Good day, ladies and gentlemen, and welcome to the Western Digital Corp Second Quarter Fiscal 2019 Conference Call. At this time all participants are in a listen only mode. As a reminder, this conference is being recorded. I would like to introduce your host for today's call, Mr. Peter Andrew, Vice President of Investor Relations.
Mr. Andrew, you may begin.
Okay. Thank you, and good afternoon, everyone. This conference call will contain forward looking statements within the meaning of the federal securities laws, including business plans and strategies, industry trends, and business and financial outlook. These forward looking statements are based on management's current assumptions and expectations, and we assume no obligation to update them to reflect new information or events. Please refer to our most recent and uncertainties that could cause actual results to differ materially.
We will also make reference to non GAAP financial measures today. Reconciliations between the non GAAP and comparable GAAP financial measures are included in the press release and guidance summary that are being posted in the Investor Relations section of our website. With that, I will now turn the call over to Steve Milligan, our CEO.
Thank you, Peter, and good afternoon, everyone. With me today are Mike Cordano, President and Chief Operating Officer and Mark Long, Chief Financial Officer. For the second quarter of fiscal 2019, we reported revenue of $4,200,000,000 and non GAAP gross margin of 31.3%. Non GAAP operating expenses were $738,000,000 and we delivered $1.45 and non GAAP earnings per share with $469,000,000 in operating cash flow during the quarter. Despite a softening business environment, our fiscal 2nd quarter results were generally within our guidance ranges.
Consistent with indications we provided at our Investor Day, overall demand trends exhibited a negative bias as the quarter progressed. Subsequent commentaries from several companies in our served markets have highlighted continued demand weakness. Geopolitical and macroeconomic conditions have contributed to our industry dynamics remain challenging. Consequently, our outlook for the March quarter will be significantly weaker than it would otherwise be given normal seasonality. I will comment on the actions that we are taking in response to current business conditions.
First, we have been transparent in sharing our views on the evolving business environment and will continue to do so. In December 2017, we were the first to describe normalization trends in Flash And since then, we have enhanced our disclosures to provide greater insight into how we are performing in both flash and hard drives. 2nd, from a product perspective, we are entering calendar 2019 with the strongest product portfolio in our history. We expect to further we continue to lead broad implementation of this technology across our product portfolio we have 96 layer products in customer hands today. In the December quarter of calendar 2019, We expect VIX 4 to achieve bit mix crossover with VIX 3 from a supply standpoint.
The product development investments we have made are yielding results. Specifically, we have completed development of internal controller and firmware architectures that can be leveraged across our portfolio in client, enterprise, mobile and embedded applications. We now address sampling our enterprise NVMe product with Bix4 by mid-twenty 19. We have a significant market We will be shipping our mainstream client SSD based on Bix4 in the March quarter. Our embedded solutions are now shipping to all of the top global smartphone manufacturers enabled by our expanding Automotive and gaming are attractive growth opportunities for Flash, and we are already making inroads in these areas.
In hard drives, we continue to provide the enterprise market with leading aerial densities, enabling the highest capacity points and most cost effective solutions. We have had an exceptionally smooth qualification process for our 14 terabyte Helium Drive and expect customer qualification activities for this industry leading offering to be completed at virtually Last quarter, we announced a 15 terabyte offering at our Investor Day and described our plans for a 16 terabyte product based on energy assist technology. This will be followed by an 18 terabyte product details of which will be shared later this calendar year. Data center systems continue to gain momentum across all of its product offerings in the quarter. While ensuring we maintain our competitiveness we are executing on
Ladies and gentlemen, please standby. Once again, ladies and gentlemen, please standby.
Hey, Sherry.
Hi. Yes. We can hear you now.
Can you put me back on the line? I'm gonna bring in this moment.
We can hear you now. Yes, I can hear you. There's feedback.
Okay. Are we okay on your side now?
Yes, I believe so.
Okay. Alright. Well, I don't know where we cut off. Anyway, I'm going to back up sorry about that. I'm going to back up a little bit of my on my script.
