Ladies and gentlemen, thank you for standing by, and welcome to Western Digital's 1st Quarter of Fiscal 2020 Conference Call. At this I would now like to hand the conference over to your speaker, Mr. Peter Andrew. Please go ahead, sir.
Okay. Thank you and good afternoon, everyone. Before we begin, let me remind everyone that today's discussion contains forward looking statements, including product development expectations, business plans, trends and financial outlook, based upon 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 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 our website. With that, I'll now turn the call over to Steve Milligan, our CEO.
Thank you, Peter, and good afternoon, everyone. Joining me today are Mike Cordano, President and Chief Operating Officer and Bob Eulow, Chief Financial Officer. Before we discuss our results for the first quarter of fiscal 2020, I want to spend a moment talking about the other news we announced today After a long and fulfilling career with Western Digital spanning 2 decades, I have informed our board that I plan to retire as CEO. I will continue to serve as CEO until Western Digital is a significantly different company than the one I first joined in 2002. We are more diversified, more resilient and much better positioned to capture the opportunities of today's evolving data marketplace.
Since my appointment as CEO, Western Digital has transformed from a storage component provider to a diversified enabler of data infrastructure with the broadest portfolio in the industry, offering customers a powerful combination of hard drive storage and flash memory products. We have successfully executed many key strategic initiatives including the company's acquisition of Sandisk, the integration of Western Digital, H CST, and Sandisk as well as the extension of Western Digital's 19 year partnership with Kioksha We now operate a powerful and capabilities to manage the volume velocity and variety of data. As we think about what comes next for our company, I believe now is the right time for Western Digital to begin the transition to its next phase of leadership. Serving as Western Digital's CEO for the past 7 years has truly been one of the highlights of my career. I want to thank our team, for their support and dedication.
To have worked alongside such a talented team. In terms of next steps I look forward to continuing to work closely with the team while the board conducts a search for our next CEO. Given our strong management team, we expect this transition to be seamless. For our shareholders, our employees and the customers that rely on our best in class service and products. Once my successor is on board, I will remain with the company in an advisory role until September 2020 to ensure a smooth transition.
I will also continue to serve as a director on the Western Digital Board for a transition period after my successor is appointed. With that said, fiscal 2020 is off to a good start. Revenue exceeded the guidance range we provided in July, and non GAAP EPS was at the upper end of the range. The upside was driven primarily by the success of our capacity enterprise drives for the data center. We are executing well in the data center utilizing the power of our solutions and the exceptional value we provide to our data center customers for their diverse storage needs.
During the quarter, we made 2 important announcements to We introduced 1618 terabyte CMR drives and a 20 terabyte SMR drive. All enabled by our energy assisted recording technology. These drives are expected to sample this quarter, Additionally, through our continued investments in heads, media and mechanical design we began shipping an air based 10 terabyte drive providing significant benefits to our customers. I am pleased to announce we commenced the initial revenue ramp of our NVMe based enterprise SSDs to major hyperscale and OEM customers during the September quarter. Efforts to qualify and ramp additional customers with our next generation products based on our 96 layer 3d flash technology are going well.
And should position us to further increase our participation in this hard drive and Flash based solutions differentiates us from our competitors and allows us to more strategically partner The overall demand environment across the consumer, mobile, Furthermore, we are seeing improving trends across our flash product portfolio and continue to believe that the flash industry has passed a cyclical trough. With a broad and growing product portfolio, Western Digital remains well positioned to benefit from the
Thank you, Steve, and good afternoon. Before I get into my prepared remarks, I want to congratulate Steve on his upcoming retirement. I value and appreciate the partnership we have built together over the past decade and want to acknowledge Steve for his leadership and numerous contributions to Western Digital. We have quite a bit of time and work to do between now September of next year, and I look forward to working together to execute on our plan. As Steve mentioned, fiscal Pasty Enterprise Drive Family.
