Ladies and gentlemen, thank you for standing by, and welcome to Western Digital's 4th Quarter Fiscal 2020 Conference Call. At this time, all participants are in a listen only I would now like to hand the conference over to your speaker, Mr. Peter Andrew, Vice President of Investor Relations. Please go ahead, sir.
Thank you, and good afternoon, everyone. Joining me today are David Gekler, Chief Executive Officer and Bob Yulau, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward looking statements, including product portfolio expectations, business plans, trends, and financial outlook based on management's current assumptions and expectations. And as such, does include risks and uncertainties. We assume no obligation to update these statements.
Please refer to our most recent financial report on Form 10Q filed with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially. We will also make references to non GAAP financial measures today. Reconciliations between the non GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website. With that, I will now turn the
call over to David
Thanks, Peter, and thanks, everyone, for joining us this afternoon to discuss our fourth quarter fiscal year 2020 results. I hope that you and your families are staying healthy and safe. As I reflect on my first full quarter as CEO of Western Digital, am extremely proud of the way our team has navigated the complexities and uncertainties inherent in this unprecedented environment. As a company, we continue to adapt to provide continuity and high quality products for our customers, deliver value to our shareholders and importantly prioritize the health and safety of our employees. Due to
the
We look at our business holistically, but it is especially important now to understand the nuances challenges and opportunities in each market we serve. So before we dig into the results for the quarter and full year, I want to talk about how the COVID 19 pandemic and other macro trends are impacting the business. I'll then update you on how we are thinking about our strategic priorities for the fiscal year 2021 before turning it over to Bob for a financial update which will be followed by Q And A. Western Digital has successfully managed through this unpredictable time with limited business impact from the pandemic. We made important investments and changes to minimize manufacturing and logistical challenges that were primarily impacting our hard drive business.
Bob will discuss the financial impact for customers throughout. From an end market standpoint, demand was mixed in the quarter. And if there's a common theme among our end markets, its uncertainty. In the second half of fiscal twenty twenty, customers were focused on ensuring they had enough supply to meet heightened demand. As expected, demand in our cloud business was strong due to the work from home trend.
At the same time, healthy demand for our Flash based notebook solutions drove record revenue in our OEM end market. Finally, in retail, While we have a robust distribution channel with over 350,000 points of purchase around the world and well established brands, we were impacted by COVID related lockdowns at many of our brick and mortar customers. We did see the business recover as the quarter progressed due to easing of lockdowns in a transition to online buying with curbside pickup. As we look to the first half of fiscal 2021, uncertainty remains. We remain vigilant given the resurgence of the virus and its potential to disrupt our supply chain including our ability to keep full teams working The global economic contraction is generally is generating an uncertain demand environment and we are closely monitoring trade related geopolitical developments which are pertinent to a global business like ours.
These near term headwinds will eventually subside and we are confident that the strengths of our portfolio strong customer relationships are well aligned to where the growth is in the cloud and on the edge. We've continued to make strategic technology and product investments in both flash and hard drives to drive long term revenue growth and gross margin expansion. Now turning to our financial results. In the fourth quarter, results were generally in line with our guidance. We achieved this while partially offsetting higher than anticipated COVID-nineteen related costs, which Bob will discuss in more detail.
We reported revenue of $4,300,000,000 in non GAAP earnings per share of $1.23 mainly driven by growth in Looking back at the full fiscal year 2020, I am pleased with our performance, our end market diversity and breadth broad customer based channel reach and innovative leadership all positioned Western Digital to benefit from the multi year growth in data creation and storage. For fiscal 2020, revenue totaled $16,700,000,000 and we reported non GAAP earnings per share of $3.04. We continue to align our portfolio with a sharp focus on growth and margin improvement. Importantly, Over the last year, we brought the market several exciting new innovations across both flash and hard drives that I'd like to touch upon. Starting with Flash, as you know, we believe Flash is the greatest long term growth opportunity for Western Digital and is an area where we've already had a tremendous foundation with consumer cards, USB drives, and clients in enterprise SSDs.
As I mentioned on the Q3 call, the migration to Flash within game consoles is yet another example of Flash penetrating deeper into the Edge and Endpoint The adoption of 5G and the build out of the Edge to support a new generation of real time services is another exciting development. We see an expanding TAM for Flash that underpins a multiyear growth opportunity. To capitalize on this opportunity, We launched VIX5, our 112 layer flash product in retail last quarter, which delivers exceptional capacity, performance and reliability all at an attractive cost. The ramp has gone very well with impressive yields and we are just at the beginning stages of this product ramp. We focus on ramping VIX5, VIX4 has continued to provide the right balance of performance and cost reduction.