As we have previously indicated, we are taking actions to right size our factory production levels while ensuring we are maintaining changes to our wafer output levels to reduce our bit supply growth for calendar 2019. We are also making adjustments to the pace of Additionally, we have accelerated the closure Lastly, we are implementing substantial cost and expense reductions across the company. In total, we are targeting $800,000,000 in annualized reductions in non GAAP costs and expenses. Mike and Mark will provide further details in their prepared remarks. The long term growth opportunities for our business remain unchanged.
Transformative trends such as artificial intelligence, machine learning, autonomous vehicles, mobility and IoT will continue to drive massive amounts of data that needs to be captured, preserved, accessed and transformed. Western Digital remains well positioned to further capitalize on the fundamental opportunities associated with the rapid growth Port. With that, I will now ask Mike to share our business highlights.
Thank you, Steve, and good afternoon, everyone. We have spent the last 2 years aggressively investing in building our architectural platforms to power product line expansion. We are now at the point where these platforms and the products launched from these platforms are ramping as we enter 2019. The results of these investments gives us the confidence that we have the strongest portfolio in the company's history. Before I get into the details of our December quarter performance, I'd like to comment on Our Architectural Platforms consists of a combination of industry leading based technologies.
In internally developed controllers and the corresponding firmware. The underlying storage technology, whether flash or hard drive heads and media, and the manufacturing and test processes to mass produce our products with high yields and industry leading quality. We have developed our product portfolio to that have strong growth prospects. We are also strengthening our market facing capabilities across the sales, marketing and go to market organizations. These key ingredients are allowing us with our customers in the broader ecosystem.
We are now in a position to drive greater participation in higher value and expect a corresponding improvement in the quality of our revenue throughout 2019. I will illustrate with a few important achievements to date. For data for the data center, we began qualifications of our NVMe SSD product in the December quarter. And due to strong customer pull, we expect to ramp this product for meaningful revenue by the middle of this calendar year. Leveraging our enterprise architectural platform and the associated IP blocks, we will be able to expand our enterprise SSD product portfolio throughout 2019 in a cost effective and predictable manner.
This includes shipping Bix4 based products to customers within this to build upon a highly successful helium technology platform, which has become an industry standard. We continue to maintain our leadership position as demonstrated by the ongoing ramp Our position in the mid range capacity enterprise market continues to strengthen with the ramp of our cost optimized for terabyte to 8 terabyte products, fueling customer breadth and geographic penetration. We continue to capitalize on our industry leading client SSD platform with product spanning from high performance gaming solutions to cost optimize mainstream offerings, all with the quality and reliability customers expect from Western Digital. This platform will enable exciting derivative products which we'll announce throughout this year. In mobile and embedded, we will further expand our presence within top tier accounts given our complete portfolio of products to address all categories of this market.
We have garnered additional design wins with our EMMC and UFS solutions, further expanding our customer base and enhancing our position among the top 5 smartphone manufacturers. We are also successfully developing leading embedded solutions for automotive, connected home and surveillance categories. This has been illustrated through several of the product announcements we made in the second half of 2018 and expect to make in the coming quarters. We are realizing the benefits of 2 years of accelerated product R and D investments already in terms of greater participation in higher value areas of the market and a broadening customer base. I will now provide additional details on We previously announced a reduction to wafer starts for a portion of the Flash joint venture along with delayed deployment of capital equipment.
The magnitude of these actions is a planned reduction of As the year progresses, we will continue to assess market conditions and evaluate the need to make further adjustments to right size our inventory. We are also accelerating our Kuala Lumpur facility closure timeline by almost 3 quarters, along with rationalizing other HDD manufacturing costs. In terms of our 2nd quarter results, Revenue in each of our end markets declined on a year over year basis due to a combination of lower demand and aggressive flash pricing conditions despite healthy growth in flash bits sold. We maintain our leading position across our GTech, Sandisk And WD brands, in our Client Solutions portfolio. We grew our presence in client SSDs during the quarter and delivered solid performance on differentiated form factor devices such as eye expand.
