriented and sort of there's more shipments that typically take place. And so we're comfortable with that. Yes. So on the like-for-like for the September quarter, we're expecting the ASPs in NAND to be slightly up in the sort of low single-digit percentage range.

Toshiya Hari:

I had one quick clarification and one question. On the clarification, the dis-synergies, we saw the $35 million to $45 million you guided to for the December quarter, is it fair to assume that's kind of a steady state for the combined business going forward post separation? Or do those costs go away? Or do those costs potentially go up beyond separation. That's my clarification question. And then my question for Dave on the NAND side, -- are your fabs fully loaded at this point? I know at the trough of the cycle, you had cut pretty significantly along with your peers. But where are utilization rates today? And how should we think about fiscal '25 CapEx?

David Goeckeler:

And then on the NAND -- the fabs are -- we're running at full utilization. We don't have underutilization costs on NAND at this point. And then the third part of the question.

David Goeckeler:

FY '25 CapEx.

Operator:

The next question comes from Steven Fox at Fox Research.

David Goeckeler:

I mean, these are very big relationships with very big customers. So we're very close to them on a day-to-day basis. So that is clearly something we look for. But I think there's a lot of relationship value here as well. So we'll be on the lookout for that. But we expect our customers to be fairly rational about this whole process. I mean, look, we're in an area of HDD where almost everybody that we talk to would like to have more HDDs right now. So I think everybody is understanding that giving us more visibility will allow us to set our manufacturing infrastructure in a way where we can satisfy the market without ending up in the situation we are in, in the down cycle where we were having to really, really cut costs and quite frankly, move a lot of people off the payroll which is an unpleasant exercise. So we'll stay very close to our customers. And we have also have a lot of information on kind of ordering patterns and all that kind of stuff. So we'll keep an eye out for that.

Asiya Merchant:

Great If I may, just if you can talk a little bit about the industry structure that has changed and maybe how it reflects in your cost declines across both your Flash and HDD business. how we should think about that going forward, given that you see a favorable pricing environment and if you can balance that with maybe improved cost decline for both NAND and HDD.

Operator:

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to David Goeckeler for closing remarks.

Operator:

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.

Operator:

Good afternoon, everyone, and thank you for standing by. Welcome to Western Digital's Third Quarter Fiscal 2024 Conference Call. Presently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this event is being recorded. Now I will turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analysis and Investor Relations. You may begin.

David Goeckeler:

Thank you, Peter. Good afternoon everyone and thanks for joining the call to discuss our third quarter of fiscal year 2024 performance. Western Digital delivered excellent results in the quarter with revenue of $3.5 billion, non-GAAP gross margin of 29.3% and non-GAAP earnings per share of $0.63, all of which exceeded expectations. Our strategy of developing a diversified portfolio of industry-leading products across a broad range of end markets, coupled with structural changes we have made to both of our businesses, is unlocking our true earnings potential and allowing us to continue improving through-cycle profitability and dampening business cycles. This strategy enables us to generate higher earnings per share even in a constrained supply environment. In addition, our commitment to achieving operational efficiency and enhancing our agility has allowed us to run our flash and HDD businesses more efficiently and further drive innovation to take advantage of new opportunities. In particular, as the technology landscape continues to evolve, the demand for AI solutions is becoming increasingly apparent across our end markets. The uptick in AI adoption is highlighting the incredible value of data and will drive increased storage demand across both HDD and flash at the edge and in the core, providing greater long-term growth and margin expansion opportunities for Western Digital. We are in the early innings of unlocking the full potential of this company, and our team remains focused on improving the profitability of our business to drive long-term margin expansion and shareholder value as these new demand opportunities present themselves. Before I dive further into the demand environment, I want to briefly comment on the status of the separation of our flash and HDD businesses. I am proud of the team's ongoing efforts as we drive towards completion of the separation in the second half of the calendar year. We remain focused on achieving the separation as soon as possible, and we'll continue to provide further updates on our progress as appropriate. Moving on to end market commentary. I am pleased to report that during the quarter, revenue in all of our major end markets returned to year-over-year growth. In cloud, we experienced 29% growth in revenue from a year ago, highlighting the incredible success of our industry-leading HDD product line. In addition, we began to experience an increase in demand for our flash-based solutions, signaling a long-awaited recovery in this end market. In client, 20% revenue growth from a year ago was driven by increased bit demand for our flash-based solutions, coupled with an increase in ASPs. In consumer, we experienced 17% revenue growth from a year ago, highlighting the power of the SanDisk premium brand. Higher flash bit sales, combined with a better pricing environment more than offset the continued decline in consumer HDD demand. I'll now turn to business updates, starting with flash. Our sequential revenue growth in the quarter reflects the continuing commitment to disciplined capital spending and carefully optimizing bit shipments into our most profitable end markets to take advantage of the improved pricing environment. This approach, combined with the strength of our product portfolio has enabled us to drive significantly higher profitability while strategically managing our inventory. On the technology front, we achieved a significant milestone by initiating mass production of our QLC-based client SSD, leveraging BiCS 6 technology. This is yet another significant milestone demonstrating our continued commitment to innovation and market leadership. These advancements pave the way to spearhead the market's transition to QLC-based flash solutions in calendar year 2024. Additionally, our progress with BiCS 8 is on track. While this technology is ready to be productized as market conditions warrant, our innovative offerings will remain at the forefront of the market, further strengthening our competitive position and bolstering our growth prospects. As noted earlier, in the third quarter, we began to experience an increase in demand for our enterprise SSD solutions. We are seeing demand returning for NVMe SSDs that we qualified before the downturn. We are also experiencing significant interest in providing these products in dramatically higher capacities for AI-related applications which we expect to ship in the second half of the year. In addition, we are also sampling our newest high-performance PCIe Gen 5, BiCS 6-based enterprise SSD. We are preparing for qualification at a hyperscaler and the product is generating significant interest in the enterprise market. We expect to ramp in the second half of the calendar year. Turning to HDD. The sequential revenue increase was driven by improved nearline demand and higher pricing as we focused on optimizing profitability per exabyte sold. In particular, nearline revenue reached a fixed quarter high, reflecting the successful strategy we put in place to bring the most innovative, high-capacity and high-performance drives to market. We have the right products at the right cost structure, which are reflected in our financial performance. Our cloud customers continue to transition to SMR with our 26-terabyte and 28-terabyte UltraSMR drives, quickly becoming a significant portion of our capacity enterprise exabyte shipments. SMR-based drives represented approximately 50% of nearline exabyte shipments in the quarter. Our portfolio strategy to commercialize ePMR, OptiNAND and UltraSMR technologies in advance of our transition to HAMR, has proven to be the winning strategy and enables us to deliver to customers the industry's highest capacity and leading TCO drives, all of which can be produced at scale with controlled costs. We are confident that our product strategy, which combines UltraSMR technology with upcoming advancements in nearline drives is enabling Western Digital to deliver best-in-class gross margin in HDDs all at a time when AI is emerging as another growth engine for the industry. As we move toward a new supply and demand environment, characterized by higher demand, supply tightness and product shortages, we are leveraging our proven technology we've already introduced to the market to meet the demands of our customers with the right portfolio at the right time, while also operating with a lean cost structure for continued profitability improvement in our HDD business. Although the actions we are taking have improved profitability, we remain focused on driving higher margins to appropriately value the incredible amount of innovation and TCO improvements we continue to deliver to our customers. Before I turn it over to Wissam, I wanted to share some perspectives on our outlook. Within Flash, in addition to growth opportunities at the edge, which is Western Digital strength, we are encouraged by the returning demand within the enterprise SSD market and expect growth throughout this calendar year. AI-related workloads are driving increasing demand for enterprise SSDs, and our portfolio is well positioned to support those use cases. Looking ahead, we anticipate bit shipments to remain flat into the fiscal fourth quarter and look to Flash ASP increases to be the primary revenue growth driver led by our focus on allocating bits to the most high-value end markets amidst the tightening supply environment. While we're pleased to see pricing trends moving in a positive direction, it's crucial to acknowledge the importance of maintaining capital discipline and only reinvesting capital back into the business once profitability improves further, and we see sustained demand. Overall, our continued focus on improving profitability through our innovation road map, disciplined capital spending and strategic pricing initiatives position us well for continued success in calendar year 2024 and into 2025 by offering the most capital and cost-efficient bits in the industry. In HDD, the success of our portfolio of leading capacity enterprise products, combined with the restructuring efforts we've implemented in recent years are yielding improved unit economics and greater visibility. As cloud demand is recovering, we anticipate continued growth driven by higher nearline demand and better pricing as we are now in a supply-constrained environment. We're optimistic about aligning the pricing of our products to better mirror the innovation we are integrating into them, supporting long-term margin expansion in our HDD business. As we reap the rewards of the innovation and operational efficiencies that we've implemented, we will look for opportunities to reinvest in the business when the conditions are ripe for expansion. We will approach every capital allocation decision with a focus on discipline. Let me now turn the call over to Wissam, who will discuss our financial third quarter results.

David Goeckeler:

Thanks, Wissam. Let me wrap up, and then we'll open up for questions. I'm pleased with the team's performance in developing a diversified portfolio of industry-leading products across a broad range of end markets. As industry supply and demand dynamics continue to improve, we will remain disciplined around our capital spending and focused on driving innovation and efficiency across our business. Coupled with the structural changes we have made to our businesses, we are confident in our ability to drive greater through-cycle profitability and dampen business cycles. As we move forward, we remain uniquely positioned to capitalize on the promising growth prospects that lie ahead, solidifying our leadership position in the industry, particularly as AI continues to drive new storage solution opportunities and growth. Okay. Peter, let's start the Q&A.

C.J. Muse:

Yes. Good afternoon. Thank you for taking the question. I guess first question on the HDD side, the gross margins are spectacular and if we take out the underutilization you're north of 32%. So, curious from here as you think about on-going tightness, on-going growth in demand led by the cloud and a pricing strategy where I think you and your main competitor are being extraordinarily rational. How do you think the progression for that part of your business will look through the remainder of calendar '24 and into '25?

C.J. Muse:

Very helpful. And as a quick follow-up, on the NAND side, I think you guided last kind of high-teens bit growth and I'm just curious, is that still a number in play or given your prioritization of highest profitable areas of NAND, should we be thinking about a different number? And you're not talking about production, but actual revenue bits?

C.J. Muse:

My apologies, for calendar '24.

C.J. Muse:

Thank you.

Operator:

Our next question comes from Joe Moore from Morgan Stanley. Please go ahead with your question.

Wissam Jabre:

Hey Joe, thanks for the question. Look, our guide comprehends a balanced view of what we have in terms of information today with the outlook; yes, we see improvement in margins in both of the businesses. So on the flash side, we still anticipate improvement in pricing that will help gross margin move a bit higher from here. And on the HDD side, as David mentioned, we continue to focus on the obviously, the great technology that we deliver, but also the cost discipline and pricing of the products. So, all of these are comprehended in our guide.

David Goeckeler:

Yes. So what I would say about the AI demand as it's coming into focus. I don't think it's so much in the results just yet, but we're seeing where it's going to impact both businesses. And clearly, one of them you just outlined, which is we're seeing enterprise SSD demand return, we saw some increase in the last quarter. We expect some increase in this quarter. But really, as we look to the second half, we have customers coming to us wanting the kind of SSDs we built and qualified before the downturn. They just want them in much bigger capacity points, 30 and 60 terabyte capacity points. So it's the same product just taking it and increasing capacity and going through a qualification on that so we're in that process with customers. We also introduced a new SSD that's more compute focused, which is PCIe Gen 5 product based on BiCS 6, very high performance that plays a little bit different role in the AI training stack and we're getting very good feedback on that product. It's being qualified by our starting qualification, we samples. We're kind of getting rid of the qualification of the hyperscaler and we're seeing good demand in the enterprise market as well. So we feel like the portfolio set up well as we go into the second half, and we're seeing a lot of demand show up for people that are very building large amount of infrastructure for model training.

David Goeckeler:

Thanks, Joe.

Aaron Rakers:

Yes, thanks for taking the question. I've got two as well. The first question, I just want to go back to kind of like the gross margin dynamics with regard to the hardware business. David, if you look back a couple of years, right, you peaked at like 150, 155 exabytes of capacity shifts. As we hear about the industry being constrained, where do you -- where would you characterize your capacity footprint today? And is it fair to assume that you have to see gross margin at or even above the high end of the 31% to 34% target model that you've laid out to kind of come back in and add capacity?

Aaron Rakers:

Yes that's helpful. And then as a quick follow-up, just on the enterprise SSD topic. I think prior to the downturn you had talked about, I want to say it was 2 or 3 cloud OEMs that you had designed in with the NVMe drive, can you just talk about the breadth of what you're expecting? It just sounds like you're kind of getting back into the market, optimizing displacement there. So how do we think about the breadth of the customer base in that enterprise SSD space?

Aaron Rakers:

Thank you.

Operator:

Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question.

David Goeckeler:

Yes. We're seeing -- I mean, big picture we're seeing a return in demand. Obviously, I think it was the largest sequential exabyte growth we've seen in a very long time. I hesitate to say ever because this is -- business has been around a very long time. But to go back as far as we could look, it was the biggest sequential increase we had seen. And it's -- as I said earlier that starts with having products that really resonate with our customers. We really believe very strongly in the technology road map we've built around ePMR and UltraSMR and is resonating very strongly with customers. Nearly 50% of exabytes shipped this quarter was SMR and we're set up well for what we talked about last time where we expect over half of our exabytes in FY '25 to be SMR-based. So like we said, coming into the fiscal year that we expected sequential growth throughout the fiscal year last quarter we extended that to the calendar year and we still see that. So we still see sequential exabyte growth going forward throughout this calendar year.

David Goeckeler:

Well, we haven't really set a bogey for that. We want to look at the holistic marketing. Again, that -- I understand this question everybody is looking for when we would reinvest, but that's really not what we're even thinking about right now. We're thinking about getting a market that's balanced on supply and demand, delivering great products to our customers that can meet the needs of the growth of the cloud. And I think that to your point, I think the business is emerging what we planned for and a lot of hard work that went in over the last couple of years which is to come back in a much healthier position with the ability to drive greater profitability. So we're just getting back to the bottom of the range that we set a couple of years ago. It's not as if we're declaring victory in that at all to your point, like I said, I feel like we're just getting back to the starting line of where we need to drive the business to, but we feel very good about to be able to drive increased profitability in it. Look, it starts with delivering great products to your customers like we have to continue to bring better TCO. And I think we have got a tremendous architecture to do that while controlling our cost to build the product. We have to work stay focused on both sides of this equation. We got to have the lowest cost and then the best TCO that allows us to drive pricing which drives margin expansion. So we're working across that whole equation. And I think the strategy is working quite well. And that's why we saw -- when we saw some -- we saw the demand return, we saw the margins pop up. But to your point, we believe we can -- we're just getting started on this.