Dix4 represented over 60% of Dix fits shipped in the quarter. Earlier this year, we celebrated the 1st production from our K-one fab, our new manufacturing facility for 3 d Bix Flash Memory. This is another important milestone reflecting the successful 20 year partnership we've had with Kiopsia. Another major highlight has been the ramp of our enterprise SSD product line, Enterprise SSD revenue in the quarter grew nearly 70% sequentially and our revenue share increased to the low double digits. This will remain an important area of focus within our Flash portfolio.
Now turning to hard drives. We continue to lead the industry in aerial density using innovations across the entire drive, algorithms, firmware, mechanical heads and media. We were the 1st in the industry to ship energy assisted drives for mass production and expect a strong ramp into the fiscal second quarter and beyond. In short, we are going through important product transitions in both our Flash and HDD businesses that we think set up Western Digital well for the future. Recognizing that these are uncertain times, we believe that the most important thing we can do is keep our foot on the proverbial innovation pedal and execute on the roadmap across the business.
We have an extremely talented team working on new products that will continue to drive leadership in flash and hard drives. Looking ahead, our strategic priorities are centered around driving innovation for customers and value for shareholders. First and foremost, we will focus on driving long term shareholder value as we bolster our Flash and HDD portfolios including ramping 2 important product lines to high volume, our SSD products and our energy assisted capacity enterprise drives. Secondly, we will accelerate our transition to Bix 5, delivering additional performance for our customers and notable cost advantages for Western Digital. 3rd, we will continue to sharpen our execution from a product roadmap and strategic business objectives and finally, we are evolving our portfolio to drive growth, margin improvement and cash generation, while also paying down debt and investing in the future.
In the near term, we expect we're also navigating multiple substantial product transitions, which will require sharp execution focus, but we are very confident they will set us up well for the long term. With that, I'll turn the call over to Bob to share our financial highlights and outlook.
Thanks Dave and good afternoon everyone. As Dave mentioned, the COVID-nineteen pandemic has created a challenging global economy that has continued to impact Western Digital's performance in large part due to the high level of uncertainty that both we and our customers are facing. While this uncertainty isn't going away in the near term, we'll continue to adapt and we believe Western Digital is well positioned for the future. With that, I'll walk you through our fourth quarter fiscal year 2020 results. For the fourth quarter, revenue was $4,300,000,000, up 3% sequentially and up 18% from a year ago.
Non GAAP earnings per share was $1.23. For the full fiscal year revenue was $16,700,000,000 up 1% from fiscal 2019 and non GAAP EPS was $3.04. Looking at end markets, client devices revenue was $1,900,000,000, up 5% on a sequential basis, and up 19% year over year. Within this end market, our robust family of client SSDs which are ideally suited for remote learning and work from home applications achieved another record quarter of revenue. Notebook and desktop related hard drive revenue declined slightly sequentially as the market continued to transition to SSD based products.
Smart Video was weaker than our expectations due to continued headwinds associated with the pandemic. In gaming, we began shipping our flash solutions for the upcoming new game console launches. And finally, Mobile Flash revenue was down sequentially, but up year over year off a low base. Moving on to data center devices and solutions. 4th quarter revenue was a record $1,700,000,000 up 11% sequentially and up 32% year over year.
For the full fiscal year, revenue of $6,200,000,000 was up 24% from fiscal year 2019. Capacity enterprise hard drive revenue was down slightly on a sequential basis, while enterprise SSD revenue grew nearly 70% sequentially and more than doubled from a year ago. Next, Client Solutions revenue was $687,000,000, down 16% sequentially and down 9% year over year due to COVID-nineteen related lockdowns. Despite this, we were encouraged to see demand pickup in June as countries began to ease lockdown restrictions and as brick and mortar locations shifted more of their operations online. This strength continued into July.
Given the unprecedented circumstances, we executed very well in this business With over 350,000 points of purchase around the world, we continue to have incredibly strong distribution breadth and brand recognition. Turning to revenue by product category. Flash revenue was 2.2000000000 up 9% sequentially and up 49% year over year. Flash ASPs were up 1% sequentially on a blended basis and up 3% on a like for like basis. Bit shipments were up 8% sequentially.
Heart Drive revenue was $2,100,000,000, down 3% sequentially and down 4% year over year. Total exabyte shipments were down 2%. On a sequential basis, the average price per hard drive increased 2% to $87 as mix continues to shift to the cloud. As we move on to costs and expenses, Please note all of my comments will be related to non GAAP results unless stated otherwise. Gross margin for the 4th quarter was up one percentage point sequentially to 28.9 percent, slightly below our guidance range.
The major item that impacted our gross margin was COVID-nineteen related costs of $96,000,000. This almost exclusively impacted hard drives the hard drive business and was primarily related to reduced factory utilization and higher logistics costs. For clarity, this item was included in our non GAAP gross margin. Our Flash gross margin was 30.5%, up four percentage points from last quarter due to cost reductions and slightly favorable pricing. Our hard drive gross margin was 27.2% down 2.1 percentage points from the prior quarter.