Demand elastic contributed to a strong 30% year over year in increase and average capacity in a flash portion of our client solutions portfolio. Within client devices, while near term demand trends in the smartphone market are soft, our view on the longer term shift towards higher average capacities remains unchanged. We achieved excellent momentum in our client SSD portfolio in the quarter. Average capacity per client SSD grew over 60% year over year in the December quarter fueled by an increased mix of our 512 gigabyte SSD at our key customers. For the first time, our client compute SSD revenue exceeded client compute HDDrevenue.
In data center devices and solutions, we have maintained our position as a leader in aero density with the highest capacity HDD products. As Steve described, the production ramp of our 14 terabyte helium drive has progressed smoothly. We are pleased to have commenced product sampling of our first generation energy assisted 16 terabyte drive and we are on In terms of the exabyte growth rate for capacity enterprise, as we previously stated, we are seeing a moderation in the first half of calendar twenty nineteen Based on our customer discussions, we continue to forecast year over year growth to resume in the second half of calendar twenty nineteen. In data center systems, we experienced excellent momentum with record quarterly bookings and new customer acquisitions in our IntelliFASH and active scale portfolios. We also had record revenue in our UltraStar portfolio of storage platforms and servers.
Demand for our products is expected to be affected by many of the market factors we highlighted at our Investor Day. These include reduced demand for mobile handsets, a continued slowdown in investments by hyperscale customers, inventory adjustments at certain customers and geopolitical volatility. To conclude my remarks, as we enter the New Year, we are confident in the strength of our product portfolio and in our evolving market position. We fully expect to emerge from to effectively navigate current conditions. I will now turn the call over to Mark for the financial overview.
Thank you, Mike, and good afternoon everyone. Revenue for the December quarter primarily due to a decline flash revenue was $2,200,000,000 with a sequential bit growth of 5% and a sequential average selling price per gigabyte decline of 18%. Hard drive revenue was $2,000,000,000. Non GAAP gross margin in the quarter was 31 point 3%, below the 32% to 33% guidance range due to a product mix for hard drives that included less capacity enterprise products and lower than expected flash pricing. Non GAAP gross margin for Flash was 35% and for hard drives 27%.
Continued focus on operating expenses combined with lower variable compensation in the quarter resulted in total non The non GAAP tax rate was 14.5 percent, which was higher than expected. We also recorded a GAAP only charge for various tax related accruals of $496,000,000 consisting of the true up for the repatriation taxes related to tax reform and future withholding taxes related to decisions about permanent reinvestment in foreign jurisdictions. These are not expected to result in near Operating cash flow for the December quarter was $469,000,000 and free cash flow was $24,000,000. Primarily driven by lower all of the sequential increase was driven by continued hard drive builds due to the Kuala Lumpur plant closure. In the December quarter, we returned $144,000,000 in dividends to shareholders.
We did not repurchase any common stock during the quarter. However, we did repay in full our outstanding revolver balance. And made scheduled principal payments reducing our overall debt balance by $537,000,000. At quarter end, we had $4,100,000,000 in cash, cash equivalents and available for sale securities, and principal debt outstanding of $10,800,000,000. As Steve noted earlier, we plan to reduce our annual non GAAP cost of goods sold and total non GAAP operating expense levels by a combined $800,000,000.
Evenly split between the two line items. For cost of goods sold we expect to see the full results of these efforts reflected by the end of the December quarter of 2019 and for operating expenses, we expect to see the full results reflected within the September quarter of 2019. These planned actions are designed to reduce our base level before variable compensation by $100,000,000 per quarter, including a normal level of variable compensation our new total non GAAP operating expense level for a 13 week fiscal quarter would be approximately $740,000,000 starting in the September 2019 Please note that the September 2019 quarter will have 14 weeks instead of the normal 13 weeks. I will now provide We expect revenue in the range of $3,600,000,000 gross margin of approximately 28 percent, operating expenses between $760,000,000 $780,000,000, which reflects the normal payroll tax reset of approximately $105,000,000 and effective tax rate of 15% to 17%. Diluted shares of approximately $294,000,000.