Operator:

Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead with your question.

David Goeckeler:

Yes. Thanks, Karl. So haven't really said where BiCS 8 is going to go. That's in our future. That's one thing we feel really good about is the technology is there and we'll bring it to market when we see it's the right time to do that when we got the right profitability, the right supply-demand characteristics to invest in prioritizing that node, the technology is in great shape. But we haven't really outlined exactly which products are going to go there first or second or third. So that's still in our future. As far as your point on QLC, this is -- we're now starting to transition to BiCS 6. And so we talked about a couple -- a number of products here that are BiCS 6 based which first the client SSD, you didn't -- I'll talk about enterprise SSD as well, but we our client SSD has been extremely well received. The performance of it is outstanding. We have our own internal controller team. They've done an amazing job of building a really, really high-performance QLC client SSD. We expect that to lead the market and lead that transition in that part of the market and then we're bringing BiCS 6 into our enterprise SSDs as well. So that will be lever we have to drive BiCS 6 which gives us more capacity, better performance and so we feel good about that transition is now starting and the products are starting to show up. They're in customers' hands, and they've been very, very well received.

David Goeckeler:

Thanks, Karl.

Q – Amit Daryanani:

Thanks a lot. Good afternoon. I have two questions as well, I guess. First on the HDD side, I'm wondering, do you think given some of the challenges on Hammer qualifications that Seagate's having, if you potentially saw a bigger uplift in market on the near line side and you think that market share could potentially sustain or does some of that kind of flow back as those qualifications get done. So I'd love to understand if the share gains you think you're seeing are sustainable or not. And then on the flash side I would like to just maybe get your perspective. I know you folks are talking about bit growth being flat in June. But as some of these qualifications ramp up in the back half how do you think about bit growth ramping up into the back half of this calendar year?

Amit Daryanani:

Got it. Thank you.

Operator:

Our next question comes from Harlan Sur from JPMorgan. Please go ahead with your question.

David Goeckeler:

Okay. Thanks, Harlan, your questions are very related. So we saw a pickup in enterprise SSD in the March quarter. It's still -- quite honestly, it's still relatively small numbers, but it's growing quite well. So we wouldn't have supplied those bits if it wasn't the right thing to do from a portfolio strategy point of view. We'll see when we get to the second half, what pricing looks like, that versus other options we have, and then we'll decide how much supply we put into those products. And you're really getting into core of our portfolio strategy, which is to have a lot of optionality. We have a lot of optionality across client SSD, across gaming, now across enterprise SSD, across mobile, across consumer, obviously, which is a big business for us. And then based on what we see going into the quarter. And then very importantly, what happens during the quarter, how do we allocate our supply to get the best return? And clearly, we're in an environment right now where things got better throughout the quarter. So as we go through the quarter, we find more opportunity to mix and get more profitability, and that's what happened in the March quarter, and you saw the results of having that agility into the business. So I really don't want to call a share number or anything like that because it tends to distort, what we want to do is maximize profitability, not maximize share in any particular market. We want to maximize where we get the most return for our supply.

David Goeckeler:

Yes. So what I'll say about yields is we're very confident in the technology. I mean, we feel very, very good about it. It's a major advancement in the architecture OptiNAND from an industry perspective to the CBA architecture. And it's -- the development has gone well. We feel very good about it. We can productize it when we need it. Again, this gets into a larger conversation about the dynamics of the market and when is the supply needed, and we're going to be very, very disciplined about going through any transition or putting any CapEx to the market until we see the profitability that we want to get. So we feel very good about BiCS 8. There was a second part of the question.

David Goeckeler:

Cost downs.

Harlan Sur:

Perfect. Thank you.

Wissam Jabre:

Thank you.

Carlos Colorado:

Thanks for taking my question. So I have -- the first one is about nearline. You are going outperforming your competition by a lot. So what are the underlying reasons in your opinion for this? And do we have to expect this to normalize over time? And do you think this can be sustained? And I have a follow-up. Thanks.

Carlos Colorado:

Okay. Thanks and the follow-up is, you mentioned that AI has revenues are of SSD sales. You have a perfect vantage point to see if AI is driving applications that traditionally were HDD is that now being transferred to SSD some of those applications, or is the classic question on cannibalization from one to the other. Is that -- is AI change in that scenario? Thanks.

Operator:

Our next question comes from Krish Sankar from TD Cowen. Please go ahead with your question.

David Goeckeler:

You're right. BiCS 6 is when we say stub node, it's we're not going to take the whole portfolio to BiCS 6. So we have a big portfolio, and we're choosing which products to take the BiCS 6. And clearly, we're taking the products that require QLC and the kind of things you're talking about. So we feel good about our node a plan in the fab being able to supply what we need in these markets.

David Goeckeler:

So we've been working on HAMR for quite some time. We understand HAMR extremely well. We understand all the issues with HAMR, and what it takes to get it qualified. Clearly, we're doing that all behind the scenes because we have a product portfolio with the best TCO we can offer in the market today, and we can do that all the way up to 40 terabytes. And 40 terabytes is where the economics flip over and you get the 4 terabyte per platter or 40 per unit, where essentially the capacity increase will cancel out the increase in costs you have to put in the unit to get the economics to work on margin, right? That's kind of a complicated -- a lot to say in 1 sentence. But our portfolio is very focused on the right product with the right cost at the right time. The right time for HAMR is at 40 terabytes. And we've got a lot of development going on that product. We have for a long time. We, quite frankly, don't need to do it in public because we have another portfolio that's selling extremely well, which we've talked about throughout this process. But have a lot of confidence in our HAMR development. And quite frankly, our customers know exactly what we're doing, and where we're at and what our plans are, and they're comfortable with that as well.

Operator:

And our next question comes from Tom O'Malley from Barclays. Please go ahead with your question.

Wissam Jabre:

Yes. Sure, Tom. So let me first start by saying that the way we think of OpEx is we don't see OpEx increasing faster than revenue. So we're still very focused on that cost discipline and OpEx discipline. When it comes to this quarter, we're expecting some increase. The increase is almost 50-50 driven by variable comp as the financial outlook has improved much faster than anticipated. So there's a bit of increase there. But also, as you mentioned, there's some project-specific R&D investments that also -- that we have sort of a direct correlation and line of sight to revenue. I would say for the next couple of quarters, the range that we've guided for Q4 is a reasonable range. I know it's too early to talk about fiscal year '25. But for modelling purposes, we can use the same type of numbers for now.

Wissam Jabre:

So for this most recent -- for Q3, we had a little bit -- and we disclosed, we talked about those. But as you can see, the numbers are becoming less and less significant. And so for the June quarter, there's still a little bit, but it's not really very significant for us to talk about on this call.

Wissam Jabre:

Thanks, Tom.

Operator:

Our next question comes from Vijay Rakesh from Mizuho. Please go ahead with your question.

Wissam Jabre:

So that's a very complicated question. I mean we can go into it in detail offline. We obviously do tons of work, and I appreciate your question that it's a multifaceted issue. It's die size, it's memory hole density, it's all kinds of very complicated thing goes into producing a NAND product. Look, we think the product compares extremely favorable. We think it leads the market. Again, for the last -- looking back many years, we have been able to produce bits at one third less CapEx than the industry average, and we expect BiCS 8 to continue that leadership in the market. So we feel very, very good about the product, about its performance. Again, when you build, this is like kind of one of the magic of wafer bonding. You can build the CMOS separately from the NAND stack and then the CMOS is kind of pristine. So the interfaces are really, really fast. So there's lots of good things about that architecture that leads to a really, really market-leading product, and we feel good about it. And we've got that all ready to go when the market the market conditions will support that level of investment.

Mehdi Hosseini:

Yes. Most of the good questions have been asked. But David, I just have a longer-term question, and I think it will help many investors let's say, prices were to go sideways in '25, and you're just focusing on that 15% cost down and higher mix of higher-value SSD products. Can you help us understand how your flash margins would evolve from here? And then I'm not trying to ask you for pricing. But I'm just wondering how we could gauge your execution first, on the product mix and be on the cost down and how they both would manifest into higher margins.

Mehdi Hosseini:

Okay. That's reasonable. Let me just move on to the second question. And this is something I always ask, focusing on HDD. Is there any update how you see exabyte shipment evolving like over the next couple of years? Is the target now 25% to 30% or less or more?

Operator:

Our next question comes from Steven Fox from Fox Advisors. Please go ahead with your question.

David Goeckeler:

I'll just say something about supply chain. Look, we stay -- we've stayed very close to our suppliers throughout the entire downturn and stay very close to them as we're planning the business going forward. So we think we always support our supply chain and Irwin Tan, who leads operations is based in Singapore, a lot of our suppliers are there, and he personally can stay very, very close to them. So we've stayed we've been very close and have supported our supply chain throughout this entire downturn. And now as things are getting better, that's a good situation for all of us. You want to talk about the cash flow?

Operator:

Our next question comes from Ananda Baruah from Loop Capital. Please go ahead with your question.

David Goeckeler:

I think that's a fair way to say it. I think it's coming into focus as to where it's going to show up on both sides of the business, but it's -- to your point, we're not ready to call what it does to the TAM, besides, we believe, it's a tailwind to both TAMs. So clearly, on the NAND business, there's very specific use cases on model training that are coming up substantially. I mean, obviously, you're seeing that across the whole technology landscape. And maybe that's a little bit easier to see we're actually seeing demand for those kind of products in the second half. And for HDD, we see it as all the data that's going to feed that process is going to sit on HDDs. And obviously, once those models get trained, they're going to turn out data that's 85% plus of that is going to be stored on HDD. So we see a very, very good setup, but we're staying close to our customers in these markets. It's still a little bit early to actually put a number on it of what it does to the growth rate or the TAM size.

Tristan Gerra:

Hi, good afternoon. A quick follow-up on this, which is how critical is it to have U.S. manufacturing for SSDs in relation to AI? And how do you look at partnership with hyperscalers as opposed to more kind of a general purpose business.

Operator:

And at this time, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to David for any closing remarks.

Operator:

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.

Operator:

Good afternoon, and thank you for standing by. Welcome to Western Digital's Second Quarter Fiscal 2024 Analyst Call. Presently, all participants are in listen-only mode. We will open the lines up for questions shortly. [Operator Instructions] Now, I will turn the call over to Mr. Peter Andrew, VP of FP&A and IR. You may begin.

David Goeckeler:

Thank you, Peter. Good afternoon, everyone, and thanks for joining the call to discuss our second quarter of fiscal year 2024 results. Western Digital second quarter results demonstrate that the structural changes we have put in place over the last few years and the strategy we have been executing are producing significant outperformance across our Flash and HDD businesses. I am confident that building leading products across a broad range of end markets, closely controlling our product cost through focused R&D and manufacturing, and bolstering the agility of our business will allow us to improve through-cycle profitability and dampen business cycles. As a result, we reported revenue of $3 billion, non-GAAP gross margin of 15.5%, and a non-GAAP loss per share of $0.69, all of which met or exceeded the non-GAAP guidance ranges we provided in October. Before discussing the business details, I want to provide some comments on the emerging trends we are seeing and how the changes we have made position our Flash and HDD businesses to benefit. In Flash, we've been able to navigate business cycles by managing inventory proactively, offering a broad range of products, and optimizing capital efficiency through our joint venture partnership with Kioxia. These successful efforts are reflected in our best-in-class gross margin throughout the cycle. During the quarter, our portfolio strategy to dynamically allocate bit shipments drove upside in ASPs and gross margin. Looking ahead, we will continue to take a disciplined approach to our supply and capital investments. Consequently, we continue to proactively manage our bit shipments to structurally align our supply and inventory with customer demand and improve through-cycle profitability into the future. In addition to the recovery in both Flash and HDD markets, we believe storage is entering a multi-year growth period. Generative AI has quickly emerged as yet another growth driver and transformative technology that is reshaping all industries, all companies, and our daily lives. Importantly, industry analysts estimate that the edge now represents approximately 80% of total NAND bit shipments, an increase from approximately 75% in calendar year 2022, which is another indication that cloud demand was significantly pulled in during the pandemic. In addition, we believe the second wave of generative AI-driven storage deployments will spark a client and consumer device refresh cycle and reaccelerate content growth in PC, smartphone, gaming, and consumer in the coming years. Our Flash portfolio is extremely well positioned to benefit from this emerging secular tailwind. In HDD, Western Digital's leading EPMR platform and enhanced UltraSMR technology allow us to provide the highest capacity drives for mass market deployment. We believe this innovative technology and portfolio strategy enable us to offer the best TCO to our cloud customers and outperform our peers throughout the cycle. We are confident that the multi-quarter near-line demand headwinds have subsided as our major cloud customers have reengaged with us. We anticipate our financial outperformance resulting from profitable share gains to become more evident as nearline demand accelerates into the second half of fiscal year 2024 and beyond. Moving on to end market commentary. During the quarter, revenue in the cloud end market returned to sequential growth for the first time in six quarters. The sequential revenue growth was led by an increase in nearline shipments. In client, sequentially, revenue declined slightly as the increase in Flash ASPs was offset by a decline in bit shipments as we proactively optimized product mix. In consumer, the sequential revenue growth was led by seasonal strength in Flash bit shipments into retail and an increase in Flash ASPs. I'll now turn to business updates starting with Flash. During the quarter, the sequential revenue increase was due to stronger execution and driving price inflection by optimizing bit shipment across our broad go to market channels into the consumer and client end markets, resulting in stronger than planned ASP increase. In particular, our WD Black gaming SSD product, which offers high reliability, best-in-class performance, expansive storage capabilities, and a hyper realistic gaming experience, achieved a new record revenue with bit shipment growth of over 50% year-over-year. On the technology front we remain on track to ramp an array of QLC-based client SSDs utilizing BiCS6 technology. Our ability to combine this new high-performance node with our in-house controller development allows us to offer a portfolio of client SSDs with unmatched performance and value. We expect these products to lead the transition to QLC Flash in calendar year 2024. Additionally, BiCS8 yield is progressing well and we remain on track to productize this technology. Turning to HDD, the sequential revenue increase was driven by improving nearline demand and pricing. Moreover, we are encouraged by demand in China with revenue doubling on a sequential and year-over-year basis, both of which were ahead of our expectations. We anticipate year-over-year growth in HDD throughout this calendar year. In both the first and second quarters, we shipped approximately 1 million UltraSMR drives per quarter. We forecast UltraSMR hard drive shipments to increase significantly in the fiscal third quarter and SMR drive shipments to continue to outgrow that of CMR drives going forward. Importantly, the adoption of UltraSMR is broadening to our major customers worldwide, including a third cloud titan in the US this year, as well as hyperscale and smart video customers in China. We expect to complete the qualifications of our 26 terabyte and 28 terabyte UltraSMR drives at these customers this quarter and throughout the calendar year and forecast SMR to comprise the majority of nearline demand by calendar year 2025. We have strong conviction that our portfolio strategy of first commercializing Western Digital's industry-leading UltraSMR technology, which will be followed by our transition from EPMR to Hammer offers the best TCO to our customers in both the near and long term, while delivering leading portfolio profitability in the industry. Over the next several years we will be introducing a number of exciting products, including multiple generations of nearline drives combining EPMR, OptiNAND, and UltraSMR technologies in the 30 to upper 30 terabyte capacity range, all of which will be ready for high volume production to support the explosion of AI training data and content. Before I turn over to Wissam, I wanted to share some perspectives on our outlook. In Flash, starting with demand in calendar year 2024, we estimate industry bit growth to be around the mid-teens percentage, similar to the growth rate in calendar year 2023. On the supply side, we estimate that fab-out bit production growth to remain in the mid-single digit percentage range. We believe our business agility and our highly capital efficient and low cost BiCS architecture have enabled us to align supply with demand via nodal transition much more quickly than our peers. We will continue our disciplined approach to dynamically managing our inventory capacities and capital expenditures to keep our supply aligned with end customer demand. Although Flash pricing has started to increase, our profitability and cash generation continue to be well below the level that justify an increase in capital investments. We anticipate wafer equipment spending will remain at historic lows in the near term and Flash to be undersupplied for an extended period of time. Overall, we will continue to focus on allocating our bids to the most attractive end markets and anticipate Flash ASP increases to be the primary revenue growth driver throughout this calendar year. In HDD, our competitive portfolio strategy has enabled us to consistently achieve profitable share gain in the last two calendar years. We are confident that this trend will continue as nearline demand continues to improve and we continue to ramp our UltraSMR enabled products. Let me now turn the call over to Wissam, who will discuss our financial second quarter results.