The biggest driver of the lower gross margin was the $96,000,000 in COVID 19 related costs, representing a 4.7 percentage point impact on our hard drive gross margin. Operating expenses were $713,000,000, well below our guidance range, primarily due our decision to cap variable compensation expense given the current economic environment. Non GAAP earnings per share was $1.23. Operating cash flow for the fourth quarter was $172,000,000 and free cash flow was $261,000,000. In fiscal 2020, we generated $1,100,000,000 in free cash flow.
Capital expenditures, which include the purchase of property, plant and equipment and activity related to flash ventures on our cash flow statement, were an inflow of $89,000,000 due to the timing of funds flowing to and from the joint ventures. In the fourth quarter, we distributed $150,000,000 in dividends to our shareholders, which was our final distribution prior to suspending the dividend. We also debt repayment of $150,000,000 At the end of the quarter, we had $3,000,000,000 in cash and cash equivalents and our gross debt outstanding was $9,700,000,000. Our debt to EBITDA ratio was 4.2 times in the 4th quarter and our adjusted EBITDA leverage ratio as defined in our credit agreement was 2.8 times. As a reminder, our credit agreement includes an approximate $1,000,000,000 in depreciation add back associated with the joint ventures, which is not reflected in our cash flow statement.
Please refer to our earnings presentation on the Investor Relations website for further details. Moving on to guidance for the fiscal first quarter. We are somewhat challenged in the near term as a result of the uncertainty of the pandemic and being in the midst of a global economic contraction. Despite this uncertainty, we continue to execute and focus on our great products deep customer relationships in large and growing markets. We are working on a number of substantial product transitions will set us up well for the long term.
We expect revenue in the first fiscal quarter to be in the range of $3,700,000,000 to $3,900,000,000. Growth in Client Solutions is expected to be more than offset by a decline in both data center devices and solutions and client devices. We expect non GAAP gross margin to be between 25% 27%. This range includes approximately $80,000,000 costs associated with the K-one fab. This should be the peak quarter in fiscal 2021 for K-one period expenses.
We expect operating expenses to be between $700,000,000 $720,000,000 interest and other expense is expected to be between $70,000,000 $80,000,000. The tax rate is expected to be between $22.26 percent in $5 in Q1, assuming approximately 304,000,000 fully diluted shares. Gross capital expenditures, which includes our portion of the joint venture leasing and self operating funding is expected to be approximately $3,100,000,000 in fiscal year 2021. This includes approximately $1,300,000,000 in cash capital expenditures. We will continue to monitor capital expenditures very closely given In summary, we are executing well in a challenging environment and results are generally in line with expectations.
We are taking decisive steps to successfully navigate through the current macroeconomic environment, while ensuring we focus our resources to address the significant long term growth opportunities that are ahead. I'll now turn it back over to Dave
Thanks, Bob. While we continue to navigate through a complex and dynamic environment, I'm confident that Western Digital can lead the market for years to come. As I've said, I came here because I have a very strong conviction that Western Digital can play an increasingly vital role in the digital transformation, and that conviction has only strengthened in the past 5 months. We have deep flash and HDD product portfolio, operational scale and great customer relationships, combined with the ever growing demand for data creation and storage. All in all, it's a great place to be, and I'm extremely thankful for the hard work that our talented global team puts in on a day in and day out basis.
We are operating in uncertain times, but Western Digital's strong consistent performance reflects our ability to maintain our market leadership by delivering With that, I'll
you. Our first question will come from Wamsi Mohan with Bank of America. Please go ahead.
Yes, thank you. I was hoping you could give us some sense on your 2018 terabyte ramp. It appeared that you were expecting ramp before in the September quarter, it looks like it might have been pushed out further. Can you talk about what's going on there? And I have a follow-up.
Yes. No, it hasn't pushed out. The ramp is on plan. As we've talked about, we plan on producing in excess of a 1,000,000 units this quarter. It's a very important quarter for us on that ramp on the, because it the quarter where we get the yields up, which gets us the margin profile we need to go into the second quarter of the fiscal year at full production capacity.
So it's on track, where we want it to be. We feel good about it. And, and this is going to be an important quarter for us, but it's, it's something we know how to do in ramping a drive platform.
Okay. Thanks for that. And I was wondering if you can maybe bridge this quarter on quarter gross margin outlook domain puts and takes there are. How much are you thinking that the HDD side is going to contribute given that some of the capacity enterprise weakness was capacity enterprise like a little bit weaker than what people were thinking. Thank you.
Yes. I'll make a few comments. I'll turn it over to Bob to make a few comments. I mean, if you look at gross margin going forward, there there's a number of headwinds. We still have the COVID costs.
We don't expect them to be as high next quarter as they were this quarter, but they're still there. The logistics costs, especially, it's just a very dynamic environment there that changes week by week. We've got the ramp of the 2018 terabyte drive that we just talked about. So in the beginning phases of that ramp, you're gonna it's a headwind on gross margin till we get up the ramp. That's why this is such an important quarter for us that we work through that.