As a result, we expect non GAAP earnings per share of $0.40 to $0.60. I will now turn the call over to the operator to begin
Thank you. You. Our first question comes from Aaron Rakers with Wells Fargo.
Yes. Thanks for taking the question. I do have a follow-up as well. Maybe the start, given the questions that we've gotten through the course of the month or so. Mark, if you wouldn't mind just addressing the balance sheet concerns, your thoughts on the capital structure, the covenant situation as you kind of look at that threshold of roughly $0.50 a quarter at EPS and any kind of thoughts on how you view the dividend?
Well, I'll talk about the first part and then Steve can talk about the dividend. So In terms of We are focused on cash flow and we believe we have the necessary headroom through the near term and through our forecast period. And we certainly from a balance sheet perspective have sufficient liquidity to operate our business. And I'll let Steve talk about that. Yeah.
And Aaron, with regards to the dividend, we absolutely remain committed to our dividend. And so it's as simple as that.
Okay. And then as a quick follow-up, I think last quarter, you had alluded to the view that possibly the nearline, the high capacity business into the CSPs would see more or less a flattish kind of year over year growth rate in capacity shift. Clearly, the results this quarter were worse than expected. And so as we work through the CSP kind of digestion, what's your updated view and capacity shipments looking into the March quarter as well as any into the June quarter as well?
Yes. So, Aaron, just to reiterate, our view of the first half is it remains the same, roughly flat growth year over year. It was a tough compare as you know with growth resuming in the back half.
I want to be clear there. So flat year over year growth in total capacity shift would put you at I don't want to put numbers in your mouth, but roughly 50 exabytes, which is a pretty notable jump quarter over quarter into the March period. Is that right?
Yes. So think about it as a mark 0 growth year over year flat.
Okay. Fair enough. Thank you.
Thank you. Our next question comes from CJ Muse with Evercore.
Yeah, good afternoon. Thank you for taking my question. I guess first question, in terms of your revenue guide, can you walk through, how you're seeing contribution between the NAND side of things in the HDD side?
Yes. So in terms of the guidance, It's about an eightytwenty split, in terms of the delta from quarter or current quarter to the past quarter. And with 80% being flat.
Exactly. So the lion's share of the decline is flash related as opposed to HDD it.
Great. And then as a quick follow-up, in the slide deck, you discussed price aggression in a HDDs? And I guess curious, are you seeing that across all verticals? Is that isolated just to nearline? Would love to get clarification on that?
No, in the slide deck, it was talking about our Client Solutions business. So that's external hard drives. We do not see any of that within standard devices business, the capacity enterprise or any of the other direct to OEM businesses. Great.
Thank you very much. Sure.
Thank you. Our next question comes from Vijay Rakesh with Mizuho.
Yes, hi guys. Just wondering when you look at the NAND side, if you can give us some color on what inventories look like exiting the December quarter versus normal and see for the hard disk drive as well.
Sure.
So can you go on mute? We're getting feedback.
Oh, I was asking, I was just wondering if we could get some color on inventory levels on the NAND side, exceeding the December quarter. And the on how to spell it out. Hello?
Sherry, are we coming through on your side?
Yes, we're coming through. Okay.
I will restate the answer. In terms of inventory, for the past quarter on a sequential basis, we grew inventory by a little over $300,000,000. And that was virtually all hard drive related. And that was a function of both the builds associated with our AL closure and our return to normal inventory levels for capacity enterprise. So we did not have a significant build from a dollar standpoint in flash.
On a year over year basis, we have grown a little over a $1,000,000,000 and it's roughly half flash and half hard drives. And it's basically the same drivers for hard drives, but with flash, it is a function of the cycle and holding more inventory. So, that's our current position.
Got it. And when you look at demand side in both NAND and hard disk drive, one of the hiccup has been this data center demand has been a little bit weaker. I was wondering what your expectations are I know you talked about that it should come back in the second half. What gives you the confidence that it should come back in the second half given that still continues to be at a very low level here? Thanks.