David Goeckeler:

Thanks, Wissam. Let me wrap up and then we'll open up for questions. I want to emphasize that the steps the Western Digital team has taken to instill and deploy an industry leading product portfolio, while also moving quickly to adapt to both volatile market dynamics and anticipate future trends have enabled us to capitalize on the upswing we see ahead. Through our product leadership and ability to dampen business cycles and improve through-cycle profitability, I am confident we are well positioned to execute on our current strategy, which will reaffirm our strength over the long term. Let's now begin the Q&A.

Joe Moore:

Great. Thank you. I wonder if you could talk about the gross margin improvement in Q1. I guess, how would -- how do you portion that between the drive business and the NAND business? And I guess, I would think with being judicious on volume, you get some pretty good NAND pricing. I guess, I might have expected a little bit more gross margin improvement. So just curious what I'm missing there? Thanks.

Joe Moore:

Thank you.

Operator:

Our next question comes from Aaron Rakers with Wells Fargo. Your line is now open.

David Goeckeler:

Hey, thanks, Aaron. So for Flash, in our guide, we don't have underutilization for Q3. In fact, we executed ahead of schedule and reached our targeted supply and inventory goals faster than what we anticipated. And so, as you know, we continue to dynamically manage supply and inventory to meet our end demand and so the fab utilization reflects that. If you recall, in our results in Q1, Flash inventory was down almost $400 million, last quarter we saw another over $200 million dollar decline in inventory. We exited the quarter at levels that we haven’t see in few years. So having said that, obviously, we will continue to be disciplined in how we manage our supply and inventory to meet end customer demand on Flash and also, of course, control our capital spend. With respect to your question at the 30%, let me clarify. Was your question 30% on the Flash or on the HDD side?

David Goeckeler:

Yes, I thought I heard you say Flash. I was going to start talking about it. Well, let me start talking about HDD. Look, at HDD, we're pretty much very close to that level. When you look at what we delivered in the second quarter and when you also look at the guide, it does reflect the continuous margin improvement on the HDD side. And so, I also anticipate that there should be continuous improvement as the recovery continues in that business. So 30% is very much within reach. And we should be able to achieve it pretty soon. On the flash side, the --lot has to do with continuing to optimize the product mix to drive that ASP up. And also, of course, continuing to deliver on our cost reduction. And so, on the cost reduction, we've done well so far. We've been in the mid-teens. I expect us to also hit that mid-teens percentage cost reduction for this fiscal year. So, as the pricing continues to improve, I’d anticipate that we would be -- we would also be there -- let’s say in the next few quarters.

Operator:

Our next question comes from CJ Muse with Cantor Fitzgerald. Your line is now open.

David Goeckeler:

Yeah. So I'll start and Wissam can add some too. So yes, we had bits down, we had a record quarter last -- two quarters ago and then we were down a little bit this past quarter, then we'll be down more. I mean, it’s just a reflection of the flow through the underutilization that we were doing to kind of keep supply and demand matched. We've talked about this a lot and not let our inventory get out of control. I think we've been very good about keeping our inventory -- we're at a four-year low on inventory, so on the NAND side. So, look, CJ, we're just going to keep very focused on what demand is, where we're at in inventory, and adjust the utilization of the fab to make sure those stay aligned as we go forward. So I think as we said in the script, you kind of assume that throughout this calendar year, you're going to see most of the growth in Flash be from pricing.

Wissam Jabre:

Now, I was going to move on to the second part of your question.

Wissam Jabre:

Okay. So mix is like -- mix is just a very dynamic process, literally day-by-day, week-by-week in the business. We have a big consumer franchise, we sell all over the world, we have hundreds of thousands of points of presence and retail platforms. We have a big channel business where pricing can get adjusted weekly, then all the way up to, obviously, the quarterly negotiated markets. So we're just always dynamically understanding where pricing is going to be. And then again, in each of those segments, we have different products. We have client SSDs that are WD Black all the way down to WD Green. So in different segments of the market, all with different price points, all with different margins, all with different demand profiles. And it's a constant process of just making sure we put the supply where we're going to get the best return. This last quarter we talked about, we mixed a little bit out of client and into consumer, as you would expect in a strong consumer quarter. And we'll continue to do that. The place where we're still waiting for it to come back is enterprise SSD, that’s still been pretty depressed and as that market starts to come back, we expect to mix into that as well.

Wissam Jabre:

Yes, of course, CJ. So on the OpEx side, for the June quarter I expect us to be more or less in line. Beyond that, as the business profitability continues to improve, I expect a gradual increase. But we're laser focused on profitability and so I don't anticipate to increase our OpEx faster than revenue growth, of course. And when you look at look at where we've come from and where we are today. We're still at or maybe more than 20% lower than where we were at the beginning of the cyclical downturn.

David Goeckeler:

Thanks, CJ.

Karl Ackerman:

Yes. Thank you, gentlemen. I have two if I may. The first, why do you think there was a doubling of China demand for [indiscernible] applications this quarter? And how sustainable do you think that is? I ask, because the Chinese economy hasn't been robust for some time, so any thoughts on that would be helpful.

Karl Ackerman:

Got it. Okay. Thank you for that. I guess, [indiscernible] if I may. It's nice to see an improving outlook for March. Showing one quarter ahead of many of our expectations. However, I'm a bit surprised to see your NAND ASP trajectory in December below that of peers. So is there any reason why your NAND prices or ASPs perhaps would fall behind peers from here? And/or maybe there would be a catch-up opportunity as well. Thank you.

Karl Ackerman:

Thank you.

Operator:

Our next question comes from Tom O'Malley with Barclays. Your line is now opened.

David Goeckeler:

I think customers just want to understand everybody's roadmap, right? And they're not looking for a particular solution. I mean, for example, we've been shipping EPMR drives for years versus PMR drives and nobody really asked us for EPMR drive. So they just want the capacity point at a TCO at a reliability level and be able to satisfy their demand. And I think that's the way we've optimized our portfolio. We've commercialized EPMR, we're very happy with the technology. We have UltraSMR on top of that. That allows us to deliver both highest capacity point in the industry, the best TCO position at very, very large scale. We can produce millions and millions of those drives per quarter. So that's what customers are looking for and they're looking to understand on your road map that you can continue to drive that TCO equation forward, because they're obviously betting extremely large data centers on our ability to do that. And our customers, I can tell you, our customers have an enormous amount of confidence in our roadmap, in our current products, and you're seeing that in the performance of the business. You're seeing accelerating growth, you're seeing better profitability, you're seeing share gains. That's a clear indication that customers are very happy with our products. Now in particular on the transition of EPMR to Hammer, I know this has gotten a lot of attention. For our portfolio, given our UltraSMR technology, it's been adopted by the market, Hammer does not make sense until we get to 4 terabytes per platter. Because Hammer adds a lot of costs to the product, so it adds a lot of costs to your bill of material. So we can deliver -- we see the next couple of generations or couple of years of ability to deliver a very strong TCO proposition at scale on the EPMR plus UltraSMR platforms that customers have clearly adopted. We see it as the majority of our demand in calendar year 2025. We will transition to Hammer when we get to that 4 terabytes per platter. That's the economic crossover, right, that we're looking for from a portfolio management point of view. So that gives you a little more color on how we're thinking about the technology, the transition, and how customers are thinking about it. I think it's very clear, customers are very happy with our road map and they understand in great detail where we're going.

Wissam Jabre:

So, Tom, if you look at our numbers and you adjust for the underutilization charges, we’re almost there. So, what I would say, instead of giving a number or movement, let's say, in quantifying it. What I would say is, I expect us to be at the 30% level, at a lower level than then our normal run rate that we've had in any priors through-cycle periods. We've taken quite a bit of cost out of our -- cost structure as you very well know. And so, that will help us get there at a faster phase. With respect to underutilization, I do anticipate to probably have a bit more in other quarter of underutilization beyond this one and then we'll see where we are in the June quarter. We can talk about it then.

David Goeckeler:

Thanks, Tom.

Operator:

The next question comes from Krish Sankar with TD Cowen. Your line is now open.

David Goeckeler:

Okay, there's a lot in there. So on NAND, we obviously look at a lot of things in NAND, there's a lot of stuff that goes into supply of NAND, from utilization rates, to nodal transitions, to CapEx investment, and it's a complicated equation. But our current view is, we see NAND under supplied for quite some time in the market and that's appropriate given where we are in the profitability of the business. As I said in the prepared remarks, we're happy to see the inflection in pricing and the performance of the business and it's ahead of where we thought it was going to be, but we've got a long way to go before we're going to get to the profitability levels where investments are going to come back. I think the answer to your question, we need very clear visibility into through-cycle profitability numbers that match our model. And we're coming out of a deep hole and that would imply that you need to be above your through-cycle level for a while to get to that level over time. So that's what we're looking at, and we expect pricing to -- pricing is notoriously difficult to predict and we're very careful that we don't forecast it, but clearly, we're predicting good pricing increases into the next quarter and we will stay very disciplined of managing supply and demand in our business. We talked about that, bits are down sequentially. On HDD, I'm sorry, could you just repeat the HDD question again so that I make sure I got it?

David Goeckeler:

Yes, so let me -- we'll defer the details of product launch on Hammer and how many discs it's going to have until we get closer to that process. I mean, it's a project that's -- we're happy with where the progress of it is, given what I said earlier. We've got -- we've built a technology roadmap that allows us to get to 40 terabytes on very well proven cost controlled, high manufacturing ability technology and we're looking forward to delivering that to the market over the next couple of years. The reality is, there's no customer like demands a particular technology. The customer wants a capacity point at a certain TCO, at a certain level of reliability, and a certain level of performance. And our technology roadmap is built to deliver that. What's inside the box is less important. The real thing is, you have to deliver all of those that we just said and you have to be able to manufacture it at a level of millions and millions of units per quarter to satisfy the market. That's what our customers are looking for. Our EPMR and UltraSMR technology, that's exactly what it delivers. The ability to deliver increasing TCO, which -- if we can deliver increasing TCO, we can continue to drive pricing higher. We can produce it at very high scale, it can be qualified very, very quickly and it's very highly reliable and high quality product. And our customers are increasingly adopting that technology as you see from our forecast.

David Goeckeler:

Thanks. The next question comes from Wamsi Mohan with Bank of America. Please go ahead.

Krish Sankar:

Okay thanks. If I could, you mentioned about entering a multi-year growth period with Generative AI and especially at the edge, the demand for NAND bits. When do you thing that the industry will start to see this demand NAND bits at the edge start to reflect higher?

Krish Sankar:

[indiscernible]

Operator:

The next question comes from Mehdi Hosseini with SIG. Your line is now opened.

David Goeckeler:

Yes, we see demand around mid-teens and that's fab out. What we see is kind of fab production of mid-single digits. And obviously, there's inventory between those.

David Goeckeler:

You did not misunderstand me.

David Goeckeler:

We'll ship to our share demand throughout the year.

Wissam Jabre:

No, we don’t anticipant that to impact our market share. The stats that you mentioned on the supply and production were for our estimates and what we see from third party estimates on the overall market.

David Goeckeler:

Go ahead, Mehdi. I’m sorry. No, please go ahead.

Wissam Jabre:

No, we're comfortable with the 15% cost downs. We believe that if you -- I mean, we're ahead of that right now in FY 2024, quite frankly, but it'll come back and I think when you look at the full year, you can still model 15% for the fiscal year.

David Goeckeler:

Thank you.

Steven Fox:

Hi, good afternoon. I was just wondering on enterprise SSDs, you mentioned that they're still depressed and you'll mix into it. But given the supply situation that you just talked about and where we are in the cycle. Like, what is your -- how do you envision coming back in that market? And like, can you just remind us what a normal mix of enterprise SSDs looks like in your Flash business? Thanks.

Steven Fox:

Would the big picture be that it trails enterprise HDDs by a certain amount of time in general? Like, do you have a vision for just -- as enterprise spending recovers, where that product cycle would be?

Steven Fox:

Got it. Very helpful. Thank you.

Operator:

Our next question comes from Mark Miller with The Benchmark Company. Your line is now live.

Wissam Jabre:

Yeah, Mark. So turning free cash flow positive is a top priority for us. We are very much focussed on it and we have line of site to achieving it. We expect to achieve free cash flow positive in the second half of the fiscal 2023, either this quarter on the next. As you know, we typically don’t guide for cash flow.

David Goeckeler:

I don't see that at this point.

Wissam Jabre:

Thanks, Mark.

Operator:

The last question comes from Ananda Baruah with Loop Capital. Please go ahead.

David Goeckeler:

It's a good point here, which is, like -- my comments earlier were about the cycle and what we see in NAND and investing in. And we're big believers in the NAND market and there's going to be a lot of bit growth in the future. And also the great thing about the NAND market is, you still have the ability to produce new nodes and more efficient as far as how much capital you need to put in to get that growth. So, look, the overall thesis on NAND continuing to grow, we have a long technology roadmap where we can continue to deliver cost downs, that's still a great story and we expect -- to your point, we expect generative AI to be additive to that, especially on the edge. The NAND market has really rotated -- through this downturn really rotated to an edge centric market. Which, again, our portfolio is very, very well positioned with our consumer business, with our client SSD business, with our gaming business, with our position with PC OEMs. So, we're very well positioned there. And yes, as we see that demand come back, and it resets the economics of the industry, we have the ability to go satisfy that demand. And so, I think you are very bullish about that.