And as I said, that's that's on track. And then on Flash, we've got, we've got an easing pricing environment. So that's going to impact gross margin there. Bob, did I miss anything?
I think those are the keys. I mean, on the hard drives, obviously volumes are a little lower, so we'll be amortizing our fixed costs over a smaller volume as we go up the yield ramp on the 18 terabyte drives. Then on the flash side, as Dave said, I mean, we've got some price and mix headwind and We also, as I mentioned in my comments, we have a cost up a bit on K1, which amounts to about a percentage point on the flash side. So it's we have multiple challenges this quarter, but I think long term, we're going to be really well positioned once we get up these product ramps.
Okay. Thank you.
Thank you. Our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah, thanks. Just kind of building off that last question a little bit. I mean, when you look at the hard disk drive gross margin 27.2% and you adjust looks like adjusted ex COVID looks like it's close to about 32%. I think it would be helpful just to kind of frame what the expectation is for COVID impact in this quarter? Is it probably not a tie, but are we still carrying 3 percentage points plus of kind of headwind on gross margin, just kind of any framework there.
And on top of that, what are you seeing in pricing dynamics in nearline right now in the market?
So I'll take the second 1. Bob can talk a little bit more about the first. The all the businesses transacting at 14 T is a very competitive point, in the market. There's no doubt about that. We're at the we're kind of at the tail end of one generation moving to the next one.
And that's why, getting up the AT and T ramp. And so in 'eighteen, 'sixteen, ramp is so important for us. And that will position us well and be able to drive accretive margins to the portfolio on that point. But, we expect that as we get 2018 out there in the conversations with customers, it's a different PCO proposition for our customers and that leads to more value for both of us. So, we're heading to a better spot.
Bob, do you want characterize COVID a little bit in this quarter. It's kind of a little tough because it's so dynamic. Yes.
Yes. It's not going to be as significant as last quarter. And last quarter, we did offset the COVID costs a bit by pricing, but obviously did not fully offset it. That's big number. As we look at Q1, we don't think we're going to have the kind of absorption variances that we had last quarter.
You may recall in the earnings call in April, I said that we had some challenges on volumes in April. So we already knew we had that headwind last quarter we don't have that issue this quarter. So I would say the costs will be down, but I don't want to be too specific. We think we've got it covered in the guidance range that we articulated.
Okay. And then as a follow-up, I know there's a
lot of discussion around cloud digestion kind of mixed data points out there. Relative to the 30% implied nearline capacity ship growth this last quarter, what is your current assessment of the demand from a capacity shift standpoint near line through the back half of this calendar year? Any kind of use on that front?
Yes, we feel like we're definitely going into, a digestion phase. If we look at, we're coming off a 3 really strong quarters of exabyte shipment. And the demand signals we're getting are going to be a little bit down for the next quarter to We think the I mean, the long term trend is obviously still good. We're using the cloud more every day, but there's been a lot of product shipped in there in the last couple of quarters and what we're seeing from them is, they're all not the same, right? We have all of them.
So they're all at different points, but when you add it all up, You see, you see next quarter, there's a negative bias on demand there from what we see looking backwards.
So down sequential? Sorry.
Yes.
Thank you. Our next question will come from Carl Ackerman with Cowen. Please go ahead.
Thank you, gentlemen. I wanted to follow-up to Aaron's last question just on exabyte growth. You obviously actually had a pretty strong quarter for exabyte growth. Within data center this quarter. But it does sound like the outlook is down sequentially as you just indicated.
Was hoping to keep you juxtapose what you're seeing across both on prem and private cloud environments versus public cloud as it relates to guess both your hard drive portfolio, but also your enterprise SSD portfolio. That's my first question. And for my follow-up, I was hoping you could you've also been a little bit smaller player in the enterprise SSD market of late, which has enabled some of the significant share gains and quite frankly, you've completely turned around your technology portfolio within that enterprise SSD market. Is your expectation going forward for September that you should outperform end market demand, given some of the share gains you've seen lately. Thank
you.
So, on the enterprise SSD,
we've done a lot of work to launch a new product at enterprise We got a couple of new products. The first one is out and it's targeted to the cloud providers. The product targeted to the OEMs is yet to ship. So, that'll happen, in the next couple of quarters. So we really are in a big product transition there.
So it's hard for me to draw a conclusion to your question about on prem versus the cloud an enterprise SSD, because we're mainly focused on the cloud side right now, working our way through calls and all those kinds of things. Given that the product is new, given that we're going through a lot of qualifications, over a multi quarter timeframe, I expect us to get better and better it's going to be a little lumpy as we move through there. So, if I look at the number of calls going on in the organization, this is across all technology We have twice as many calls going on as we had a year ago this time. So that gives you an idea of, where the how the portfolio is refreshing and we're driving that into the market. On the hard drive side, I guess I can talk about the OEMs in the private data center more just as a overall market.