We also had record exabyte shipments in Flash, as we benefited from demand elasticity in share gains in SSDs for PCs and notebooks. In data center devices and solutions, our capacity enterprise exabyte shipment growth was over 60% year over year, led by the ramp of our 14 terabyte These drives now represent the majority of our capacity enterprise unit and exabyte shipments. Industry analysts expect the 14 terabyte capacity point to be the industry's highest volume product through the first half of calendar year twenty twenty. Building on our Aero density leadership and execution on mechanical design, we announced our plan to accelerate the of our 9 Platter energy assisted capacity enterprise drive platform. This enables us to ship 1618 terabyte CMR and 20 terabyte SMR drives on a unified platform, simplifying the qualification process and reducing the time to market for our customers.
We will be sampling all of these drives by the end of this quarter and will commence volume shipments in the first half of calendar twenty twenty. In addition, we began shipping a new 10 terabyte air based product powered by our innovative airflow architecture underscoring our aerodensity and mechanical design leadership. Given the strength of our capacity enterprise portfolio, and the opportunities we see in this up from our prior estimate experienced generation 96 layer product with additional customers, which positions us for further market share gains in calendar year 2020 and beyond. We have a unique and sustainable competitive advantage within the data center built on strong customer relationships product portfolio. Our strategic position within this important end market will drive future revenue growth.
In Client Solutions, revenue grew on a sequential basis, driven by an improving pricing environment and a seasonal increase in mix shipments. This quarter, we began shipping 96 layer, QLC based retail products and external SSDs. The trust and reputation of our brand and our customer's preference for the performance and reliability of our solutions are key differentiators. In client devices, the main contributor to our year over year decline was our decision to limit our participation in the mobile market. On a sequential basis, In PCs and notebooks, we gained market share in client SSDs as our exabyte shipment growth exceeded 70% year over year.
Our bit production of 96 layer of VIX 4 surpassed 64 layer of VIX 3 during the September quarter. We are on track to commercial Our JV partner, Kioke Siob and Western Digital executed well, bringing the OKIG fabs back to full production after the power outage limiting our output reduction to 4 exabytes. Our flash supply is tight we continue to believe that any excess inventory in the flash industry supply chain will be substantially reduced by the end of calendar 2019. We expect flash industry supply bit growth to be in the mid-twenty percent range in calendar 2019, and in the low 30% range in calendar 2020. In addition to continued growth in our existing Flash portfolio, and capacity enterprise markets, we see several new incremental growth opportunities.
1st, the launch of the next generation gaming consoles will be important events for the gaming industry and our Flash business. We expect these new consoles to utilize high capacity flash storage to improve the gaming experience. 2nd, we expect to expand our product portfolio and diversify our customer base the mobile market with products for the automotive and industrial markets will further expand our opportunities in these growing and more stable flash based markets. I will now turn the
environment and look forward to helping enable a seamless transition to the next CEO. I'm pleased to announce revenue for the September quarter exceeded the high end of the guidance range we provided in July and non GAAP earnings per share came in at the high end of the range. Revenue for the September quarter growth in data center devices and solutions and client solutions. Revenue was down 20% year over year as we faced a tough compare tough comparable quarter in fiscal 2019. By end markets, data center devices and solutions revenue increased 20% sequentially and 6% year over year due to the success of our capacity enterprise drives for we predicted that in the second half of calendar twenty nineteen, we would return to growth in capacity enterprise.
We are experiencing that predicted rebound now. On a sequential basis, Client Solutions revenue grew 18% on seasonally stronger flash bit shipments and a stronger flash pricing environment. Client solutions revenue declined 4% year over year, primarily due to reduction in hard drive CAM. Client devices revenue was up 1% on a sequential basis and decreased 39% year over year. The year over year decline was a result of our decision to scale back flash bit shipments to the mobile market.
Flash price declines and a reduction in the hard drive TAM. By product category, flash revenue was $1,600,000,000, up 8% sequentially and down 36% year over year. Flash ASPs were flat and bit shipments were up 9% sequentially. Hard drive revenue was $2,400,000,000, up 13% sequentially and down 3% year over year. Average price per hard drive was $81.