David Goeckeler:

Thank you. All right, thanks everyone. I appreciate your time today. We will see you throughout the quarter. Take care.

Operator:

Good morning, ladies and gentlemen and welcome to the Western Digital First Quarter Fiscal 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note today’s event is being recorded. At this time I’d like to turn the floor over to Peter Andrew, VP of FP&A and Investor Relations. Sir, please go ahead.

David Goeckeler:

Thank you, Peter. Good morning and thank you for joining our call. I will first discuss the completion of the strategic review and then turn to our first quarter results. We're thrilled to announce the completion of our strategic review and plans to form two independent public companies focused on capitalizing on the data storage industry's growth in HDD and flash. After evaluating a comprehensive range of alternatives, the Western Digital management team and Board determined that spinning off its flash business is the best executable alternative at this time to fully realize value for shareholders. This transaction will allow each franchise to execute on its product and innovation roadmap and capitalize on the unique growth opportunities in their respective end markets. Each company will benefit from streamlined management focus, operational flexibility, and the ability to set its own distinct capital allocation and shareholder return policies. We are excited for the opportunities this transaction creates to better serve our customers, support our suppliers, partners, and employees, and unlock significant value for our shareholders. Before discussing the details, let me walk you through the journey that brought us to this point. In March 2020, I joined Western Digital with a strong conviction in the company's unique position to accelerate and benefit from the digital transformation that is reshaping every industry, every company, and how all of us live our daily lives. And importantly, I saw an opportunity to create value for a leader in both NAND flash and hard drives. During my early days at the company, I spent considerable energy into rebuilding and refocusing the company, including the formation of the HDD and flash business units. It soon became clear that our focus on driving two distinct technology portfolios was the right strategy, and the new management team that I brought and worked together to transform Western Digital by bolstering business agility and reinvigorating innovation. In addition, we promptly focused on strengthening our balance sheet. We made the tough decision to suspend our dividend, which allowed Western Digital to speed up debt reduction and paid down $2.7 billion of debt over a couple of years following the suspension. We further enhanced our liquidity by bringing in $900 million of strategic investment from Apollo Global Management and Elliott Investment Management and amended our credit agreements. We also settled a long-standing tax dispute to increase strategic optionality. The groundwork we laid over the past several years, including the additional actions taken in fiscal year ‘23 to right-size the business, have enabled us to navigate a dynamic environment, all while staying focused on delivering a range of industry-leading products. Each business is now in a strong operational position to succeed on its own and the actions we are announcing today will further enable each company to drive long-term success in the years to come. The Western Digital team and Board completed the strategic review after evaluating a comprehensive range of alternatives and determined that spinning off its flash business is the best executable alternative at this time to fully realize value for shareholders. During our strategic review process, we evaluated material opportunities for each of our businesses. However, given current constraints, it has become clearer to the board in recent weeks that delivering a standalone separation is the right next step in the evolution of Western Digital and puts the company in the best position to unlock value for our shareholders, while providing strategic optionality for both businesses. Given the confidential nature of the strategic review, we will not be discussing any of the other alternatives that were considered during the process. On page six of the presentation, we present a separation transaction summary. The HDD business will retain the Western Digital name and become an independent publicly traded company. The flash business is expected to be spun-off in a tax-free transaction to Western Digital shareholders, and the name of the publicly traded company will be determined at a later time. We target to complete these plans in the second-half of calendar year ‘24, subject to the principal closing conditions described in the slide. Page seven provides a bit more visibility into some of the end market exposure for our flash and HDD businesses on a trailing 12-month basis. Moving to the individual businesses on page eight. In HDD, Western Digital is a well-known leader in the mass storage market with an ability to generate consistent cash flow on a standalone basis. Our ability to lead the industry in bringing new innovations to the hard drive market to enable higher capacity points for mass market adoption has established Western Digital as a key strategic supplier to the world's global cloud service providers, storage OEM, and distributors. The massive opportunity is driven by the ongoing expansion of the cloud infrastructure, connected to intelligent endpoints and powered by high-speed networks. Industry analysts estimate the HDD addressable market to grow at approximately 12% compounded annual growth rate to $25 billion over the next three years with cloud representing over 90% of the total addressable market. The cloud represents an incredibly large and growing end market for Western Digital and we are well positioned to address customer storage needs. Moving to our flash business on page 10. The Western Digital flash business is well-known for its broad go-to-market channels, enviable premium brand retail franchise, and strong client SSD portfolio. Industry analysts forecast the flash market to grow at approximately 15% compounded annual growth rate over the next three years to $89 billion in calendar year 2025. We believe content increases in the consumer and client end markets, as well as explosive growth of data created in the cloud by emerging applications such as generative AI, virtual reality, and autonomous driving, are driving a faster growth in flash versus HDD. The highlight of our consumer end market is the strength of our SanDisk brand of retail products and our suite of high-performance SSDs for gaming enthusiasts. The brand recognition and affinity, combined with our unmatched presence across the world, is a great setup for the business on a standalone basis. Our successful 23-year partnership with Kioxia continues to provide us a reliable source of high-performance, low-cost flash. Together, we have successfully brought to market numerous generations of flash technology with the industry's lowest cost and best capital efficiency. The joint venture fabs produce over 30% of the world's bits and our joint memory technology roadmap remains incredibly well positioned especially as we lead the industry's transition to wafer bonding. We will likely host an investor day closer to the time of the spin-off of our flash business to give investors greater clarity into the historical and future outlook for each of our businesses, along with the intended capital structures for each business. With that, I'd like to turn to first quarter fiscal ‘24 earnings review and business update. Western Digital's first quarter results exceeded our expectations as the team's efforts to bolster a business agility, drive innovation, and right-size the business have enabled us to capitalize on enhanced earning power in an improving environment. We reported first quarter revenue of $2.75 billion and a non-GAAP loss per share of $1.76. Our ability to develop differentiated and innovative products across a broad range of end markets has resulted in sequential margin improvement across both flash and HDD businesses. In flash, healthy inventory levels on our balance sheet and signs that flash pricing is beginning to inflect have laid the groundwork for further gross margin improvements. Our broad go-to-market channels, enviable retail franchise, and strong client SSD portfolio have enabled us to shift bits to the most attractive end market categories and achieve 26% sequential bit growth, as well as upside and gross margin. In HDD, our industry leading 26 terabyte ultra-SMR drive became the highest near-line volume runner in just two quarters, which demonstrates Western Digital's aerial density leadership and ability to deliver high volume innovative technologies to data center customers worldwide. During the quarter, demand in consumer and client continued to improve, exceeding our expectations. In consumer, flash revenue has returned to growth on a year-over-year basis, led by strong content increases and unit growth. In client, PC and component demand also exceeded our expectations, and demand for gaming consoles and mobile remained resilient. In cloud, demand for both hard drive and flash products remains subdued. I'll now turn to the business updates starting with flash. During the quarter, flash revenue increased sequentially, led by record exabyte shipments and continued content growth in consumer and client end markets, including PCs and all retail products, as we continue to optimize bit placement in an improving environment. WD Black, which is optimized for gaming, continued to perform well, with bits shipments more than doubling and content per unit increasing over 50% year-over-year. We are in an excellent position from both of flash technology and capital efficiency perspective. Today, a majority of products we are shipping are based on BiCS5, the most capital efficient node in the 3D era that continues to provide an amazing cost structure and efficient capital spending. As we look into calendar year ‘24, we are ramping an array of QLC-based client SSDs based on BiCS6 technology to lead the expected industry transition to QLC. After BiCS6, we remain on track to introduce a broad range of high performance products based on BiCS8 technology with its unique chip bonded on array architecture. Turning to HDD, revenue declined due to lower nearline exabyte shipments driven by subdued demand from our cloud customers and slower-than-expected recovery in China. However, demand for consumer and client hard drives was stable. Western Digital has continued to lead the industry in driving innovation within the nearline market. Our ability to bring innovation into mass market drives that are quickly deployed into cloud data centers is reflected in our results as we successfully led the industry's transition to SMR-based nearline drives. Specifically, our 26 terabyte ultra-SMR drive, which we first announced at our investor day, accounted for nearly half of our nearline exabyte shipments with total SMR shipments exceeding the 40% goal we laid out in the same quarter a year prior. We are on track with our 28 terabyte ultra-SMR drive qualification and have a clear roadmap of EPMR and ultra-SMR based innovations into the 40 terabyte range. These developments are a result of the choices we have made in the past few years through a combination of product R&D and manufacturing capabilities, and we are proud of how we have been executing against our strategy. Looking ahead to the fiscal second quarter, in flash we expect both modest bit and ASP improvement and a decline in underutilization charges to drive continued sequential improvement in both revenue and gross margin. In HDD, we expect higher nearline shipments and seasonal demand in consumer end market to drive sequential revenue growth. We anticipate our value-based pricing efforts and lower underutilization charges will lead to sequential revenue and gross margin improvement in the quarter and through the rest of fiscal year ‘24. As we continue to execute against our HDD product roadmap, we are setting the stage for profitable growth for years to come. With that, I'll turn it over to Wissam.

David Goeckeler:

Thanks, Wissam. Let me wrap up and then we'll open up for questions. We are now emerging from a historic storage cyclical downturn, where all of the changes made in the past several years were evident in how well each business performed relative to peers. The first quarter of fiscal ‘24 builds upon the improvements we made in fiscal year ‘23 around discipline, supply, and capital expenditure management, while executing on our product innovation roadmap. We continue to tightly manage our operating expenses and are closely monitoring demand in our end markets to appropriately manage our inventory in both flash and HDD, all to improve sequential and year-over-year upside in our results. Moving forward, as we progress through fiscal year ‘24, we see an improving market environment in both businesses. With an improved position, the separation of the company unlocks value by creating two independent public companies with market-specific strategic focus. Better positions each franchise to execute innovative technology and product development, capitalize on unique growth opportunities, extend respective leadership positions, and operate more efficiently with distinct capital structures. Okay, Peter, let's open up for Q&A.

Joe Moore:

Great. Thank you. And congratulations on the decision here. Can you talk through a little bit anything preliminary in terms of how the OpEx might be a portion between the two businesses and you mentioned, you know, maybe you'll give us the capital structure at a later date, but just anything early on, unlike, you know, what you think the right amount of debt is to apportion to the two businesses?

David Goeckeler:

Hey Joe, this is David. Thanks for the question. Good to hear from you this morning. One thing I will say is we're very happy with the level of efficiency we've driven into the business over the last year, especially during this downturn, and we think has put us in a very good position to go through this transaction. I think OpEx over two years is down, over the last two years is down over $200 million. So we put ourselves in a position where we've got very efficient business and some flexibility to go through a transaction like this. So as Wissam said, we'll have more to say as we get closer.

Wissam Jabre:

Yes, Joe, the current announcement does not affect our ability to address the convert. As we've said before, our plan is to address the convert that's maturing in Feb ‘24 by the end of this calendar year.

Wissam Jabre:

You're welcome.

Aaron Rakers:

Yes, thank you for taking the question. Two, if I can as well, real quick. I guess the first question is just thinking about the separation, appreciating that you're not going to give anything at this point around the capital structure. I'm just curious though, the relationship with Kioxia, you know, I know in the past there's been certain attributes of rights as part of the JV. Any kind of context about the dialogue, you know, moving to the separation as it relates to that JV rights or, you know, should we be thinking about any approval processes that are involved in that?

Aaron Rakers:

Okay, and then as a quick follow up, I'm just curious on the hard disk drive business. I know the cloud revenue and total is down consistently, again, quarter-over-quarter. Just how would you characterize what you're seeing from a nearline perspective from the cloud? Have you started to see demand pull again? Just any kind of context of how you're thinking about, you know, the shaping of kind of a recovery here as we move forward?

Aaron Rakers:

Okay. Thank you.

Krish Sankar:

Yes, hi. Thanks for taking my question. I had two of them too. First one, again, sorry to harp on the separation, it makes a lot of sense. I'm just kind of curious. In the past, David, you've spoken about some of the synergies in R&D and how the HDD product line uses some of the bomb from OptiNAND et cetera. I'm just kind of curious, would that change post the separation, or there's going to be no strategic shift on that, and then I had a follow-up?

Krish Sankar:

Got it, thanks for that David. Another quick follow-up, your peers spoke about the HAMR Technology getting like adopted next year, and your road map shows EPMR to extending to 32 plus terabyte,. I'm kind of curious how you think about HAMR and your road map in case they'll catch up with C8?

Krish Sankar:

Thanks, David.

Operator:

Our next question comes from Wamsi Mohan from Bank of America. Please go ahead with your question.

Wissam Jabre:

Okay. So, on the first one, yes, I mean, Wamsi, I think you kind of laid it out there. We've been going through a whole series of actions that have set us up for this announcement. You know, it was really about execute the business better and give ourselves as much strategic optionality as possible. So as I talked about in the prepared remarks we've, you know, we separated ourselves in the business units on the product side that allows us to really get very focused on the portfolio and all the OpEx we spend on building our products, make sure we get the best return for it. I think that's worked out well. We then did the same thing in operations. We've now divided those organizations around HDD and flash. So we’ve -- and then we've optimized, taken out cost everywhere we can so that we can operate them independently and also have just the most efficient business possible. As I said, we've focused on our balance sheet. So I think we've put ourselves in a very good position where we can go through this separation and the organization is as prepared as we possibly can be for it. We've also, as I said earlier, we've taken a lot of OpEx out of the business. So we've driven the OpEx down to a very efficient number. So we believe we can go through the separation and end up with two very well-structured companies that can execute very well. And they come out of the gate with market-leading portfolios on each side and into a recovering market. So we feel good about that. Cost of the portfolio look I mean as you continue we feel the roadmap we have in place, you know, we can produce ultra-SMR, EPMR, OptiNAND drives very high scale, very quickly, very high yields on all the products. So we think the cost position is very advantageous. You see that in our results, you know, so you know when HAMR comes will fold that in and you know we want to get to the point where we have the same level of yields we have the same level of confidence as we do something like a 26-T drive that we just launched and now it's the, you know, nearly half of our exabytes, a quarter or two in. And that's how we think about launching new products. So you know, when we get there, I think that we'll have that same kind of cost structure on HAMR, and we have a great, very, very strong position to drive very efficient, very high scale, very quickly, new drives for many generations on the technology that we've put in place over the last three or four years.

David Goeckeler:

Thank you. Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead with your question.

Wissam Jabre:

Yes. Good morning, Sidney. Thanks for the question. The current announcement does not affect the amended credit agreements. And so from a free cash flow, from a governance perspective, we're comfortable that we can operate effectively. We have ample liquidity. We do have ample operational flexibility to operate, so I don't see the current announcement as impacting us in any way.