Yes. So the comps we have is a number of things. Obviously, it's through direct conversations with our customers is a combination of the rate of growth relative to their services remains sort of steady and constant. So, so what they need to do collectively is get through their optimizations as well as in some cases there's some excess inventory in the system for that group of customers. So a combination of those factors gives us confidence that we'll see the growth resume for us in both sides of our business in the second half of the year.
Our next question comes from Mehdi Hosseini with SIG.
Thank you. Have one question and one follow-up. Going back to the NVMe commentary and how you're positioned for a new product launch, want to better understand your value at what and what is it that you've been able to get some design wins? I'm under assumption that Three quarter of the NVMe SSD market is dominated by 2 and 1 Korean competitor dominating at least half of the market in that context, want to understand what is it that gives you confidence that you're going to gain traction? And I have a follow-up.
Yes. So 2 things. One is the quality of the product we're bringing in the market in terms of its relative competitiveness. And you sort of stated what are the other motivations. There's 2 guys with a lot of market share.
They all prefer to diversify. So there's a pull from our customer base on those 2 factors and they're rather significant. Yeah.
And the other thing, Mehdi, that I would add to that is we have to keep in mind is that these are These are our traditional customers. I mean, they deal with us across the product spectrum. We are a known supplier to them. And so if we're able to deliver the right product at the right time with the right cost We arguably have a pretty good head start anyway given our pre existing relationships. Ships.
Sure. And my follow-up has to do with TMC and relationship and wafer supply agreement. And I'm just going to ask you and you feel free to how you're going to answer this. Historically, you've been obligated to purchase a certain amount of wafer and it's been on a cost plus arrangement. Given all the changes that you're making, cutbacks on wafer starts and everything.
And in the context of where NAND prices are going and the SSC revenue contribution now till second half of twenty nineteen, how should we think about this relationship? Is there room for realignments of both party would benefit? And should we still assume that, the prior arrangements that were based on cost plus looking forward?
I'm not sure that you're characterizing the relationships the right way. We have the ability to throttle our wafer start levels on our own. Now there are certain fixed costs that they have incurred. For example, building setting up the building some of the infrastructure costs that we don't pay directly that we are still obligated to pay for. And so we talked about this last quarter on our earnings call.
When we looked at that from a broad economic perspective from a cash perspective, we determined that it was more economical given the supply demand such to cut our wafer starts, which we are doing and are in the process of doing And that will carry through kind of the first half of this year and we'll continue to evaluate what level that needs to be. But from characterization of the relationship is not correct and the economic consequences of that for us were favorable. Both from a well, from a cash perspective essentially.
Yeah. Perhaps a better question would be, would the current downturn bring the 2 parties together? Everyone talks about the need for consolidation? And is this the opportunity for a more closer relationship?
Well, that I'm not going to speculate on that, Medi, and I'm sure you appreciate that.
Okay. Would you agree that industry needs to consolidate to better, adjust to the industry dynamics supply and demand?
I'm not going to comment. I'm not going to I appreciate your question, Mehdi, but I'm not going to comment on that. We go to the next question please.
Okay. Our next question comes from Amit Dariani with RBC Capital Markets.
Hopefully, I get four questions as well. I have 2, though, that I'll stick to. I guess I'm surprised by the gross margins on the HDD side of 27%, Steve, I don't know if you've seen that since the time and flood time. So just could you just touch on what's going on over there and how do you see the path for gross margins on the HDD side through calendar 2019?
Yeah. No, it's a fair question on it. And the reality of it is just to be upfront, I'm not happy with the hard drive margins. Disappointed by the level there. It's driven by 2 things: 1, weaker or lower capacity enterprise mix.
Which obviously capacity enterprise hard drive carries a higher margin profile. And oh, by the way, we are carrying a cost burden in the HDD space, which is the reason why we're closing Kuala Lumpur not only the reason that we're closing it, but also the acceleration of that. And so as we finalize the closure of that facility and capacity enterprise. Our mix improves in the back half of the year. We'll see those margin levels to return to a more acceptable and traditional level in the hard drive space.