Exabyte shipments were up 23% sequentially hitting a new record level. As we move on to costs and expenses, please note all my comments will be related to non GAAP results unless stated otherwise. Gross margin for the September quarter was 24.8% with a flash gross margin of 19.3% and a hard drive gross margin of 28.5%. We completed all of increase of more than $100,000,000 in quarterly spending. The hard drive gross margin was up slightly from the June quarter, And we expect this December quarter gross margin to be approximately 30% as we fully realize the benefits of the cost reduction efforts.
Flash gross margin was up on a sequential basis as we benefited from a better flash pricing environment. K1 fab cost was $64,000,000 higher than expected. Excluded the $7,000,000. Adjusting for a normal 13 week quarter, operating expenses were below the $740,000,000 run rate target. During the quarter we completed all of our operating expense reduction efforts announced in January.
In addition, Once we complete the exit of our storage systems business, we should start to see an approximately $25,000,000 per quarter reduction in operating expenses beginning in the March quarter. Operating and free cash flow was $294,000,000. Which include the purchase of property, plants and equipment and activity related to flash ventures on our cash flow statement were an inflow of $41,000,000. As previously noted, we are benefiting from the timing of the funds flowing back and forth between us and the joint venture. For the full fiscal year, we continue to expect capital expenditures that will flow through our cash flow statement to be under operating funding is expected to be similar to last fiscal year between $2,500,000,000 $3,000,000,000.
In the September quarter, we distributed $147,000,000 in dividends to our shareholders. We paid down debt by $319,000,000, which included an optional $250,000,000 debt pay down. As our cash generation continues to improve, our first priority will be to reinvest in the business to maximize long term holder value. After paying our dividend, our next priority will be to reduce our debt. At the end of the quarter, we have $3,200,000,000 in cash and cash equivalents.
Our $2,250,000,000 revolver remains unused and our gross debt outstanding was $10,400,000,000. Total inventory dollars were flat on a sequential basis, but higher than projected as the joint venture fab recovered faster than expected. This resulted in a sequential increase in flash inventory particularly at the end of the Moving on,
Sherry, can you hear us on your side?
Yes. Your line is open.
And with guidance. So, again, this is non GAAP guidance and it's as follows We expect revenue to be in the range of $4,100,000,000 to $4,300,000,000. Percent. Please note that this range includes approximately $75,000,000 in costs associated with the K-one fab. Operating expenses are expected to be between $750,000,000 due to higher variable compensation spending.
We expect interest and other expense of $85,000,000 and we expect the tax rate to be 26 percent plus or minus two points. As a result of this detailed guidance, we expect earnings per share between $0.45 $0.65, assuming approximately 302,000,000 in fully diluted shares. With that, I will now turn the call over to the operator
Thank Our first question comes from Aaron Rakers with Wells Fargo.
Yes. Thanks for taking the question. And Steve, congrats on the retirement. It's been great working with you. Two questions if I can real quick.
First of all, I guess one of the things that stands out a little bit is the capacity shipment number on Flash up only about 9% sequential. By my math, it's up maybe high single digits on a year over year basis. So can you talk a little bit about it seems like the product portfolio is in a great position. NVMe's ramping client SSD capacity shipments were strong. I'm just curious of why we it seems to be a little bit muted as far as the capacity shipment trends in Flash.
And what's your expectation going into the December quarter for capacity ship?
Yes. So, Aaron, let me address that. So the primary reason for that is really the point that I made and Bob made in comments is we did not participate in a substantial way in the mobile marketplace in the quarter just completed. So that's the primary driver of bit shipment in the quarter.
Okay. And recall, and Aaron, and recall this is Steve. Recall, that that lack of participation in the mobile market was by choice from our standpoint given that the profitability levels for that segment of the market were not at all attractive.
Okay. Fair enough. And then as a second question, on nearline capacity enterprise drives, in the slide deck, you note that you now expect overall the market to approach 30% year over year growth. I think last quarter you talked about growth meaningfully exceeding that 30% level. I know you guys are talking about north of 40% growth in your capacity shipments, but what's changed over the last quarter?