Wissam Jabre:

Okay, maybe I'll start a little bit on the cost side and then David could chime in on the top line side. Look, the -- when -- one of the bigger, obviously, levers is the underutilization. We did in Q1, around $225 million. In total, we had around $234 million to 235 million of other charges. And our guide has a underutilization at a much lower level, and so that's one element. In addition, obviously, we continue to focus on cost reduction. We do have still, we're still, if you exclude the underutilization aspect, we're still taking cost out of the system on both the flash side and the HDD side. And so that's a key lever to improve the gross margin. And then if I take it back up to the top line, we see obviously improvement on the revenue side and the improvement is coming from both sides of the house on both businesses. So that also contributes quite well with respect to the gross margin and within that revenue also we do have a bit of a mix that's helping us as well.

Sidney Ho:

Thank you.

Tom O'Malley:

Good morning, and thanks for taking my question. I just wanted to ask on your expectations for both market demand on the NAND exabyte side for fiscal year ‘24, as well as your view of supply. I mean, you're starting the year up almost 50% year-over-year, obviously off a very low base and sequentially up mid-20s. Some of your peers have talked about really demand here to begin the fiscal year or to begin the recovery in those -- for those other guys, but kind of some slowing as guys saw the bottom ordered a bunch and then have kind of slowed down. Could you just give me your comments on if you're seeing any of that and then your expectations for the exabyte shipments for you for the fiscal year?

Tom O'Malley:

Helpful, and then on the other side of the business, you talked about the, kind of, you know, varied inventory positions you have, flash going down, HDD actually going up a bit. And if you compare your results with Seagate, at least for the last couple of quarters, results have been relatively similar. Could you just talk about when we should start to see that divergence, just given the fact that you're addressing a higher capacity point in the market today, and theoretically you should see some outside benefit. When do you think you'll start to see that divergence in the market? Thank you.

Tom O'Malley:

In terms of revenue difference.

Operator:

Our next question comes from Srini Pajjuri from Raymond James. Please go ahead with your question.

David Goeckeler:

Yes, I think you got it there in your question. I think you have more broad-based participation in the market by the big hyperscalers as they get to the end of their inventory corrections. So that's been part of it. Remember, we're coming off very, very, very low numbers. So we expect improvement throughout the year by more people participating in the market and more consistent participation by the ones that have been in it on a quarter-over-quarter basis. China has been -- it’s been better, but not -- it hasn't recovered as fast as we expected, so it's still a little bit lumpy and weaker than we would like. So the smart video market has been pretty consistent and we've seen some good results there. But in the cloud space, it still has a little ways to go.

Wissam Jabre:

Yes, sure. So on the tax payment, in Q1 we made a $523 million payment with respect to the IRS settlement. This covers the years 2008 through 2012. And so this is why you see when you look at our free cash flow that we reported for fiscal Q1 at a negative $544 million, in that we had that $523 million payment. On the -- it was partially offset by the sale and lease back of the Milpitas facilities of around $191 million. So all in all, we're around the negative $200 million for the quarter. As we look forward, obviously, the key is the continuous improvement of the profitability and of the business, working capital management. You've seen our transition on the inventory side, for instance, in Q1. We continue to manage inventory very, very closely on both flash and HDD. So I expect that inventory to continue to decline gradually in this coming quarter and the next. And then the continued focus on CapEx for the fiscal year. Would it say that for fiscal ‘24 we expect our cash CapEx to be significantly lower than fiscal 2023. So, you know, free cash flow is, and cash flow is very important to us, big focus, and we'll continue to focus on it. And as we look into the second-half of fiscal ‘24, we're projecting to be cash flow positive on a quarterly basis in the second-half of this fiscal year.

Operator:

Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead with your question.

David Goeckeler:

Good morning, Karl.

David Goeckeler:

Yes, I'll take the second part of that, and Wissam can comment on the underutilization charges. Look, we expect bits to be up slightly in the December quarter. It's a strong consumer quarter for us, although we don't really break out by mix. But I mean, I think that's one way to think about it. We expect an improving price environment and bits to be slightly up.

Karl Ackerman:

Thank you.

Timothy Arcuri:

Thanks a lot. David, at the bottom of slide four, you did say that the board remains open to considering other alternatives should they become available. So since you put that in the presentation, can you talk about what other options could be available? Is this a reference to the collapse of the JV that Hynix commented about or was asked about on its call? Is this in reference to an outright sale of the NAND business? Can you just talk about that a little more?

Timothy Arcuri:

Got it. And then, Wissam, for you, so the underutilization charges of $120 million at the midpoint, how do they split for December? I would think that more of its now in the HDD business, but how does that split things?

Timothy Arcuri:

Great, thank you, Wissam.

Operator:

And our next question does come from Vijay Rakesh from Mizuho. Please go ahead with your question.

David Goeckeler:

So yes, we, I mean, coming off such a high on ‘22, ‘23 will be down, but then we expect to get back to, we expect a consistent exabyte growth in this business in the mid to high-20 range on an ongoing basis.

David Goeckeler:

Yes, no, we don't expect any change in the technology roadmap. The JV is very strong, very solid, very productive. Teams work together on a day-by-day basis. We've talked a lot about that. We're very happy with where it's at. The relationship is very strong. The technology roadmap, we think, as we talked about last time with BiCS8 and wafer bonding, we've made a huge step forward there. You know, we've always been able to produce NAND at a better capital intensity than the rest of the industry. Our measures over the last several years are up to a third less capital intensity for the business. So the JV has been strong for ‘23 plus years and we expect it to be strong for very, very far into the future. So we feel very good about that.

David Goeckeler:

Yes, we expect demand in ‘24 in the NAND business to be high-teens, you know, and if it gets really strong maybe it'll creep over the 20s and low-20s, but we're thinking about those high teens numbers. And like I said, production will be significantly below that.

Operator:

Our next question comes from Harlan Sur from JPMorgan. Please go ahead with your question.

David Goeckeler:

Good morning, Harlan.

David Goeckeler:

Yes, we do. We feel very good about that. I mean, I've spoken about this in the past. It's an explicit goal of the technology team to continue to drive those cost downs and we feel good about our ability to do that. It's been one of the strengths of the JV and the JV technology team for a very long time.

David Goeckeler:

Well, we like the portfolio we have. We qualified our NVMe based enterprise SSD at multiple cloud providers. And unfortunately, we qualified right into a significant downturn in cloud consumption of enterprise SSDs. So as that starts to come back over the next several quarters and as we go through ‘24, we expect our position to improve as those vendors start consuming again. I mean, the reality is there's just not a lot of buying in that market going on right now.

David Goeckeler:

Thank you.

Mehdi Hosseini:

Yes, thank you. David, I just want to go back to your comment just made regarding enterprise SSD. When I look at the slides from the results of a strategic review, you're highlighting strengthening client SSD and also retail. But I don't see any mention of enterprise SSD. How should I reconcile that with the comment you just made?

Mehdi Hosseini:

Okay, great. And just a question, a follow-up question for Wissam, and I'm not asking you for a guide on 2024, but if I just look at your cost decline, if I just assume 10% the cost decline and assume the current ASP trend, your NAND flash business should become profitable maybe by mid-year or sooner than later. The trajectory is very supportive of reaching profitability in the next couple of quarters. Is that a fair assumption?

Mehdi Hosseini:

Okay, thank you.

Operator:

And our final question today comes from Toshiya Hari from Goldman Sachs. Please go ahead with your question.

David Goeckeler:

Thanks, Toshiya.

David Goeckeler:

Yeah, I guess what I -- Wissam will comment a little bit as well, but I guess what I would say Toshiya is we're, you know, we're not putting a broad statement out there about that. What we're doing is just being very dynamic with how we manage wafer start so that we can keep supply and demand matched as best we can without letting inventory get up too high. So as you saw, I mean, our NAND inventory is at the best level since I've been here in the company. I mean, Wissam's team has done a great, and the operations team just done an unbelievable job of managing that. So we'll stay very close to where our markets are and how we're seeing demand, and then we'll adjust wafer starts appropriately.

Toshiya Hari:

That's very helpful. Thank you. And then as a quick follow-up, David, you talked about value-based pricing on the hard disk drive side and how that's driving better gross margins into the December quarter. Can you speak to any kind of specific end markets where you're seeing traction? Is it mostly client and consumer? Are you able to push through some price increases in the cloud segment as well? Thank you.

Toshiya Hari:

Got it. Thank you.

Operator:

And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining. You may now disconnect your lines.

Operator:

Good afternoon, and thank you for standing by. Welcome to the Western Digital's Fiscal Fourth Quarter and Fiscal 2023 Conference Call. Presently all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. Now, I would like to turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analyst and Investor Relations. You may begin.

David Goeckeler:

Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our fourth quarter and fiscal year 2023 results. Western Digital's fiscal fourth quarter revenue exceeded expectations as our access to broad go-to-market channels, enviable retail franchise and strong client SSD portfolio enabled us to capture demand upsides in both client and consumer end-markets, reaffirming our strength in a challenging market environment. We reported fourth quarter revenue of $2.7 billion and non-GAAP gross margin of 3.9%. Non-GAAP loss per share was $1.98. Before diving into the specifics of the quarter and the full fiscal year, I would like to take a moment to reflect on our accomplishments in fiscal year 2023. Importantly, we continued to optimize our operations and successfully executed our innovative product roadmap, priming ourselves for greater profitability when demand rebounds across hard drives and flash. Throughout the fiscal year, we were focused on enhancing our product leadership and reinforcing our business agility. In HDD, we have successfully qualified our latest family of capacity enterprise hard drives that all major customers and are shipping our 26-terabyte Ultra SMR drive in high volume. In Flash, we pioneered the use of wafer bonding and advanced 3D NAND manufacturing and introduced the groundbreaking technology in BiCS8, which sets the foundation for future 3D NAND scaling. On the expense front, we streamlined investments across our HDD and Flash portfolio, which enabled us to significantly reduce quarterly operating expense, while continuing to deliver innovative products and technologies that address customers’ growing storage needs. Further, we have reduced our cash capital expenditure run rate by over 50% in the fiscal second-half and consolidated our hard drive manufacturing footprint. These efforts enabled Western Digital to preserve capital, while effectively executing on product strategies and aligning our supply with post-pandemic demand environment. Notably, we reduced our inventory by nearly $300 million sequentially and exited fiscal year 2023 at a much healthier level than a few quarters ago. And in June, we successfully completed amendments to our credit agreements, which provide Western Digital with significant additional financial flexibility as we navigate macro dynamics. In summary, we continue to proactively take action to bolster our agility, enhance our liquidity position, optimize our inventory levels across HDD and Flash, and strengthened our position as an industry and market leader. We exited fiscal year 2023 well-positioned to capitalize on improving market conditions and capture long-term growth opportunities in data storage, spanning from client to edge to cloud. Finally, I want to acknowledge that the strategic review is ongoing. We continue to make progress on this process and we'll provide updates as appropriate. Turning to the fiscal fourth quarter, revenue in both client and consumer end-markets returned to sequential growth led by normalized end-market demand and higher average capacity per unit in Flash. In consumer, retail flash exceeded our expectations across all major product categories. We saw similar results in client with upside in both HDD and Flash and across almost all major product categories, including client SSD, gaming console, embedded flash and client hard drives. In cloud, demand for both hard drive and flash products remained subdued. I'll now turn to a business update, starting with HDD. In the fiscal fourth quarter, ongoing cloud weakness drove the overall decline in HDD revenue. However, demand for both client and consumer hard drives has stabilized and exceeded our expectations. At the end of the fiscal fourth quarter, we have successfully qualified all variance of our 22 terabyte CMR and 26 terabyte Ultra SMR hard drive platforms at all major cloud customers, setting the stage to improve shipments and profitability. In addition, we are about to begin product sampling of our 28 terabyte Ultra SMR drive. This cutting-edge product is built upon the success of our ePMR and Ultra SMR technologies with features and reliability trusted by our customers worldwide. We are staging this product for quick qualification and ramp as demand improves. Turning to Flash, revenue increased sequentially led by growth in both client and consumer flash bit shipments, which exceeded our expectations with total bit shipments returning to year-over-year growth. The stronger-than-expected bit growth is attributable to normalizing PC and consumer demand, as well as content growth. Average capacity per consumer and client SSD increased over 40% and 20% year-over-year, respectively. Moving to technology developments, we continue to aggressively productize BiCS8 based on a chip, bonded to array architecture. BiCS8 solidifies Western Digital and Kioxia's leadership in cost capital efficiency and I/O performance into the future. Before I turn it over to Wissam, I wanted to share some perspective on our outlook. In HDD, as we look to the fiscal first quarter, we expect overall demand to remain stable. Beyond the fiscal first quarter, we anticipate both improving demand and new product ramps to drive growth in revenue and profitability. In Flash, we are encouraged by several indicators signaling improving market dynamics. Notably, our two largest end markets, client and consumer are returning to growth, inventories are normalizing, content per unit is increasing and price declines have been moderating. With that, I'll turn it over to Wissam.

David Goeckeler:

Thanks, Wissam. Let me just wrap up. Fiscal year 2023 marked a period of exceptional progress and strategic planning for Western Digital. We diligently optimized our operations and executed our innovative product roadmap, priming ourselves for greater profitability as demand inevitably rebounds across hard drives and flash. As we move forward, we remain confident in our ability to capitalize on emerging opportunities and deliver continued success. Before opening up for Q&A, I would like to take a moment to recognize Siva Sivaram, our esteemed President of Technology and Strategy. Siva will be leaving Western Digital to pursue a great leadership opportunity in a different technology domain. Siva has made significant contributions to Western Digital and SanDisk over the past 10-years and he is a wonderful friend. We wish him all the best going forward. Peter, let's start the Q&A.

Joseph Moore:

Great. Thank you. I wonder if you could talk to NAND in the current quarter looks like the underutilization charges are similar. Does that mean your utilization is unchanged? And I guess it seems like you're able to make some inventory progress. Does that mean that you can at some point have a line-of-sight to bring that back up?

Wissam Jabre:

Yes, Joe. And with respect to underutilization, we saw similar type of underutilization charges in fiscal Q4 versus Q3. For the Flash side, and when you look at HDD, we had a bit of more underutilization. But sticking with the Flash, also in our guidance, we've noted similar levels into fiscal Q1. Albeit, if you look at, sort of, the range of $200 million to $220 million, I would say it is split 70% Flash, 30% HDD. And also we're -- if I think of, let's say, the fiscal Q2, I anticipate more or less similar levels of underutilization from where we stand today.

Wissam Jabre:

So with respect to uses of cash, as you noted, we do have the convert that matures in February ‘24, and we plan to address that this quarter or the next one. We also have the IRS settlement that is coming up and we expect also this payment to be very likely this quarter. But with respect to liquidity, exiting fiscal Q4, we had approximately $4.9 billion of liquidity. And so if you recall the delayed-draw term loan was put in place in the event we need to address the IRS settlement. So that will be drawn down to take care of the IRS settlement when it happens. And with respect to the convert, I mentioned we'd address it in the coming two quarters.