I mean, Well, let me, let me say that response for a different time because that's more PC related. But I don't know if I have a tremendous amount of insight, Bob. I don't know if you do on the hard drive side versus on prem versus in the cloud, if we could draw any strong conclusions for that?
No, I think we're seeing softness in both areas as we move forward into Q1.
Thank you, gentlemen.
Thank you.
Our next question will come from Mehdi Hosseini with SIG. Please go ahead.
Yes. Thank you for taking my question. The first one on the Hardist Drive, one of your competitor had reference weaker demand trends, especially for client non compute as of China, And when I, when I just do a backup envelope, if that is what's happening and impacting your client non compute, it seems to me that your exabyte shipment for that particular segment may have been down by more than 20% on a Q over Q basis. And I was I mean, if you could elaborate on it. And I have a follow-up.
Yes, I'll elaborate on the general market. I don't know if I can follow the back of your envelope that fast, but Look, I think the channel, let me talk about the channel in general and smart video as part of that. That was a real slog this past quarter. I mean, the team worked really hard on it. We thought we saw TAM shrinkage.
There are significant TAM shrinkage of $100,000,000 or so
of years
throughout quarter. So, it was we look at to us, that's a good indication of overall demand. That's out there and it was tough and related to that. And we see that going forward kind of a negative bias on that market. So I don't know, Bob, if you have any additional comments on the smart video in particular?
No, I agree in the short term. If we look over the longer time horizon, that is going to be another area of growth in the hard drive business. So we really see the capacity enterprise business and the smart video business growing as we look over multiple years.
Yes. I mean, I think this overall theme you're hearing from us, which is, as we look at, I mean, as we look forward into the next quarter, We see some challenges given COVID, given the state of the economy, given all the demand we've seen in the first half and inventory rationalizations and digestions that are going on, But in all of those markets, we see very good long term trends. And so it's a question of how fast that comes back. But, all of the I think the pandemic has shown us the amount that all of us are relying on technology. And I think our Portfolio is well positioned for that world as it has been in some time.
Great. Thanks for the detailed color. And just my follow-up question has to do with your, the Flash. You highlighted the fact that you fee revenues were up 70% or so. But I heard that commentary suggests there is a, favorable mix shift into the September quarter.
Perhaps you could help us better understand dynamic to if you were to elaborate on the mix of your NAND how SSD and a smartphone application are trending? And it seems to me that maybe the game console is is happening later in the year? And if you could elaborate on it, it'll be great.
Yes. So I think there are a bunch of pieces in there, Mehdi. So game console is definitely a growth area and we're very fortunate to be participating in that. And as you know, we haven't been in the hard drive side of that business. For quite a while.
So it's all upside from our perspective. And then I would say overall there may be slight mix changes as we go quarter to quarter. We are seeing some pressure in terms of price and that's factored into our guidance as well.
Yes, Mehdi. This is Peter. Also, don't forget, we
do have a little bit of
a step up in the K1 cost as you go Q to Q, that'll be another pressure on the Flash Coast margin.
Okay. But in terms of the end market mix as it relates to Flash, there is we should assume a significant change
I think the biggest change is the one I mentioned on Game console becoming more significant. But otherwise, it'll be up and down here and there. I don't think it'll be that material.
Our next question will come from CJ Muse with Evercore. Please go ahead.
Yes, good afternoon. Thank you for taking my question. I guess first question As it relates to your overall revenue guide for September of down 11% sequentially, should we be thinking that each business is down similar to that rate is one doing better than the other. Could you shed a little light on that, please?
Sure. I mean, I think we're seeing, we're seeing retail. Last quarter, we started off in the retail business which is roughly 20% of the business has, is really challenged and it got better as the quarter went on and and June was good. It wasn't quite all the way back to normal, but it was strong. And we've seen that continuing through July, and we're expecting that business to, to be positive in the quarter going forward.
And if you look at all the other businesses, the cloud Again, we talked about that. We see a digestion phase there. We see the OEMs kind of really watching inventory, and managing that tighter. And then I talked about the channel. So As we said, long term, we see good things where the portfolio is going.
But in the near term, that's how we see the 4 major businesses.
And so if I just read between the line, given the commentary on retail, that would suggest NAND might be a little bit better than HDD?
I wouldn't draw specific. Yeah.
I don't know if I'd
go into that level of detail.
Okay. And I guess a question on the Flash side and to follow-up on Betty's question. For the June quarter, I guess I was a little bit surprised by the lower ASP uplift, but higher bit growth. I guess, can you comment on what drove, what drove that? And I guess just to follow-up, should we be assuming similar mix as the June quarter coupled with an uplift in gaming?
To as we build out our ASD kind of assumptions?
Yes. So I'll make a few comments. I'm sure Bob will make comments. I mean, part of the ASP looking back was retail where ASPs were for Flash were more challenged So that's a big piece of that number. I think going forward, you shouldn't expect a tremendously different mix minus what you said gaming.