Has there been a bit of a softening in terms of your expectation, I guess, going into the December quarter? Or what's really driving that change of of growth expectations.
So, Aaron, I think for us, we actually updated our performance on the year. We had originally had stated last quarter we'd be north of 30% for us. We updated that guidance to north of 40%. We're actually seeing strength in exabyte consumption across the capacity enterprise segment. Now the other thing that's happening for us that's more unique is the power of the 14 terabyte product is doing quite well.
And obviously, we are gaining market share in that segment and that's showing up on an exabyte basis.
Are there constraints in the market, which is tempering the overall market, the industry expectation?
No, I think we would suggest the industry industry will grow at north of 30, we will grow at north of 40. And again, that's all up from our last outlook on both numbers.
Okay. Fair enough. Thank you.
Thank you. Thank
you. Our next question will come from Mehdi Hosseini with SIG.
Yes, thank you. And it's Steve. Good luck with the with your next endeavor and was very nice working with you. Moving on to questions, Can just two follow-up, is very helpful when you talk about exabyte shipment guide, especially for the nearline. And as you look into the next year, how do you see that exabyte shipment, target changing?
And again, this is 2020 versus 2019? And how would how should we think about the mix of the nearline exabyte as a percentage of the overall exabyte shipment for West vintage?
Yes. So let me just comment specifically FaaS Enterprise. We would expect for 2020, our current outlook is about 35% year over year growth. So continued strength year over year And so we don't split out total HDD X by growth and we don't specify that.
Okay. And by the way, Mehdi, that 35% consistent with our longer term expectations. Rex?
Sure. You kind of preempted my prepared question as by saying that you didn't participate in the mobile segment as it relates to your NAND shipment and there's a debate as to what happens to that inventory in the channel reserved to mobile segment as you look into the March quarter. So with that as a background, how do you see the supply and demand in NAND looking into the March quarter. And I'm not asking for a guide. I just want to better understand your view.
You didn't participate in that market and in that context, how do you see your prices trending into March quarter?
Yes. So I'll take that, Mehdi. We, first off, as we indicated, we believe that we passed the trough in terms of the flash cycle. And the overall inventory situation is improving. In other words, supply is getting much more aligned to demand.
And we would expect that largely for ourselves and for the industry as we exit the December quarter that things will be fairly in balance. Now when you move into the March quarter, And let me actually broaden that question a bit. When you move into the first half of the year, one of the things that we have to keep in mind is that we will see a typical seasonal decline in terms of, from a demand perspective, supply is relatively linear And so we will have to just like we do every largely every year in terms of the calendar cyclicality, we'll have to manage through that. But then as we move to the back half of the year where we will see and this is the back half of calendar year, of a calendar year 'twenty, we will see that begin to flip demand and begin to improve. And we'll see rather than modest improvement in our financial results that we've been seeing, we should see an accelerating improvement in our performance from a financial perspective as we move into the back half of calendar 2020.
Yes, Mehdi, and just to give you some numbers to work with there. We talked about low 30s on supply bit growth, we would expect demand for the calendar year to be slightly above that.
Thank you. Our next question comes from Carl Ackerman with Cowen.
Good afternoon. Thank you for taking my questions and Steve. Again, congrats on your retirement and best of luck in your future endeavors. Two questions, if I may. Sticking on mobile for a moment, you referenced that mobile margins have not been attractive for the last two quarters, but is that because you don't have captive DRAM I guess how important is that is it for you to have either captive DRAM or a new long term supply agreement for DRAM as you contemplate your competitive position in smartphones over time?
Yes. Let me answer that. So let me delineate mobile. So there's the discrete and component part of mobile and then there's the MC which includes DRAM. I think strategically, we do not see MCP as a long term strategic place for us to operate.
We're focusing our
Yes, Sherry, can you hear us now?
It can.
Do you want to take that?
Okay. Let me let me back up and repeat that. I don't know where we drop off, our mobile market participation, let me break in 2 components. 1 is the MCP business that includes DRAM. The second is discrete and component participation in mobile end use applications.