David Goeckeler:

Thanks, Joe.

Operator:

Thank you. [Operator Instructions] Our next question is going to come from the line of C.J. Muse with Evercore ISI. Your line is open. Please go ahead.

David Goeckeler:

Okay. Hey, C.J., right? C.J., that was very -- it was a little tough to hear you there, but I think we got the gist of the question, which was supply demand normalization. Is that right in Flash?

David Goeckeler:

No, that's right. Okay. So look, I think as I said, there are a number of things we saw in the market. This quarter we saw sequential bit growth overall, we saw clients and consumer returning to exabyte growth on a year-over-year basis, with consumer SSD content up 40%, client SSD up 20%. We saw our inventory down. We think in the client -- in the consumer and client markets, PC markets basically shipping to demand at this point. We expect our -- for the fiscal year, we saw our bits about flat year-over-year. For the calendar year, we see them down low-single-digits. We probably see the industry down a little lower than that. So we're taking the actions to bring supply and demand better into balance, and I think we're seeing that across our markets. Cloud is still -- there's still a couple of quarters ago, there that's a larger story, but in our two biggest markets for Flash, we're seeing that supply-demand balance start to move closer together, put it that way.

David Goeckeler:

Okay. I think that was the strategic review and timing, C.J. So as the process is active, we look forward to talking more about it when we reach a conclusion.

David Goeckeler:

Thank you.

Unidentified Analyst:

Thank you, guys. This is [Michael] (ph) on behalf of Aaron. I wanted to ask, how are you guys thinking with the recent uptick in AI investment in the data center? How do you think that impacts the mix of Flash relative to HDD capacity being deployed, or maybe how that would impact you going forward? And then kind of related to that, how -- are you guys -- can you guys just give us an update on where you stand with your enterprise SSD qualifications? Thank you.

Unidentified Analyst:

I appreciate that. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question is going to come from the line of Tom O'Malley with Barclays. Your line is open. Please go ahead.

David Goeckeler:

Yes, I think as we moved, you know, so first of all, we think we're going to see sequential exabyte growth in capacity enterprise HDD throughout the fiscal year, but it's going to be towards the end of the year, end of the first quarter where we start to get line of sight to all of the customers coming back. I think we're having discussions across all of our customers about what they're -- we always have conversations, but some of the big ones have been in inventory digestion for quite a while. So we're getting better line of sight to the end of that. But I think we still have a couple of quarters to go, but improving I think next quarter things will be stable. It will be a bit of mix impact there. We expect client to be a little bit more challenged in this quarter. But I think as we move throughout the year, things will get better. And I think your timing of a couple more quarters of getting through phase and as we get into early next year, we expect things to look better.

David Goeckeler:

Yes. Pricing really starts with innovation. I mean, I think that's where we -- we're staging our 28 T Ultra SMR product. We're really happy with where Ultra SMR is at. EPMR opting in and we're already staging our next product for growth there. That's the underpinnings of where we're able to bring a better TCO proposition to our customers. And as we do that, we're able to share in the benefits of that as those drives gets deployed. The rest of the market is more market driven pricing. We have a lot of different channels, a lot of different markets we sell into. And that type of pricing is just is more of what you would typically think in any big market around supply and demand.

David Goeckeler:

Thanks, Tom.

Krish Sankar:

Yes. Hi, thanks for taking my question. I told them personally with some Flash side [Technical Difficulty] and June was [Technical Difficulty]. Just so that the pricing should improve after or revenue should improve after December. Is that a function of overall NAND pricing getting better, or your specific exposure to retail and PCs above BU? And then I have a follow-up.

Peter Andrew:

Yes. Sorry. Sorry, Krish. Could you please repeat?

Q – Krish Sankar:

I apologize. I was just trying to figure out the pricing [Indiscernible] in June. We spoke about the revenue improvement. Is it a function of NAND pricing improving or just statistic [Indiscernible] your targeted retail and PC is going to get better?

Krish Sankar:

No, no. I think it does. It does. I was just trying to figure out the specific and verticals, which is PCs and retail.

Krish Sankar:

Got it. Thanks David. And then a quick follow-up on hard drive. You said that you're sampling the 8-terabyte ePMR. Is the 32 terabyte ePMR still on your road map? And are you like doing that by increasing the number of disks per drive? And how do you think about the gross margin [Technical Difficulty] to terabyte?

Krish Sankar:

Awesome. Very good update. Very helpful. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is open. Please go ahead.

David Goeckeler:

Hey, Wamsi. So first of all, yes, I mean, you hit it. I mean we have ongoing and very significant conversations with our customers on a -- many quarters out, so that's what gives us -- that's what underpins the view we have. To your point, things can change, but that's the current view and the conversations are productive and positive. On the build, the order comment, look, I think the industry is going to come out of -- well, let me speak about us. So Western Digital will come out of this downturn. It's a pretty severe downturn in a cyclical industry, but we've done a lot of things that I think the business is going to be different on the other side of this. So first of all, we've taken a significant amount of capacity out-of-the system. We've talked about the shifts from client to capacity enterprise, at least as long as I've been here and it's been going on for many, many years before that. I think that transition is going to be essentially done. There is a long tail on any technology, but if you look on a unit basis, we'll come out of this with significant less spending on our infrastructure. We'll have the lowest fixed-cost we've had in a decade-plus in our HDD infrastructure, and we'll really be focused exclusively on that client enterprise business going forward. That's not a -- we still have a client business. Don't get me wrong. It's still going to be there. Like I said, there's a long-tail of technology. But I think as part of that, the industry will come out and we will come out of this as more of a build-the-order, if you will, as opposed to a build to forecast. So that's why we're having these conversations with our customers because it is a it is a long build time on an HDD, and we want to make sure that we've got the infrastructure in place. We've got the components in place, and we're running the right process to deliver what our customers need at the right time. So I think that maybe the short answer to your question is yes, Western Digital will be -- is going to more of that kind of process.

Wissam Jabre:

Sure, Wamsi. So when you look at the September quarter, the guide at $200 million to $220 million of underutilization charges and they're split roughly 70% Flash, 30% HDD. And I would -- just to clarify also to add with respect probably to the following quarter. I expect -- sorry, underutilization related charges to be let's say, 5% to 10% down and most of the -- if not all of the decrease would be coming from HDD.

Wissam Jabre:

You’re welcome.

Operator:

[Operator Instructions] Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. Please go ahead.

David Goeckeler:

Yes. What I would say is the it's always a very robust conversation given the amount of business we do with the hyperscalers. It's clear that some of them have been in a very severe inventory digestion phase and kind of took a pause on buying anything, but we're back to having conversations with those customers. I mean, they're still growing. And storage is still being created and growing. So we expect those conversations in those businesses to the buying will reemerge and we're having the conversations on when that will happen and in what magnitude just to make sure that we've got all of our capacity aligned to deliver that. I think we're getting very good reception on the product road map. As we talked about our 22, 24, 26 terabyte platform and products have now been qualified by all of the major cloud vendors. We're just -- we expect to ramp those significantly, especially the 26 T next quarter. That's really becoming a major capacity point for some of the biggest cloud builders. And right on the back of that, we're launching a 28 T UltraSMR drive. So the conversations are strong, and it's about making sure we have clear alignment on what their requirements are going to be and that we get the proper manufacturing in place to deliver on that.

David Goeckeler:

SMR, it's very idiosyncratic. I mean the intersection of adoption and inventory digestion makes it very lumpy. And if you look at the current quarter or last quarter, but I can say going forward that several of the major cloud providers are standardizing on an SMR deployment, UltraSMR for us, and we expect have a significant ramp of that technology over the next several quarters.

David Goeckeler:

Thank you, Sidney.

Toshiya Hari:

Hi, guys. Good afternoon. Thank you so much for taking the question. I had one clarification and then a question. David, on NAND ASPs for the current quarter, I guess you talked about bids being up double digits sequentially, and you're kind of guiding revenue to flat sequentially. So I guess, the implied ASPs are down perhaps a little bit more than what they were down in the June quarter, but you talked about moderation. So is the sharper price decline in September that's implied in guidance or embedded in guidance, primarily a function of mix? Or am I missing something there?

Toshiya Hari:

Okay. Got it. And then as my follow-up, maybe one for Wissam. You mentioned that for fiscal '24, you plan to cut CapEx significantly. Curious if it's purely impacting your capacity decisions in NAND? Or are there any changes or shifts to how you think about the road map? And related to that, I think on a bit shipments, David, you mentioned for calendar ‘24, you guys are going to be, I think, down low single digits. But how should we think about bit production in calendar '24, given the CapEx and production cuts that you're going through right now?

Wissam Jabre:

Thanks, Toshiya.

Shannon Cross:

Thank you. Thanks for taking my question. I'm wondering, you have any unique perspective having both HDDs and SSDs. There's commentary coming out of Pure, and I'm hearing more from some of the other storage vendors of a growing use of or cloud within data -- or sorry, growing use of SSDs within cloud and data centers and almost like a potential secular shift. Again, Pure takes it kind of to the extreme. But I'm just wondering how you think about how the mix will trend over time, maybe layer in AI, if you want? And just think about [Technical Difficulty] we should worry about what are you hearing from your customers? And then I have a follow-up. Thank you.

Shannon Cross:

Okay. Great. And Wissam, can you talk a little bit about OpEx? How you're thinking about it relative to maybe a more normalized level? And how much loan for the model as revenues come back before you have to start spending more from an OpEx perspective?

David Goeckeler:

Michelle, can we have the next question please?

Timothy Arcuri:

Thanks a lot. I had two, Wissam. The first one is on underutilization charges. And it's kind of like a two-part question. So the first is what's the current utilization in NAND? And then on the HDD side, is there kind of a mild post as to where these could start to go away? Because you're guiding $70 million for September for underutilization in HDD. It sounds like it goes to maybe 60 to 65 in December quarter. But when does it go away because you started to take underutilization charges. I think when HDD revenue went sub $2-billion per quarter. So do we have to get all the way back to $2 billion a quarter to have those HDD underutilization charges go away?

Timothy Arcuri:

Thanks a lot for that, Wissam. And then just on the debt service cost. So you have the convert due in February. I think that's at a pretty good rate. I think it's at 1.5%. So the debt you're going to replace that with, I imagine, is going to be pretty expensive. So it seems sort of -- I guess my question is sort of where does that leave you in the cap structure? Obviously, it seems like debt service costs are going to go up maybe $20 million a quarter once you have to issue new debt for that. So can you just talk about sort of how you solve for all that? Thanks.

Timothy Arcuri:

Thanks a lot, Wissam.

Ananda Baruah:

Yes. Thanks, guys. Appreciate you taking the question. Thanks so much. Really just -- two quick ones, if I could. When would you expect 26 terabyte and maybe I'll even through 28 in there since you mentioned it, David, there each crossover. And then I just have a quick follow-up to that. Thanks.

Ananda Baruah:

Thanks for making the distinction. That's actually really helpful. And the follow-up is, do you guys have any view yet, any opinion, on when things normalize out in hard drives, if the hyperscalers return to what their classic utilization levels have been historically, how they run the capacity? Or do you think they settle in somewhat different on the utilization?

Ananda Baruah:

Right. That’s awesome. Thanks a lot.

Operator:

Thank you. And our last question is going to come from the line of Karl Ackerman before we have a short statement by our CEO.

David Goeckeler:

So units, I expect to recover, right? I mean we're going to get exabyte growth. We're at a low point on units. We expect units to recover and get back to where they were and eclipse that actually as we continue to get exabyte growth. I'll put in say, a once again, I am very excited about generative AI. I know everybody is. But I think it's going to come to our world on storage once all this gets deployed. And so I expect to see units recover. I think the build-to-order process is going to be a fairly straightforward process because we have deep relationships with set of customers here. It's a big market. It's a big relationship. And I think it's just getting the business model to a place where there's better alignment between the infrastructure we have in place. Again, we've been talking about this for many years now that in a lot of ways, cloud has significantly benefited from the reduction in client and there's been a consistent availability of infrastructure to build hard drives. And we're at the end of that transition now, so we have to just have more planning around that. I think the long-term agreements were a step into that. I think this is maybe the next step into how do we run our franchise to make sure we've got the best alignment between delivering a great product and value proposition to our customers, which is extremely important, the storage is an incredibly important part of the data center and making sure that we have the right infrastructure in place to fuel that growth. So I expect it to be a pretty natural change or evolution of the business model, and I expect it to be a very positive on all sides. Thank you, Karl. All right, everyone. Thanks for joining the call. We look forward to talking to you all throughout the quarter. Take care.

Operator:

Good afternoon, and thank you for standing by. Welcome to the Western Digital’s Fiscal Third Quarter 2023 Conference Call. Presently, all participants are in listen-only mode. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Peter Andrew, Vice President, Financial Planning & Analysis of Investor Relations. You may begin.

David Goeckeler:

Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our 2023 third quarter results. Western Digital’s third quarter performance exceeded expectations with core metrics at the high-end of our guidance range, demonstrating the company's resilience in a challenging market environment. We reported third quarter revenue of 2.8 billion non-GAAP gross margin of 11% and a non-GAAP loss per share of $1.37. Over the last several years, our team is focused on enhancing business agility and delivering a range of innovative industry leading products that address the increasing data storage demands of our customers. The groundwork we laid combined with the actions we have taken since the beginning of this fiscal year to right size and refocus our business have enabled us to navigate a dynamic environment. I am pleased that we delivered non-GAAP gross margin at the higher-end of our guidance range due to strong execution across both our HDD and Flash businesses. In HDD, our early actions to streamline our manufacturing footprint and focus our product offerings on delivering the best value for our data center customers have resulted in gross margin upside and profitable market share gains in HDD. In Flash, our broad go to market strategy anchored on our enviable retail franchise in a strong client SSD portfolio enabled us to optimize bid placement and bolster gross margin. During the fiscal third quarter, we saw signs of demand stabilizing across various end markets. In consumer, Our flash and HD results were consistent with the expectations we shared in January. In client, demand for each major product area came in better than we expected across PC OEM, channel, mobile and gaming. In cloud, demand for capacity enterprise hard drives improved whereas the demand for flash drives was consistent with our expectations set in January. Before I jump into updates on our HDD and Flash businesses, I would like to reiterate that the strategic review process is ongoing and we will provide updates as we have them. I'll now turn to the business update starting with HDD. During the fiscal third quarter, our HDD revenue improved sequentially with growth in capacity enterprise offsetting seasonal declines in retail and client. During the quarter, our 22 terabyte CMR drive became the highest volume product among all of our 20 terabyte and above capacity points. Demonstrating our leadership position at this capacity point. In addition, we expect the complete qualification of our 26 terabyte Ultra SMR technology in the fiscal fourth quarter. These innovative products provide multi-generation benefits to our customers. Turning to Flash, total exabyte shipment came in higher than expected in consumer, mobile, PC OEM, and channel products. Despite the industry experiencing the worst downturn in over a decade, Western Digital delivered positive product gross margin, excluding underutilization charges, driven by our unique combination of premium retail brands, broad go to market channels, and low cost flash supply from our joint venture fab with Kioxia. Furthermore, we continue to see encouraging signs of price elasticity driven content growth in retail flash led by WD Black, SSD optimized for gaming, as well as mobile PC OEMs and channel within client. On the technology front, BiCS6 achieved its anticipated cost crossover during the quarter. Moreover, on March 30, Western Digital and Kioxia announced our next generation BiCS8 node, a groundbreaking technology that builds upon the success of BiCS5 and BiCS6. This new technology is based on circuit bonded to array architecture, which provides several benefits, including reduced cycle time faster yield ramp, better or lateral scaling, and industry leading IO performance when compared to products based on circuit under array architecture. We continue to aggressively productize BiCS8 for a broad range of applications, which will position Western Digital for success as business conditions improve. As we look to the fiscal fourth quarter, in hard drives, overall demand will be impacted by ongoing inventory digestion at cloud customers and a sustained decline in client. However, we are beginning to experience improved demand at certain customers in China. In Flash, we are seeing signs of stabilization and content increase per unit. PC OEMs have emerged from inventory digest and are now shipping closer to end demand. Gaming will remain strong, while enterprise SSD for cloud applications will remain soft. We anticipate modest growth in bit shipments into the fiscal fourth quarter. Before I hand the call over to Wissam, I would like to thank the Western Digital team for the response efforts they made in addressing the network security incident we disclosed on April 2nd. Our team took proactive and precautionary measures to secure our operations and successfully executed on our business continuity plans. With that, I'll turn it over to Wissam.