Got it. And if I could just follow-up, and I realize everyone's crystal ball is somewhat cloudy these days, but to the extent you could see and look at all the cost reduction initiatives that you guys have, do you think gross margins in aggregate for Western Digital trough out of the March quarter and they start to improve for the rest of the year? Or do you think June could be another soft quarter before things ramp up in the back half? Just how do you think the gross margin trajectory from here given all the cost reductions you guys are doing?
Well, let me let me give you a little bit. Let me answer your question. I'm going to broaden that question. So let's talk a little bit about how we see 2019 playing out. So let me talk about the top line first.
So we would expect that for next quarter, our fiscal Q4, and I'm going to speak in relatively general terms, but this will help all of you our revenue levels to look pretty consistent with what we're expecting for fiscal Q3. Going into the back half of the year we would expect that our revenues will begin to improve for 2 principal reasons. 1, improvement in capacity enterprise volumes as our hyperscale customers return to more normal buying patterns and resumption of growth in terms of capacity enterprise. And then additionally, let's call it a seasonal bump in terms of our revenue kind of call it across the board, both in terms of Flash as well as in other areas. So our revenue will begin to improve.
Now I'm going to I'm going to start your question on margin for the time being. I'm going to talk a little bit about OpEx. OpEx this quarter in terms of expectations, Mark touched on it is inflated beyond what it would normally be. It's an inflated and, you know, it's inflated really because of a couple different reasons. Inflating compared to, fiscal Q2, because, one, we've got FICA taxes that kick in this quarter that for higher wage earner people that'll kind of go away as we move through the quarter And then the other thing is, is that we had some variable comp credits that were in the December quarter that will not recur in terms of in the March quarter.
So that's why that compare looks a little bit odd. When you then move through the balance of the year, 1, we've got operating expense actions that we will be taking that will the full effect of that will be realized in September, but there will you will begin to see more of a benefit of that in the June quarter. So OpEx will be trending down as we move through the year to a $740,000,000 level, starting the September quarter. Absent one complexity in that in the September quarters, we will have 14 weeks of operating expenses versus 13. So we all need to keep that in mind from a modeling perspective.
From a margin perspective, that is always difficult to, to determine. And it is really the wild card. Clearly from a flash, supply and demand perspective, which is consistent with what others have said, we expect that we're going to continue to be under pressure as we move through the first half the year. The second half is a little harder to say, but I'm going to tell you what we are assuming. It doesn't mean that it's going to happen, but I'll tell you what we are assuming is that we are assuming that margin pressure in the flash area will persist through calendar 2019.
Now we're doing that for really one principal purpose from a financial modeling perspective in that we want to have a conservative bias. So we're kind of, I'll call it planning for the worst. That is leading us to the actions that we outlined from a cost and an expense perspective in terms of either accelerating actions that were already planned or taking new actions to take costs and expense out of our system. But it's obviously not fully within our control to say, how are how is Flash supply and demand gonna play out as we move through the calendar year because obviously we've got demand, which there's a fair amount of fluidity and uncertainty associated with that right now. And then we do not have clearly we don't have control nor do we have complete visibility in terms of the production levels of our competitors.
I know that's a long answer. What that will mean from an EPS perspective is, is that you is that probably next quarter, I'll look a lot like this quarter in terms of EPS performance with some level of improvement 14 week, can we make up for that 14th week of OpEx in the September quarter? In other words, can we get 14 weeks of sale? That's always a challenging thing when you go to 14 weeks. But that's kind of how the year is going to look based upon our current expectations.
Perfect. Thank you so much for all the insight, Steve.
Thank you.
Thank you. Our next question comes from Carl Ackerman with Cowen and Co.