Strategically, we've moved away from product investment in MCP. And over the longer horizon, it's not an area of product focus for us. So when we talk about participation, is that plus the discrete business, which we chose for economic reasons to minimize our participation as we had higher value places to put our beds. So we see that sequentially improving and the economics in mobile, improving along with other segments of the market.
That's helpful, Mike. As my follow-up, shifting gears to gross margins for a moment, Clearly, you and your peers are operating well below normalized run rates in NAND. At the same time though, I think your outlook for hard drives hard drive gross margins are good, but still a little bit below where we were roughly a year ago. I guess, will the exit of the systems business or areas of the systems business be the primary driver for gross margin improvement in hard drives? And I guess how do we think about the margin implications from the incremental disc and heads on those higher capacity drives?
Thank you.
Yes. So let me I'll address that and then Bob and Mike can chime in. And adding any additional color. So the first thing is the exiting of the system business will have no material impact one way or the other on our gross margins. So if you look at our hard drive gross margins, I mean, let's be clear about that.
Our hard drive gross margins, although good levels are not where we want them to be. We want those hard drive gross margins to be north of 30%. In the low 30% range. We are still dealing with some of the cost overhang of exiting our Kuala Lumpur Manufacturing Facility. That is now behind us.
And so we should see our hard drive margins improve into that low 30% range as we exit this as we exit the December quarter. And then obviously, our intent is to sustain and possibly improve that over a period of time. Flash gross margins are clearly not where we want them to be. They are improving, albeit at a slow rate. We would have continued to expect as we see this sort of ripple through the market because different customers start different levels, different markets, started at different levels.
The pace of that improvement is not linear for all of those aspects, but we'll continue to see steady improvement in our flash margins this quarter and then into subsequent quarters. And as I indicated earlier, we expect that improvement to improve at a improved rate as at a better rate as we move into the second half of calendar twenty twenty.
Thank you, gentlemen.
Thank you. Our next question comes from Mark Delaney with Goldman Sachs.
Yes, good afternoon. Thank you for taking the question. I had some follow ups around gross margins and maybe first just to better understand the outlook for NAND and that it gets the guiding for margins to improve somewhat next quarter. Can someone understand around ASPs on a like for like basis you can give more color on what you're assuming there given the comments about a cyclical bottom?
Yes, I can start. And first of all, I want to remind you on the NAND side. We do have a headwind with the K-one startup costs and bringing up that fab and we are beginning production there. But And there's probably in the neighborhood of a 3 point headwind that we're faced with on the NAND side. And as we've ramped volume, then obviously the margins will improve everything else being equal.
So in terms of a flash overall, as we get to equilibrium between supply and demand. We're definitely expecting that the pricing will get better as we move through 'twenty like Steve was saying. So I think it'll take a little bit of time to work through that, but I think we're going to be in a good place.
Okay. Thanks, Bob. And then my follow-up was on the hard drive gross margin again along the lines of the prior questioning. I have been under the impression that for the December quarter hard drive gross margins could hit 30% especially given the upside that the company is seeing in the nearline business, which I think typically runs at least 30% if not higher. Is there anything in terms of increased headwinds around gross margins at the the company has seen in the December quarter.
This may be keeping hard drives gross margins under 30% or was I out of the wrong about the ability to hit 30% with my previous expectations for the December?
No, let me let me I'm sorry, let me let me because I get kind of, this one I feel strongly about We will we our intent is to have gross margins north of 30% for our hard, our hard drive business this quarter, the December quarter. And so there's no headwind at present.
Of course, there can be things
that will happen, but there's nothing at present. That indicates that we won't hit that level.
And the other thing I would add, Mark, is if you look out over time, we expect more and more growth in terms of capacity enterprise capacity enterprise will become a bigger percentage of our overall mix and that will help the margins go up as well.
Got it. Thank you very much. And Steve, good luck with your future endeavors.
Thank you. Thank you.
Our next question comes from Mitch Steves with RBC Capital Markets.