David Goeckeler:

Thanks, Wissam. Over the past few quarters, we have successfully ramped a series of industry-leading storage products and commercialized innovative technologies, while concurrently rightsizing our cost structure. Our proactive actions have positioned Western Digital favorably for the future as demand gradually returns to normal levels. In closing, I would like to thank our team members for their unwavering commitment in advancing innovative products and driving operational efficiency. Their exceptional efforts have allowed Western Digital to deliver in [Technical Difficulty] to the dedication and support of our people worldwide, and we remain committed to upholding the highest ethical standards in all that we do. Okay. I look forward to your questions. Let's open it up.

C.J. Muse:

Yes, good afternoon. Thank you for taking the question. I guess I'd love to get a sense for where you're seeing demand stabilize versus where you still see pockets of inventory? And as part of that, I guess embedded in your revenue guide, it looks like you're kind of suggesting HDD down maybe 10% to 15%, SSD down 5% to 10%. So, I guess is that kind of the right way to think about it? And then as part of that, where do you think we're seeing stabilization and where do you think we need to work down inventory some more?

C.J. Muse:

Very helpful. And as a quick follow-up, can you kind of walk us through what you're thinking today in terms of underutilization charges beyond the June quarter?

Wissam Jabre:

And just to add – C.J., sorry, just to add a bit more color, I think we – in our guide, we're estimating around [220 to 240] [ph], the range of underutilization charges. And by business, this is roughly two-thirds Flash, one-thirds HDD or one-third [SSD] [ph].

David Goeckeler:

Thanks, C.J.

Joe Moore:

Great. Thank you. You mentioned that you're taking lower cost for market charges on NAND, can you talk about the methodology there? Is that – do you pool that and then take a charge overall or is it anytime any individual product falls below the market price you adjusted down?

Joe Moore:

Got it. Okay. Thank you. And then in terms of the underutilization charges and things like that, do you know how the covenants are going to be defined? Are you going to be able to remove those charges from the EBITDA number as defined in the covenant?

David Goeckeler:

Okay, great. Thank you very much.

Operator:

The next question comes from Aaron Rakers from Wells Fargo. Please go ahead.

Wissam Jabre:

So Aaron, we typically factor into our guidance all the expectations. And when we exited Q3, like a typical quarter, we do our reserve reviews and we take the – we make sure that the balance sheet properly stated. And so based on our forecast, everything is baked into the guidance. Typically, we have a small amount in the guidance just like we did also in the past quarter.

David Goeckeler:

Yes, I mean, I think there's always price pressure in this market Aaron, but we've been very disciplined about the value of our products. I think you – one of the things we feel very good about is, we've been investing in our HDD roadmap, things like OptiNAND, ePMR, UltraSMR, these products are really now starting to ship in volume. We talked about the 22-terabyte CMR drive was the highest volume drive at 20 and above. So, we feel very good about where the portfolio is, about where it's going. We've got a number of very large customers qualifying SMR right now. That's clearly the next step in the data center, our UltraSMR product there, the 2016, we talked about we'll finish up calls this quarter and start deploying next quarter. So, we feel like we've got a portfolio that is aligned with what the market needs. And that's showing up in, kind of how we're able to monetize that portfolio and not have to compete on price. So, future technologies like HAMR will be there. We're still are ways away before that product is going to be a volume type product. The volume products are the 22s going and then SMR are going to be the big volume products over the next couple of years and after that we'll get to HAMR. We feel confident about that technology. It's been in development for a long time. We're in the final stages of it as an industry and I think everybody is excited that it will be the roadmap for 30 and above when we need it.

Operator:

Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead.

David Goeckeler:

Yes, we've been very transparent about that incident. When we noticed it, we let folks know, we took our – we basically disconnected ourselves from the public Internet to protect ourselves and then restore the environment. We still have capabilities inside the companies and the factories were operational throughout that. Clearly, a tremendous amount of work by the team, but we feel like we're nearly all the way back now as far as operation. We got to bring the store online in here in another week or so, but it was really, really good to see our business continuity plans, you don't want to rely on them too often, but when we had two, they were there and they kept the company moving forward.

Wissam Jabre:

Sorry, Sidney. I just wanted to add that for fiscal Q3, we don't have any impact in the numbers to the network security.

David Goeckeler:

I would say, we have – I mean obviously we have very robust conversations with our customers all the time. I wouldn't pin the tone of conversations on to how any one particular player in the market is acting or what they're doing. We stay very focused on our business. As far as where is the bottom, I mean we expect the market to come into balance as we go through the second half of the year. I think we're clearly taking a lot of actions in our own business to closely manage it, supply and demand. Keep the utilization of the fab close to where demand is. So, we manage our inventory. Clearly, we're going through one of the most severe downturns in a while, but we think as we move through the second half of the year the market will come into balance.

Operator:

Our next question comes from Mehdi Hosseini from SIG. Please go ahead.

Wissam Jabre:

Yes, we typically don't break that out as much on the call. This is a bit too much detail, Mehdi, for me to discuss here. The one comment I would make though, when we think of inventory, our operations team is really focused on minimizing where we can. So, we basically try to stage it in the places that makes the most sense from a demand perspective.

Wissam Jabre:

I mean, the inventory write-down typically is, it's really based – the ones that was, for instance, I called out is based on basically the inventory value relative to where the market price is. And so, if – when prices decline by a lot, then we do have to take a closer look and see if there's any impact, but that's what I would say about that.

Wissam Jabre:

What I'm saying is, we – what I'm saying is, at the end of every quarter our balance sheet is properly stated because we do look at where the inventory value is versus where the demand is and the prices are most particularly at the finished good level. And so, where we see differences we have to adjust our inventory value, otherwise it is properly stated. I guess your question is more around trying to predict where the price is going and we typically don't necessarily do that.

David Goeckeler:

We're doing analysis on that, Mehdi. What I would say is, to me – I'll even go a little longer-term, bigger picture. This just reinforces the value of stored data. I think that it just seems like there's this constant ways for people can figure out how to use all the data they've stored to do very productive things with it. And I think the latest is training these AI engines. And so, we just think it's another element of the long-term value of data storage and it's just a big secular tailwind for the HDD business and the enterprise SSD business. I mean, again, you know that they're both – they both have big TAMs in the data center, and they're both growing. And we think this is another reason why people will store more data is because they can monetize it in different ways in the future.

David Goeckeler:

I think it will – HDD is the lion's share of storage in the cloud. So, you would expect that's where the bigger lift would be across those two technologies.

David Goeckeler:

Thanks Mehdi. It’s good to talk to you as always.

Shannon Cross:

Thank you very much for taking my questions. My first is, as you look at what you're doing on OpEx in terms of holding in cost, how do you think about the – how you're – where you're investing? And how are you making those decisions? And how should we think about potential impact to future projects at this point? And then I have a follow-up. Thank you.

Shannon Cross:

Thank you. That was helpful. I'm curious – and maybe I'm trying to make lemonade out of lemons. But I'm just wondering, as you've cut capacity on the HDD side, and you've had these underutilization charges, are there things that you've learned in terms of maybe how you manufactured in the past ways to drive incremental productivity? I'm just thinking it's kind of – it's certainly a unique time to maybe take a step back and look how things are – how things have been done and what you can do in the future? Thanks.

Wissam Jabre:

Yes. I mean the one thing I would add also, in addition to what David said, some of the activities that we drive in terms of the manufacturing side are taken back into the development organizations to think about things that come on platforms and the ability to improve on the way our products are designed for manufacturing efficiency, even increasing manufacturing efficiency going forward. And of course, with that comes a better cost structure.

David Goeckeler:

Thanks, Shannon. Appreciate it.

Krish Sankar:

Hi, thanks for talking my question. David, first question is on your NAND ASP decline in March quarter, seems to be better than what your competitors had. I'm just kind of curious, any puts and takes if you talk about your specific pricing versus competition in March, how to think about it in June? And along the same path, you mentioned the supply-demand balance later this year and bit shipment for flash growing. Are you baking in some, kind of a mobile recovery that's going to help you drive that? And then I have a follow-up.

Krish Sankar:

Got it. Got it. Thanks for the dividend. And then as a follow-up on the HDD side, it's kind of nice to see the 22 terabyte CMR is now bigger than 20 terabytes in terms of volume. How should we expect that to grow? And what is its impact on gross margin?

Krish Sankar:

Got it. Thanks David.

Operator:

Our next question comes from Wamsi Mohan from Bank of America. Please go ahead.

David Goeckeler:

I think the elasticity in NAND is mainly what I was talking about. I mean, we're seeing PC OEM up mid-20s year-over-year on capacity. I think a really interesting number to me is the elasticity across our consumer franchise, which is tens – hundreds of millions of devices we sell a year in that channel up a third year-over-year on capacity per unit. Gaming up more than that, and mobile up even more than that. So, I think we're seeing the market work. Even in the midst of a great downturn, you expect – well, especially in the midst of a great downturn, you expect to see elasticity start to kick in, and we are starting to see that across the portfolio. What was the second part of the question, again?

David Goeckeler:

Prebuying. Yes. I think you do see – I think we are seeing instances of that. I wouldn't say it's pervasive, but we see instances of it. And I think it – I think maybe it's a sign of where the customers think we are in the cycle as well.

Wissam Jabre:

Yes, [real close] [ph]. So, we are totally focused on free cash flow. As you've seen us since the beginning of the year, we've been very proactive on OpEx, reducing that quite a bit on CapEx, as well as taking underutilization to manage and preserve our cash and not build inventory. And so, this is very important to us. In fact, we continue to make improvements. I mean, if you look at our CapEx trend, it's gone down quite a bit. This year, we'll probably be spending approximately if not even more than 35% below last year. With respect to the next few quarters, we typically do not guide for free cash flow. But what I could say is that this is, as I said, a top priority for us and is a big focus, as you would imagine, as we navigate the dynamic environment.

David Goeckeler:

Thank you.

Operator:

The next question comes from Tom O'Malley from Barclays. Please go ahead.

David Goeckeler:

Yes. I think, Tom, it's – I would say as we go through the second half of the year, it will get better. The issue is that these revenue levels and these unit levels, it's just very lumpy. You have very large customers that if they buy or not buy, it can impact the TAM and the available market in a very significant way. So – and that's what we're experiencing next quarter. I mean, this quarter, we saw things were a little better than we thought on capacity enterprise shipments. We'll see a sequential decline in that, and then we're expecting to go back up as we go in the second half of the year. But I expect it to be lumpy as we go through this inventory digestion because a lot like we saw in the PC OEM space, a lot of customers are just completely focused on inventory digestion, which is basically new purchases just go to zero. And customers at this scale with this, kind of business that has an impact. So, I expect to see a lumpiness over the next several quarters. I do have a level of optimism about China in the second half of the year. We're seeing better activity there. And so, we expect to see that improve in the second half of the year as well, which should also help the business.

David Goeckeler:

I guess I would say that customers that are different segments of the market that are through their inventory digestion are now more or less shipping to end demand being lean on inventory. There are instances of people doing strategic buys in that – in some of those cases where they've got their inventory to where they want it, but now they're making their own – they have their own view of the cycle. That's a very small number, I would say. And then the other one is just – where they're at in their – the data center customers especially are just in – there's a variability of the level of inventory at each customer, and they're so big that it can impact the entire market. So – and like I said, ones that have heavy inventory are basically working that down in an aggressive way. And so, I think it's going to – like I said, I think it will be lumpy for a couple of quarters until we get through that.

David Goeckeler:

Thanks, Tom.

Toshiya Hari:

Hi, good afternoon. Thank you so much for taking the question. David, three months ago, you mentioned that you were cutting production in your NAND business by 30%. I'm curious if the magnitude of the cuts today are, kind of in that ZIP code, if anything has changed materially? And going forward, what would you need to see to start taking up your utilization rates in the Flash business?

Toshiya Hari:

Got it. That's helpful. Thank you. And then one follow-up for Wissam on the balance sheet side of things. I know you don't guide free cash flow on a quarterly basis or annual basis, but just curious how we should be thinking about inventory, whether it be dollars or days, going into the June quarter and working capital overall. Is that going to be a consumer of cash in the June quarter or do you think you can generate some cash from working capital? Thank you.

Operator:

Our next question comes from Harlan Sur from JPMorgan. Please go ahead.

David Goeckeler:

Yes. Thanks for the question, Harlan. Always good to hear from you. We've talked about this quite a bit over the last year. It's about qualifying the products at the big players, qualified in the channel. We just qualified this last quarter on BiCS5 enterprise SSD with some of the biggest customers. So, the road map is moving forward as we expected. It's just a very dynamic market right now. So, it's difficult to judge share. Obviously, our goal is what we've put out there is to drive that higher. And I have every confidence we'll do that as the market stabilizes and some of these big customers get back to their normal rates of purchasing.

Srini Pajjuri:

Yes, thank you. I have a question on the cost side, Wissam. So, it's a little tricky to figure out given all the, I guess, one-time charges. I'm just wondering, you previously talked about NAND cost declines in the mid-teens, I believe, just wondering if you're tracking to that. And then as we go to BiCS8, how should we think about the cost declines, especially – I guess, historically, we've had 30% to 40% bit demand growth. And going forward, if that dynamic changes, if it's lower than 30%, do you think we can still, kind of get to that mid-teens cost declines or do you need the 30% to get to that level?