Hi, good afternoon, gentlemen. Steve or Mark, I wanted to clarify on your I appreciate all the commentary they just gave. Thank you for that. But I did want to clarify on your gross margin and OpEx savings assumptions, combined equating to a run rate of $800,000,000 Could you please remind me how much of these savings are incremental beyond what you previously called out from integrating Sandisk exiting calendar 2020, which if I recall correctly, you expected an incremental $600,000,000 from the end of 2018 through 2020. Secondly, where are the 2 largest buckets you expect to extract the $400,000,000 of COGS savings from.
And then lastly, how should we think about you reinvesting those savings into strategic growth areas of the market? Thank you.
Okay. So the first question is relatively straightforward in that the entirety of the COGS actions are incremental, to the previously announced Sandisk related synergies. So that will we were targeting 2020 and So these are separate from those. And then when we think about the primary drivers, from a COGS standpoint, these are first, associated with our acceleration of the KL closure and rightsizing our HDD footprint. And then the second big driver is just an overall focus and improvement in terms of our other COGS related expenses on the, primarily on the hard drive side.
So the vast majority is associated with the hard drive side.
I
think those were the main points you asked. Was there
I think there was a there was a last question, which I was going to answer and I lost I'm sorry I missed that. There was Can you do we cover everything?
You have a follow-up there? Oh, where do we reinvestment?
Oh, reinvestment. Yes. So let me comment on that. I'm sorry. Yes.
The reinvestment. One of the things let me make this point, one of the things that we are trying to do, obviously, we need to tighten our There's no question about that. I mean, you know, it's a challenging market. Margins have been under pressure. So we absolutely need to tighten our belt and we will do everything to do that.
One of the things that we don't want to do, I've used this phrase before as cut our nose off in spite of our face, right? So we we don't want to, unreasonably curtail our investments in terms of fundamental technology or in terms of fundamental product offerings. So those are areas where at present, we Other than trying to push on efficiencies and things like that, we are not making fundamental cuts that we will believe will hurt either our short term or our long term competitiveness. Now that being said as market conditions evolve, we'll continue to evaluate That's present. That's what we're trying to do.
And we believe that we can do that even with the aforementioned cuts that we're making in both costs and expenses.
Sherry, can I have the
next question? Thank you. Our next question comes from Sidney Ho with Deutsche Bank.
Thanks for taking my question. I guess, you previously talked about fiscal 2019 cash CapEx of $1,500,000,000 to $1,900,000,000 of JV CapEx, I assume that hasn't changed. I understand you assess it throughout the year. Can you talk about within that budget, what are you planning in terms of wafer capacity additions versus, just kind of more technology transition
Yeah. So we are not expanding wafer capacity. So that's all tech transitions that you see from us.
And just to address the quantitative side. We do continue to expect to be in that $1,500,000,000 to $1,900,000,000 range for total cash CapEx for fiscal 2019.
Okay. And then my follow-up question is that in your prepared remarks, you talk about bid supply costs. So of 96 layers in fixed 4 in Q4 of this calendar year. And at your Analyst Day, you show a slide that says costs per gigabyte crossover between to 96 layers will happen sometime in first quarter calendar 2019. Is that normal to see a 3 quarters lag in terms of the supply crossover.
In other words, are there any changes to technology roadmap maybe can you remind us what kind of cost improvement per gigabytes do you expect this year?
Thanks. Yes. So let me try to answer that is normal. And then really the benefit of the technology transition gets you the cost crossover earlier, but we have to continue to transition the fab to get the bit crossover. So that is standard and normal.
And we've talked about this notion of our long term cost down between 15.25 We think this year is at the lower end of that range and it's driven as we get more of the production over, to the BIX 496 layer output.
Yeah. And so going back to the Investor Day, we absolutely stand by and our ability to have the lowest cost per bit from an NAND perspective. So that belief in conviction remains.
I appreciate it. Thank you very much.
You're welcome.
Thank you. Our next question comes from Jim Suva with Citigroup.
Thank you very much. Considering the cost cutting that you're proactively doing, Can you help us compare to where that kind of gets us from a gross margin perspective or other actions you're doing? I believe last month at your Investor Day, you gave some, gross margin guidance longer term, 35% to 40%, if I'm correct. And kind of what you're looking at now is 28%. So quite a big gap.