Hey guys, thanks for taking my question. I think I'm going to focus a bit just on the gross margin kind of the NAND inflection. I think a lot of people are looking for kind of like $0.80 or even a dollar for December quarter guide with the improving memory environment. So I guess maybe can you help us at least understand how you guys think of the inflection in terms of how much leverage you're going to get on the gross margin side if we were to look out, let's say, 3 or 4 quarters. And I'm trying to understand the comment about how you're going to see a more material inflection in the back half for calendar 'twenty.
So a couple of things. Let me talk about the dynamics in the current period. We talked about. So when we look at where we started from, all in markets in Flatchwood, redeagle relative to pricing and margin. We also noted that mobile was a inferior performing segment for us.
We are taking more of that on this quarter as a percentage of the total. So that is having a bit of a headwind relative to the flash margin in the current quarter. So Steve's comments earlier on 2020, we see supply and demand in pretty good shape as we come into 2020. But the normal seasonality of the year, we got to make sure we're managing through that in a cautious way. And we expect that as the year moves on as we head towards middle of the year in the back end, that will continue to improve.
And the rate of margin improvement in Flash will accelerate in the back half of the year.
Okay. And then in terms of the NAND gross margin, I mean, does that go back to like 30s in the back half of twenty twenty? I mean, just any sort of rough match, you could be helpful.
Well, we are I mean,
I may be clear on this. We're not providing guidance beyond what we've done in terms of Flash gross margins. But I'll tell you where we need to get to and where we want to get to is back to where Flash gross margins are in that 40% range. That's That's a margin level that we view as attainable over a period of time and it's also a margin level that we believe is required to get sufficient return on the capital that we are investing
Thank
you. Our next question comes from CJ Muse with Evercore.
Yes, thanks for taking the question. I guess another question on gross margins. Specific to the NAND side, can you quantify the K1 fab costs in the September quarter? I think you said $75,000,000 in the December quarter and how we should think about that, progressing into 2020. And then I guess as a second question there.
On the flash bit side, it looks like implied in there given these costs roughly big growth of only 10% or so in the quarter. So it looks like you're growing about 19%, 20% for the year versus many of your competitors who are suggesting low 30s for the industry. And so I guess Is that a function of just deciding not to want to play, in the mobility side? Is it a function of not having the right bits or or is there something else? Thank you.
No, let me address the last question first in terms of us growing. And first off, the big growth that we're seeing from a demand or revenue perspective is consistent with previous expectations. It hasn't changed. And by the way, one of the things that you have to keep in mind is that we took a meaningful amount because we saw the oversupply conditions, well, we saw it coming and we saw that situation being, let's just call it untenable And so we were reducing our bit output from a supply perspective to help offset that growth that unnecessary growth from a supply perspective that created, the substantial price decline that we in the industry realized. In the back half of 2018 and also into 2019.
So I'll ask Bob to address
Yeah. So, C. J. In terms of the September quarter that we just finished, the K-one costs were at $64,000,000 And what I said in the guidance is we expect in the December quarter that will be in the neighborhood of 75,000,000 We think they will start to come down from that point in time. But this is I mean, this is new production capacity we're putting in place.
It becomes a part of our construct over time.
Okay. Yes. CJ, one other comment I'll make is when you think about this on a bit share comparative basis, when you think M and E or ratio to others. So this was simply us choosing to not produce very low margin product for the reasons Steve said.
Makes sense. Thank you.
Thank you. Our next question comes from Steven Fox with Cross Research.
Gross margin question. But
maybe We'll have to start banning gross margin question.
Yes, I know. Last one. Let me get this in.
So in terms of just the mix impact on NAND gross margins, can you maybe talk a little bit about what's going on mix how mix is affecting the gross margin guidance for the current quarter versus what you just reported in gross margins? And then along similar lines, you mentioned some incremental growth next year from things like next generation gaming and industrial Can you talk about their mix impact on gross margins? And if I dare get in 1 more, given what you said about the first half of the calendar year, are you able to at least hold gross margins around current levels or based on what you do with where you choose to put your bits or do we backtrack a little? Thank you.