Operator:

Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead.

David Goeckeler:

I think we see the enterprise and the cloud market. They're both soft right now. So, we don't see a huge difference between the two. Again, the difference is, Karl, that you got this idiosyncratic behavior at really big customers. So, a customer that usually buys a significant amount of hard drives in a quarter, hundreds of millions of dollars goes to zero. You can pretty much assume they're buying under replacement demand. So, that's kind of where we're at. We just – again, other customers are going along more according to plan. So, the inventory level is a bit distributed across big customers. So, we look at this quite a bit to understand like where do we think the exabyte growth is and where are we setting the – our long-term production capabilities and all of that. But right now, it's just a little difficult to draw long-term conclusions and some of – a little bit behind some of your question, given just the way the market is – the lumpiness of the market.

Vijay Rakesh:

Hi. Just a quick question. I don't know if you talked about Elliott strategies, and I think they had filed some – they had some filings, but just wondering how that process is progressing? I don't know if you can talk to it.

Operator:

Our last question comes from Ananda Baruah from Loop Capital. Please go ahead.

Wissam Jabre:

Yes, Ananda. With respect to the 1.1 billion of convert due in February 2024, the plan is to address it over the next couple of quarters.

Operator:

Yes, that was the last question.

Peter Andrew:

Thank you.

Operator:

Good afternoon, and thank you for standing by. Welcome to the Western Digital Fiscal Second Quarter 2023 Conference Call. Presently, all participants are in a listen-only mode. [Operator Instructions]. And as a reminder, this call is being recorded. Now I will turn the call over to Mr. Peter Andrew. You may begin.

David Goeckeler:

Thank you, Peter. Good afternoon, and thank you for joining the call to discuss our 2023 second quarter results. The Western Digital team worked diligently within a dynamic market and delivered revenue at the high end of the guidance range we provided in October. We reported second quarter revenue of $3.1 billion and non-GAAP operating loss of $119 million. Our non-GAAP loss per share was $0.42. Our ongoing efforts to control expenses, optimize working capital and deploy capital judiciously helped us manage cash flow amidst a challenging flash pricing environment and larger-than-expected ACD underutilization that pressured gross margins. Before we discuss the details of our second quarter results, I wanted to cover two other announcements that we are making today. First, we disclosed that Western Digital has entered into agreements with Apollo Global Management and Elliott Investment Management for convertible preferred equity investments totaling $900 million. In connection with the agreement, Reed Raymond, a partner at Apollo, will join our Board starting immediately. On behalf of the Board, I am pleased to welcome Reed, a leading technology investor who will provide us with additional financial and strategic expertise, which will be critical as we continue to execute on our business strategy and complete our strategic review. Second, on January 25, we secured access to $875 million of financing through a delayed draw term loan. When combined with the actions we undertook to structurally lower our cost structure, these financings provide valuable financial optionality and flexibility to Western Digital as we continue our strategic review. Regardless of the outcome of the strategic review, our goal is to ensure the business is in a solid financial position to invest in innovation and create long-term shareholder value. Given the ongoing nature and confidentiality of the process, we will not be answering any questions about the strategic review process or making comments on market rumors. We will provide updates as we have them. Over the past three years, we have worked continuously to reinvigorate innovation and bolster business agility for both our flash and HDD organizations, which enabled the Western Digital team to stay ahead of the market. Over the same period, we paid down $2.7 billion in debt and arranged for settlement of a long-standing tax dispute. Since the beginning of fiscal year 2023, we have taken additional actions to reset the business in response to the post-pandemic environment. These actions include

David Goeckeler:

Thanks, Wissam. Before we open up for questions, I wanted to reiterate our view of the long-term opportunities for both Flash and HDD storage. Importantly, our efforts have enabled us to regain architectural leadership in both Flash and HDD, and we are preparing these technologies to address the meaningful long-term growth for data storage from client to edge to cloud. With our diverse portfolio, broad go-to-market engine, an enviable retail franchise and a lower cost structure, we remain confident in our ability to deliver long-term shareholder value. Okay. Peter, let's open up for Q&A.

C.J. Muse:

Yes, good afternoon. Thank you for taking my question. Obviously, we're kind of in a perfect storm here. But curious, as you think about maintaining your technological competitiveness in the NAND side, while at the same time, significantly slowing down CapEx for both you as well as what we've heard from Kioxia for BiCS6. I guess, how do you balance those two things? How do you set the stage into a recovery and maintaining that leadership? And how much longer can you squeeze the requisite kind of 15% cost down out of BiCS5.

C.J. Muse:

Very helpful. If I could follow up, Wissam, can you confirm that for the March quarter is just $150 million incremental underutilization charges? And then how are you thinking about that rolling off through calendar '23. Thank you so much.

Operator:

And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

David Goeckeler:

So first of all, let me talk about the kind of how we're thinking about it. It is a very dynamic situation. I think when we were looking at our CQ1, we've seen some demand drops. We've come off a very strong quarter of bit growth. We just delivered 20% sequential bit growth. That's why we didn't cut wafers earlier. When we look at our fiscal Q3, we're seeing some drop in both client and enterprise. The enterprise SSD side of it is more a digestion issue. So, to make sure we manage our inventory and we don't get things to build up. And so that's why we're -- we've decided to cut wafer starts in the first quarter. Again, as Wissam said, that's a -- it's literally a decision we can make every week about how do we load wafers into the fab. Right now, that's a one quarter decision to make sure we keep our supply and demand balanced as best we can. I see Wissam looking up -- do you have a number on the overall bit growth for the year.

Aaron Rakers:

That's helpful. And then as a quick follow-up, on the hard disk drive side, I mean, looking at 61 exabyte capacity shift, that's down 40%, 45% sequential. What gives you the confidence that, that's just a transitory digestion thing? And maybe there isn't anything going on competitively? Just any kind of visibility you want to share in that business?

Aaron Rakers:

Thank you, David.

Joe Moore :

Thank you. I just wanted to make sure I understood the mechanics of the underutilization charge. Is that sort of the cost of just higher cost per bit because you're running underutilized? Or are you -- I mean it sounds like you're pulling some of that forward in time, but maybe not all of it. Can you just talk about what exactly that charge will represent and how that's going to play out this quarter and next?

Joe Moore :

Okay. It does. I guess, how are you guys thinking about the signals of like when that goes back to full utilization? I mean do you wait for pricing to stabilize? Or is there something you can see beforehand that will tell you and it's time to kind of keep to move the fab back to full.

Joe Moore:

Great. Thank you very much.

Unidentified Analyst:

This is Jason on for Tim from UBS. I have a couple of questions. So, my first question is on your -- on the NAND segment. Sorry if I misunderstood, but I believe you said single-digit bit growth for NAND in calendar year '23. So, I was just curious which end markets are driving this demand weakness this year. Also, I was just curious whether we should expect any potential risk for NAND inventory write-downs in March quarter or June quarter. Thank you.

Unidentified Analyst:

Got it. Thank you. And my second question is, apart from your comment on the utilization charges, do you guys also see any potential additional risk or purchase order cancellation fees for any type of pay agreements you have with your suppliers if it remains weak in the near term? Thank you.

David Goeckeler:

Yes. Again, going back to Wissam's prior comment, that's part of our normal quarterly close process. And if there were any adjustments that were needed to be made, we would have made them at that time. But of course, you got to remeasure it and take a look at it every quarter.

Krish Sankar:

Hi, thanks for taking my question. To first one, David, you mentioned nearline HDD could improve. I'm kind of curious how to think about pricing trends for nearline HDD in the March and June quarter? And also think about the nearline exabyte growth in the first half of this year in calendar '23 overall. And then I had a follow-up.

Krish Sankar:

Got it. Very helpful. And then as a follow-up, just kind of curious, you mentioned the cloud inventory digestion. And you also mentioned that for HDD in March, the cloud business stabilized. So curious on the NAND side or even HDD side, when do you expect this digestion to bottom? And then when you think things start improving from a demand standpoint or maybe your own inventory standpoint. Thank you.

Operator:

And our next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Wissam Jabre:

Well, let me start with the answer, Wamsi. When we look at our inventory exiting the fourth quarter, our inventory appears to be in a better position than our peers. And so obviously, when we consider the utilization and where the demand is and the improvement in demand over time on the HDD side, that's really what drove my comment. And so, based on what we see today, this is how we anticipate things to unfold.

David Goeckeler:

Yes. It's a number of things. So first of all, it is to give us the flexibility to manage through the depths of the downturn. It's important that we look at -- we have a blend of different kind of financing, both debt and equity. We can't just take all debt. We've got to watch our debt to equity our EBITDA to debt ratios and make sure we manage it all as one package. And I think so that's part of it. A big part of it is kind of facilitating the execution of our strategic review. These. You'll see in the 8-Ks that are filed. These agreements are very complicated and they're very well thought through to give us the ability to execute a range of outcomes and make sure that we can be in a good position as we move to that stage of the process of not putting a time line on that, but these are set up in a way that give us a lot of optionality and flexibility to facilitate that outcome. And then third thing it brings additional capability to our company. Reed Raymond is a very sophisticated technology investor that will join our Board. Elliott will have the right to join our Board under an amended letter agreement with them when they clear some issues at their choice. So, it brings a lot of capability to us as well. So, we feel good about people investing in the business about the opportunity to do this, and it puts us in a very strong position to continue to execute the business, invest in innovation as well as set ourselves up for the next phase of our strategic review.

Shannon Cross:

Thank you very much. I have a follow-up to the last question and then an additional question. I just want to -- should we assume that you're not going to initially draw down the term loan that you have and that's kind of an insurance policy? And how should we -- I'm just trying to figure out interest expense on that. And then I have a follow-up.

Shannon Cross:

Okay. Thanks. And then I'm curious, what changes are you looking at to get down to OpEx at about $600 million a quarter just as you look across your cost basis? Thank you.

Operator:

Our next question will come from Tom O'Malley with Barclays. Please go ahead.

Wissam Jabre:

So, Tom, maybe I'll start with the latter part of your question. as we're guiding for a share loss for this quarter, including the dilution of the preferred -- the convert would be anti-dilutive. And so that's why you don't see them reflected in the share count. However, as we swing to a profit, I would expect us to include them as part of our fully diluted share count. So, they'll have some limited dilution impact.

David Goeckeler:

Yes. I think one of the things we're seeing is one of our big enterprise SSD customers go through a digestion phase in our FQ3 and I think they'll get through that in a quarter and be back to buying. So that should be -- that will get back to a good guy instead of a bad guy as far as the volume. And then we'll -- this is a very seasonally weak quarter for consumers. So, we'll see some step-up there. Client is a little bit TBD is now commercial and enterprise is a little weaker. The consumer side has stabilized. So, I don't want to put too much of qualification on it. But again, we feel good about our ability to have a very diverse portfolio, very diverse go to market engine. We've talked about this from the channel to consumer to the big OEMs to the web players. And I think, quite frankly, we saw last quarter that go to market engine performed really well. And when we get past a few seasonality things and a few things that are idiosyncratic with big customers, we'll see it kick back in and perform well.

David Goeckeler:

Hi, Jim.

Wissam Jabre:

So, Jim, thanks for the question. My comment around underutilization going away was more related to the HDD side of the business. On the flash side or on the NAND side, I would say it is a dynamic situation. We will continue to assess as we see the demand signal coming. And so, the example I gave earlier was on the assumption that we don't -- that we have only one quarter of underutilization. I wanted to make sure that's well described, so that -- for modeling purposes. But yes, the comment around underutilization disappearing was mostly related to the hard drive side. And look, on the NAND side, also when we exited Q4, we -- our inventory position was better than some of our peers. And we're taking this action to continue to manage our inventory given where the demand picture is today. but that's an evolving situation, and we will be -- we can -- as David said, this is a decision that we can take on a weekly basis if we need to change the approach.

Operator:

And your next question will come from Karl Ackerman with BNP Paribas. Please go ahead.

David Goeckeler:

Yes. I don't think we're that far along to say -- to issue that kind of guidance, I guess, I would call that. But I think what we're saying is BiCS8 is well along in its technology evolution and it's reached production phase like I said -- I wish we had -- on video, I can show you the BiCS8 product I'm holding in my hands and playing with. But yes, I would say the investment doesn't change the way we're thinking about our supply situation. What we're trying to do is match our supply situation to our demand and make sure we can manage our inventory and it doesn't get out of control as we go through this process. We're trying to be very dynamic. And obviously, when you're slowing down the fab. And one of the ways to do that is to slow down the nodal transition. It brings in this whole question of how long we're going to stay on BiCS6, how fast do we transition to BiCS8. And we're working through all of that. Again, that's a bit dynamic. A lot of it depends on what BiCS8 looks like and how it's being productized. And I think one of the things we're seeing here today is it has reached the productization stage ahead of schedule. And so, we'll have more to say about what that fab mix looks like as we go forward. It's clear we're going to have BiCS6 will be a shorter node. It won't go into every single product if it will go into the products that it needs and then we'll move other products straight to BiCS8.

Wissam Jabre:

The quick answer to this, Karl, is we don't see the need to do that. And so, this is why we don't project it. We continue to manage the inventory situation on a dynamic basis. But as of the end of the quarter, we were comfortable on where we are. And from where I stand today, we don't see the need to do that.

Steven Bryant:

Thanks for taking my question. I just want to follow up on that last question about the inventories. Can you expand on the strategy from here? Because I'm looking at your inventory days and they're up from 102 a year ago to 133 days. And you mentioned there's still some demand question. So, I'm trying to understand why start ramping back HDDs next quarter versus taking an inventory write-down versus other strategies to sort of get your inventories in better alignment and generate some better cash flows? Thank you.

Steven Bryant:

Yes. No, that definitely helps filling some of the blanks. I appreciate that. Thank you.

Operator:

And our last question will come from Sidney Ho with Deutsche Bank. Please go ahead.

Wissam Jabre:

So, Sidney, this is a fair way of looking at the transition from Q2 to Q3 with the improved utilization or, let's say, smaller -- lesser underutilization on the hard drive side, we expect to see some improvement in the gross margin quarter-to-quarter. And unfortunately, with the high underutilization charge related to the 30% supply cut on the Flash side, we're anticipating the gross margin there to be slightly negative. And so that sums it up.

David Goeckeler:

Yes. I would say it's -- actually, the channel has been pretty good on the client -- on SSDs this past quarter. So, I don't think there's anything particularly unusual in the channel. I think the channel performance has been -- was actually one of the bright spots last quarter. So, I don't think we see anything too unusual there.

David Goeckeler:

Thank you, Sidney. Hi, everyone. Thanks for joining us on the call. We look forward to talking to you throughout the quarter. Take care.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.