Is there a roadmap to get back to that? And if so, timeline or given that industry changes or are those off the table? Thank you.
No, I think, as Steve pointed out, we stand by our long term financial model with the gross margins of 35 to 40% for the reasons we stated at Investor Day. Currently because primarily of the flash cycle, we are below that range. We highlighted we will periodically operate below the range and periodically operate above the range. And our actions are designed to improve our cost structure, as we said, a lot of that is focused on the HDD side of things, but we continue to believe that over time as the, flash market normalizes and returns to a balanced state, We will get head back towards our target range, but we haven't given a timetable for that.
Thank you very much. Thank you.
Thank you. Our next question comes from Ramsey Mohan with Bank of America.
Yes, thank you. Steve, this was one of your weaker free cash flow quarters in a very long time. I was wondering how you're thinking about the company's ability to drive free cash flow in Q1 and the rest of fiscal 2019? And just how quickly can you work down that inventory from the Kuala Lumpur build?
Yes. So you're absolutely right. I mean, free cash flow, we were essentially or well, cash flow, we were essentially, where we slightly free cash flow positive for the quarter. Right now, I mean, obviously as our earnings compress cash flow comes under more pressure. I can tell you that what I am pushing the team, in other words, challenging the team is that and I'm only going to talk about the current quarter that we remain free cash flow neutral for fiscal Q3.
That's going to be a challenge Certainly not saying that we're that we're that that's it's not don't take it as guidance per se. But we are absolutely pushing on cash flow. That is our number one priority. And so we are looking at all the levers that we can from an economical standpoint to maintain a free cash flow neutral position from an operating perspective. And of course, that's before any financing activities, whether that's the payment of our dividend or any debt mandatory debt pay downs that we might have.
And so if we are successful at maintaining free cash flow from an operating perspective, that would mean that we'd have kind of I'll call it a relatively modest decline in our aggregate cash balance, ending in the March quarter. So that's what we're challenging ourselves. But you're absolutely right. And valid to focus on that and it remains very much of a high priority, from my standpoint and accordingly, accordingly, with the rest of the management team.
Our next question comes from Mark Delaney with Goldman Sachs.
Yes, good afternoon and thanks very much for taking the question. The questions on the enterprise hard drive business, looking at my model, I think unit that came in at the lowest level since the HDST acquisition. Certainly, there's a lot of discussion about the near line portion of that already on the call, but something maybe talk on the mission critical piece of that business? I know, WD's prior view has been that there's still going to be a longer tail of that and curious if any of the weakness in enterprise hard drives related to mission critical and how you think your market share mission critical is trending?
No, we've talked about previously. We, have exited that marketplace from a new development standpoint. Patient from production shipments. So from that standpoint, we've prioritized investment in enterprise SSD and other areas. So from an overall market share standpoint, we probably ceded some market share in the quarter just reported, but that's really about the end of our our end of life shipment scenario.
Thank you. And our next question comes from Munjal Shah with UBS.
Yes. Hi, thank you for taking my question. I had 2 quick ones. How could you characterize the inventory at in the channel and the customers at current levels? And then on China, did you see any demand?
I mean, what is your exposure there? And what type of demand trends did you see there?
Okay. Let me comment. So I think channel inventories are slightly elevated. And inventory at end customers in certain pockets, there's a substantial amount. And that's part of the muted demand we see as we came into the quarter.
Yeah. And on China, I don't I mean, obviously people have talked about, a softening environment in China. In kind of a broad sense. And that's generally what we've seen. And it's kind of across the board.
I don't think that we've seen anything that is unusual or deviates from that. In other words, smartphone guys are kind of off in an enterprise business. So just kind of a general weakness, but nothing that stands out in particular to highlight.
Thank you. I would now like to call to hand the call back over to management for any closing remarks.
So thank you very much for joining us and we certainly look forward to continuing our dialogue. So have a great rest of the day. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect and have a wonderful day.