Was it now, it's good to see gaming start to ramp up. We expect that to continue to ramp through the second half of the year and take a low double digit percent of our supply. So that's a that's a good story.
Yes, I don't have a lot to add. I mean, I think in the transactional businesses, we've definitely seen more pricing pressure than we've seen from the OEMs. Although, overall, we think prices will be down this quarter.
Thank you. Our next question will come from Joe Moore with Morgan Stanley. Please go ahead.
Great. Thank you. What if you could talk about in the NAND business, just how comfortable you are? I mean, last year you, when things got kind of weak, you guys took underutilization actions to kind of clean up inventory. You're not doing that now.
Does that suggest supply demand in a healthier place or just anything you can kind of tell us about the state of your inventory, customer inventory and your plan there?
Yes, I'll make a few comments and Bob can make a few comments. I think we feel good about the amount, the industry keeping supplydemand and balance. I mean, clearly, we've got a, in a recession, we have a drop in demand. So we're seeing some pricing implications of that. But we feel like kind of where supply demand is is fairly balanced going forward.
We're certainly watching our CapEx investments very closely and managing more tightly with our partner. But, Bob, you want to same thing about inventory? Or
Yes. I mean, I joined the company, right, in the middle of the last trough. And I can tell you the supplydemand imbalance is nothing like it was then today. So I think it's I think everybody's behaving pretty rationally. We still see the industry growing bits and the bits both supply and demand the neighborhood of 25% to 30% and that's our intention as well.
Okay. And then for my
follow-up, it sounds like you're pretty comfortable on the adjusted EBITDA covenant calculations for September. But obviously, memory can be uncertain beyond that. Can you talk about your comfort level overall the covenants? And is there anything any actions you could take if things got worse to sort of make sure you don't have any issues there?
Very comfortable. In fact, if you go back and let to the trough, I was just talking about we never really got that close to breaching the covenant on the adjusted basis. So, I really don't think there's much of a risk there.
Hey, Joe, also just to put a little bit more transparency into the credit agreement metric Please make sure you take a look at the slide deck that's on our website. We've got a lot more detail on that metric in there.
Thank you.
Thank you. Our next question will come from Ananda Baruah with Loop Capital. Please go ahead.
Hi, good afternoon. I appreciate you guys taking the question. I guess the first one for me is with regards to the gross margin guidance, could you give us a sense of which part of the business you expect to contract more of the hard drives versus the, versus flash? It sounds like on flash, there's slight mix And on retail, Bob has put your remarks, slight pricing pressure. They're not from OEM contract yet.
It sounds like on the hard drive business, it's probably one mix related. Is there anything in addition to that? And then could you just give us a sense of magnitude? For each of those businesses? And then I have a quick follow-up.
Thanks.
Yes.
I mean, I'll touch on it again. I don't want to get into too many specifics. As you know, we only guide gross margin for the company overall, but we're definitely seeing pressures on both sides, both on the hard drives and on the flash. Like we said before, we've got significant product transition going on on the hard drive side. We've got yield curve that we're working our way up.
And we've got the COVID-nineteen pressures that, they won't be as bad this coming quarter. The quarter we're in now as they were last quarter. But we definitely have pressures on the hard drive side. And I would say on the flash side, we're seeing pressures, primarily on price and a little bit of mix. And then the K1 cost that we talked about as well.
Right. The K1 cost. And guys, any, you mentioned about going through a period of digestion. In cloud that that dovetails with your top competitors' remarks. And also with the remarks of the hyperscale, any context you can provide around just sort of do you think that means this cycle is through?
Or this digestion to you guys really just mean like a pure digestion as you think we can get back to some semblance of growth again in the near future?
Yes. I mean, look, I mean, we see we it's a long term growth market. I mean, we see 30%, 35% CAGR exabyte growth in that market for years to come. We're coming off of a couple of quarters of significantly above that. It's not surprising we would go through a little bit of time where all of that capacity gets deployed.
But I think just look at the world around us. I mean, we're all using the cloud more every day. I think the last 5 months have accelerated the amount of transformation that was going to happen and using of cloud technology significantly. So I don't I'm not exactly how we would both define a cycle, but I see a really good long term trend in this And I see us well positioned as well. That's why this coming quarter is important for us to get the 'eighteen, 'sixteen platform ramped get the million units produced, get those shipped, to put ourselves in a good position for that continued growth.
Okay. I
agree with that. I
appreciate it.
And just the one thing I would add, I just think there's been a lot of supply chain disruption this year. Both in terms of our own production, our customers trying to make sure they get supply. Now our customers are working off inventory levels. So I just think between the pandemic and the recession and concerns on supply, it's been a very challenging year.
Thank you. Our next question will come from Mitch Steves with RBC Capital Markets. Please go ahead.
Hey, thanks for taking my question.