Well, again, I'm going to address the last question first. We would expect that our profitability levels certainly from a margin percentage standpoint, we'll continue to modestly improve as we move into the first half of the year.
Okay. And back to the mix, let me just reiterate. Within the Flash business, we're taking on a greater proportion of mobile business this quarter, which is a margin drag and is dampening our sequential margin performance to some degree on the flat side. And then Bob also talked about the fab startup. So those two things are affecting the Flash margin in this quarter.
When we go into 2020, certainly a number of the new markets our good bit consumers, the gaming business, we think that that is going to be not only a good consumer of bits, but at reasonably attractive margins. And industrial and automotive are even better yet relative to margins and more stable and non cyclical.
Yes. And Bob already indicated that the K1 costs are kind of a 3 point drag. And then if you neutralize for mix, I think that we would all be seeing a much more satisfying increase in our flash margins. When you neutralize for those two items. And I think that's important for all of us to keep that in mind.
The trajectory is in the right direction. It's just that there are other moving parts that tend to mask those improving trends.
Got it. And Steve, congrats on all your accomplishments at Western Digital. Thanks.
Thank you very much.
Thank you. Our next question comes from Sidney Ho with Deutsche Bank.
Great. Thanks. Maybe one more question on this on the Flash side. I know you talked about a few times about strategically walking away from the mobile Can you remind us your mix within the NAND Flash business today? And how do you think that would change a year from now?
Is there more tailwind coming from this mix change in mix? And what are the areas that have better margins or worse margins than the average for the business?
So we don't specifically disclose the ratio of Flash participation, but I can give you some color on relative performance. Certainly, the areas of big investment for us that we emphasize are where we want to grow our participation. So enterprise SSD fast growing higher overall margins than the average over time. Industrial embedded both similarly situation, higher margins, good growth rates. And then ultimately certain segments of mobile over time are attractive and we're focused on those, hence our UFS product investments.
So the higher end, higher performance part of that marketplace. So we put a big emphasis on quality of revenue and seeking out those higher margin more stable end markets. And those would be examples that we're focused on.
Great. My follow-up question, I'm sure you're welcome, my hard drive question. The last earnings call you talked about introducing 16 terabyte CMR and there's AT tariff by SMR, but you ended up launching a high capacity about 2 months later. Can you talk about why you made that change in the roadmap and what kind of feedback are getting from your customer so far?
Yes. So the reason that we made that decision, it's actually quite simple, is that we made faster progress in terms of our 9 platform than what we had previously anticipated. And so the advancements that we were making from a mechanical perspective allowed us to pull in that platform sooner than what we anticipated which was favorably received by our customers from a marketplace perspective, which I'll ask Mike to elaborate on. Yes.
And I think a number of dimensions of this, obviously, it gets them to 18.20 terabyte sooner than they would have otherwise. So the TCO benefit when you combine cost per bit with the other elements like slot tax, because you eliminate some slots required, and also the quality that we deliver with our products. The whole economic equation is better. And then we talked about we get a multiplatform qualification. So for them, their ability to qualify a single platform that covers all of those configurations is both a simplifying of their efforts, a cost reduction of their efforts, and it gets us to market earlier.
So all positive trends from the customer's perspective and getting to that new 18 terabyte CMR and 20 terabyte SMR capacity earlier is of big value.
Thank you. Our next question comes from Ananda Bara from Loop Capital.
Hi. Thanks guys for taking the questions. And, Steve, congrats as well for me. I know we have a little more time with you, but it's certainly been fun. I do have a gross margin question, guys, but I'm going to start with the hyperscale question, just to provide some relief here.
So first a clarification, the comment earlier in the Q and A about 35% growth for calendar 2020 year over year. Was that your hyperscale outlook for calendar 2020 or was that another? No,
that's total capacity enterprise. So hyperscale and OEM consumption of that class of product together.
Thanks for that. And Could you update for us? Do you have an updated view on what this cycle might look like this, the hyperscale cycle might look like now? Think you made some comments in the last couple of quarters?
Yes. I think the only thing we can say is we continue to see strength of the cycle into the first half of twenty twenty. I don't we'd want to go any beyond that. That's supported in the 35% year over year growth parameters.
So I don't see it rolling over yet.
And the any sense of if the incremental strength is pull in to this year? It's been a little bit stronger than we thought. Pull into this year? Or did your tea leaves point to sustainability as we move kind of move into the March quarter?
So it would point to sustainability end of the first half of the calendar year 'twenty.
Okay. That's great. And then just quickly on the Flash gross margin. So as we think about the different layers of the headwind that could roll off, it sounds like there's some mobile and that 300 sorry, the K-1s is 300 basis points, but it sounds like as you participate more in mobile, the headwind will diminish sort of incoming quarters before we get the inflection in a few quarters. Will the K1 cost will that 300 basis points headwind.
Will that also kind of gradually roll off until we get into September quarter? And then what are the other levers that will also contribute to the gradual expansion or margins before we get into the second half of next year. I just don't want to miss anything. I want to make sure I'm understanding it appropriately.
Yes. So I'll start with the K-one question. So right now, I mean, we're just beginning production in that fab. And so, it will be a gradual improvement in absorption over the next few quarters. And eventually, it'll be fully absorbed and have a cost structure similar to what we experienced elsewhere.
And as I talked about, we are continuing to expand the product portfolio and increase participation in, let's call it, higher quality revenue segments like Enterprise SSD and other sort of high end mobile marketplaces as we progress into 2020. So think of it as customer and product mix improvements as well. Thank
you. Our next question comes from Vijay Rakesh with Mizuho.
Hi, thanks guys. Congrats, Steve, and good luck with the next endeavors. Just on the flash side, I was wondering going back on the gross margin, that's the last question here. If you could look at, you said you're trying to exit some of the mobile segments. But wondering as you look at first half, do you expect to step up, as you exit some of those mobile segments and what kind of margin improvement should you expect on the flash side as you move more into the SSD or in a less price sensitive markets?
And some questions on that. Sorry, go ahead.
Well, I was going to respond to that. I'm sorry, but so let me clarify. We have not exited from the mobile market. We chose not to participate in segments of that market for a period of time. Because the margins, it was not it made no economic sense, okay?
As we see the pricing environment in that market begin to stabilize and improve consistent with improving supply and demand dynamics. We will be increasing our participation in that market starting this quarter.
Got it. Got it. And on the hard disk drive side, you talked about 16 and 20 terabyte you give us some color of how when you expect to ramp some of those products as you go through 2020?
Thanks. Yes. So obviously we said we're sampling those the current quarter and we expect to ramp that in the first half of calendar twenty twenty. So that's in the not too distant future. Thank
you. And our final question today will come from Nehal Chokshi with Maxim. Yeah,
thank you. Just for edification purposes here or yeah, education purposes. When does the NAND flash industry typically seasonally peak in terms of bit demand from a monthly perspective?
Well, I mean, this is not like a facetious answer. It's the old adage the best quarter of the year is October, November December. It's around that time. But I don't know literally which month
Yes. Okay. And so, Mike, I think you made a comment that the exabyte loss from the power outage turned out to be 4 exabytes, so 6 exabytes. But you still expect that the excess inventory industry wide would be flushed out by the end of this year. So given that lower exbite loss, have you seen better demand than expected over the past 3 months?
Yes. So I think in general, our bit consumption of demand been at or a little above what we thought. So our comments where we thought by the end of the year, the industry inventories would be substantially improved and we stand by that.
And what's been the driver of that better than expected demand for the NAND flash bits?
I think we've seen generally speaking some a little bit better mix in terms of capacity per unit. And I think some of the end markets are a little more robust than maybe we originally expected including mobile.
Got it. Thank you.
Speakers, I'm showing no for any closing remarks.
All right. Thank you for joining us today. I would also like to extend a thank you to all of our employees' customers business partners. We look forward to a successful year together. Have a great rest of the day.
This concludes today's conference call. Thank you for joining. You may now disconnect.