I just wanted to follow-up
a bit on the gross margin side. Can you talk about COVID-nineteen issues kind of being a little bit better than you guys saw or better than last quarter. How do we think about the bigger drivers for your gross margins going back to 30%. Is it really going to be NAND improvement on pricing or is it going to be a lot of supply chain issues? I'm trying to get an understanding of what's really moving the margins sort of dramatically on a quarterly basis.
Yes, I'll maybe paint a big picture of that and Bob wants to go into a little bit of detail. So, I mean, it's worth them working both sides of it. One is, on Flash. First of all, continue to drive Bix 5. Bix 4 is a great note for us, giving us cost reductions performance we need.
The Bix 5 transition, I think the team made really, really sound choices on going to that technology as we talked about, The yields have been impressive. We're kind of ahead of internal plans on that node. So continuing to drive that technology roadmap that gives us cost advantages is the first part of it. And then secondly, it's optimizing the portfolio on top of it for the markets we play in for optimizing gross margin. That's a, you know, you see us moving more to enterprise SSD things that we think are going to drive higher margin.
So that, that's a that's a big part of it on Flash. And of course, then you got pricing on top of that, which is a market concern. On the hard drive side, again, it's a gross margin to me is led by Innovate So we ramp the 18, 16 terabyte platform. That's a better TCO for our customers. That's a better value proposition.
For them, that's higher gross margins for us. So that's why we're so focused on getting that getting up the production ramp on that and why we feel good about that platform. So those are the main drivers from my perspective.
Yes, I don't think I had much to add. I mean, I think it's clear we've got room to improve in both the hard drive area and in the flash area and we've got the products to make it
Got it. And then just one other small one just on the smartphone cycle. I mean, it's been very clear that some of the bigger products got pushed out, right? Something they're going to ramp up more in Q4 to Q3. Can you maybe give us an understanding of how that impacts you and how you guys think about the push out as it relates to the Flash business?
I guess I can start. I missed the question. It was on mobile. I'll start. So as you know, we've been underweight mobile for quite a while.
We continue to be underweight in terms of mobile. Now is that business is lower than was anticipated. Our competitors need to find homes for those bits. So we're not completely insulated from the challenges on the mobile slide because they do need to move into other markets in order to move the bits. But I think in terms of our strategy of focusing on on the other areas.
I think it's worked out pretty
time, we would like to ask that you please limit yourself to one question. Our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.
Great. Thanks for taking my question. On the NAND side, SSD side, I know you probably don't want to comment on how much do you think NAND prices going to come down. But hypothetically, if prices start to decline more rapidly than you cost improvement over the next few quarters, say 10%, fifteen percent, twenty percent a quarter, How would you respond to that kind of pricing environment in terms of inventory utilization, CapEx and so on and so forth?
Yes, I guess I can start. I mean, and first of all, our view on cost reduction is still around 15% a year. So we don't we don't see that changing. We think that's what you're going to see in the 3 d era because it's so much more capital intensive. And what we think you're going to see is a competitive marketplace where people are behaving rationally.
I mean, that's a lot of the the reports that we've seen over the last couple of weeks. It seems like everybody is trying to make sure we don't end up in an oversupply situation. And And we're going to be cautious as I said in terms of how we invest in our capital. Some of the CapEx we're funding right now is related to equipment we put in place last fiscal year. So we'll keep a very close eye in terms of what's going on in terms of the balance of supply and demand.
Yes.
I mean, I don't like to deal too much in hypotheticals, but we've got a lot of conviction in that market. If you just look at gaming, really coming on in the second half of this year. As you said, the 5G cycle may move around a little bit, but it's still out there. So there's a lot of demand drivers and we believe in that 30% CAGR in that market on the demand side.
Thank you. Our next question will come from Shannon Cross with Cross Research.
Thank you very much. I was just wondering if you could take a step back when you were coming up with your guidance, sort of from a higher level. How much of it is coming from a lack of visibility versus maybe specific conversations with your customers? And then if you're looking at where there might be an opportunity for upside, where would that be? Thank you.
Yes, I would say in general, we look at a wide range of data points. I mean, some of the businesses are, like a retail business, what's the trend that's going on there and what do we see and what may be disruptions. For example, in the period ahead, we typically see a back to school cycle unclear what that's going to look like. So that puts some, that puts some variability in the forecast. But we talked to our our teams are very, very close to our customers.
So we're talking to them on a near daily basis, and getting a very a sense of what how they're thinking about their end markets and what the signals they're giving us for demand and we're factoring all that in. To kind of what they're telling us and what we see as the bias. And then we're wrapping in new product calls. I mean, we talked about it in our prepared remarks. We're going through a bunch of very substantial product transitions.
Now, we feel really good about that. But we got to get through it. There's risk in those. So we make a risk view of which of those are going to hit, which of them are not, which ones may move around for various reasons. Now, I think I said it earlier, we have twice as many calls going right now as we did last year.
And the number is over 4.50 So there's a lot of activity across portfolio. And the big ones, there's probably 2, 3, 4 dozen really big ones. So We factor that in as well. And we, we, we understand when they're going to hit and put some judgment around that. Wrap it all up into the guide.
So if some of those quals move around, they could be in a positive or negative. There's enough of them that hopefully that is out. But we put together our best view of what we think is going to happen over the next quarter.
Thank you. Our next question will come from Patrick Ho with Stifel. Please go ahead.
Thank you very much. Dave, maybe just following up with some of the NAND questions. You talked about the strong demand you're seeing for the VIX V product. Given some of the market dynamics that are going on right now, you mentioned some price erosion and maybe a little bit of inventory that's been built in some digestion how do you see that potentially affecting the ramp of the Bixby product? Does that push it out somewhat?
Or are we going to see maybe a potentially deeper, Bix4 decline as Bix5 ramps up?
Yes, I want to be careful. I don't think I talked about Bix5 demand in the sense So I don't think our customers just look for the NAND products and it's up to us to build the right technology for that. And as we drive the roadmap forward, we we can get more advantageous costs for us. And what we're saying on Bix 5 is, the development of the technology is going well and the yields are going well. We've got the product in the, in the retail channel already.
And we are working on all the engineering work put it into the whole but there's a lot of work to do there, right. Before we read, BiCS 4 is a great node for us. It's providing us the performance and cost advantages that we need. As I said, I think 60% of our bits this quarter will be on fixed 4. You're going to see us fixed 4 will be our our major node for, for, several quarters to come as we work on the transition in the portfolio to PIX5, which will then carry us for another several
go. Please go ahead.
Thank you. I have a question about the cost on the NAND side. Bob, Can you talk about as Bix5 ramps? I think previously you said your cost decline expectation is about mid teens or so annual. As Bix5 ramps, do you still expect that?
And then also on the K1 cost, you said $80,000,000 this quarter is the peak And if demand continues to remain weak, how should we think about that $80,000,000 coming down over the next few quarters? Thank you.
Yeah. So I guess a couple of questions in there. First of all, we still believe over a number of quarters, we're going to average 15 year over year cost declines. And we think that's pretty sustainable. We've been able to achieve that with VIX4.
We think we'll be able to achieve that with VIX5. And we'll continue to work through the transition. And as Dave was just saying, it's going to take several quarters to ramp up on Big Five. It's not to be overnight. We throw a switch and we're on BiCS V and BiCS4 has worked out really well.
BiCS4 will be an even bigger percentage of the total next quarter than it is this quarter. So We still have a ways to go on Bix 4. And then in terms of the K1 costs, we do believe this is the peak There's a lot of equipment getting installed. As you know, it's a long cycle time. So we've got to get products through the cycle.
And then we'll be able to capitalize our inventory more of those costs and bring down the period expenses as we move forward. So I think we're getting to the point where volumes are getting up there where the period expenses will start to go away.
Thank you. Our next question will come from Vijay Rakesh with Mizuho. Please go ahead.
Hi guys. Just Two questions. I was wondering on the hard disk drive side, on the 18 terabyte, I know you mentioned, it's a big part for you. Will you be shipping you said more than 1,000,000 units here. So, you expect that to ramp to couple million in December quarter.
How does that ramp? And also, On the NAND side, it looks like that $80,000,000 cost for K1 startup in September is almost 1500 bps. Of a gross margin headwind. So is that a clear 30 bps of gross margin headwind looks like. So is that the majority of the gross margin headwind on NAND or is pricing a bigger factor in there?
Thanks.
You want me to start? Yes, let me start on K1. So We've been averaging around $60,000,000 a quarter the last four quarters in terms of period expenses for the K1 fab. And And then as we said in the September quarter, we're going to go up to $80,000,000. So, incrementally, it's about $20,000,000 on the Flash revenue.
That's somewhere in the neighborhood of an incremental point. And as I just finished commenting on, as we start to ramp volumes and we are, we'll start to absorb those costs And I think we'll definitely see that number coming down in the couple of quarters following the September quarter. So I think we're in good shape there. And then in terms of volumes on the hard drive side, I mean, we're we definitely have plans to produce over a million units of 2018 16 terabyte product and we'll get as many of those out the door as we can this quarter.
Yes, we're not putting a number out there for the December quarter, but I think as we said, we want to get ourselves in a position where were up the yield curves and we've got the manufacturing capacity to really step on the gas on that node. And we're doing that now. We're working. So this quarter, The important number is to get the production up so that we can get up that curve. And of course, we'll ship as many of them as we can.
Thank you. Ladies and gentlemen, I'm showing we're at the bottom of the hour and drawing to a close. I would now like to turn the call back to management for any further remarks.
Okay. Well, thank you, everybody, for taking the time to, listen to Western Digital today. We look forward to talking to you throughout the quarter.
Yes. Thanks, everyone.
Thanks, folks.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.