Good afternoon, and thank you for standing by. Welcome to Western Digital's 4 Quarter And Fiscal Year 2018 Conference Call. As a reminder, this call is being recorded. Now, I will turn the call over to Mr. Peter Andrew, Vice President of Investor Relations.
You may begin.
Thank you, Sherry, and good afternoon, everyone. This conference call will contain forward looking statements within the meaning of the federal securities laws, including statements concerning, our product and technology platform, market positioning, business strategies and growth opportunities, market and flash, industry trends, our joint ventures with Toshiba Memory Corporation and our expected future financial performance, capital allocation plans, and potential share repurchases. These forward looking statements are based on management's current expectations and are subject to risks, and uncertainties that could cause actual results to differ materially, including those listed in our quarterly financial report, on Form 10Q filed with the SEC on May 8, 2018. We undertake no obligation to update our forward looking statements to reflect new information or events. Further references will be made during this call to non GAAP Financial Measures.
Reconciliations of differences between the of our website. We have not fully reconciled our non GAAP financial measure guidance to the most directly comparable GAAP measures because material items that impact these measures are not in our control and or cannot be reasonably predicted Accordingly, a full reconciliation of the non GAAP financial measures guidance to the corresponding GAAP measures is not available without unreasonable effort. During Q And A, we will ask that you limit yourselves to one question. As a reminder, we are also providing concurrent presentation on this webcast and a PDF of the slides and our remarks will be available later today in the Investor Relations section of our website, along with our quarterly fax sheet. With that, I will now turn
With me today are Mike Cordano, President and Chief Operating Officer and Mark Long, Chief Financial Officer. After my opening remarks, Mark will provide a summary of recent business highlights and Mark will cover the fiscal 4th quarter and full year financials and wrap up with our first quarter guidance. We will then take your questions. Demonstrate the power of the Western Digital Platform. Of 4% to 8% as demand for our hard drive and flash based offerings remains strong.
Non GAAP gross margin improved nearly 5 percentage points to a record 42.5% And with non GAAP operating expense growth of just 2%, our business model demonstrated significant earnings leverage. The long term trends We have assembled a compelling portfolio of storage technologies that address these market opportunities and big data and fast data. With the continued expansion of our product lines, we believe we are well positioned to address this growing There has been much debate among the investment community about flash industry cyclicality and its effects on our business. I would like to share my perspective on it. The tight demand supply balance experienced by the industry for the last several quarters was driven by several factors including the complexities of technology conversions such as the move from 2 dto3d and then in 3 d to higher layer counts.
As these technology conversions are maturing, and manufacturing yields are improving, the rate of flash supply growth is also increasing. We estimate that in calendar 2018, industry bit growth will be at the high end of the long term range These factors, together with a softer demand environment in key sectors such as mobility, are causing flash pricing to decline in a rate faster than in past quarters. The flash industry has been in the midst of adjusting to continue through we are reviewing our near term capital investment plans for Flash with our joint venture partner. We are a leader in both hard drives and flash based technologies and products. Flash portfolio to remain healthy.
Additionally, our broad portfolio of hard drive solutions coupled with the underlying growth in cloud infrastructure allows us to better manage dynamic market conditions. To demonstrate the confidence and long term outlook our board has authorized a new $5,000,000,000 share repurchase program. We believe today's announcement is an excellent capital allocation opportunity We are focused on innovating and executing on our long term value creation strategy by utilizing the power of our platform I want to sincerely thank We will be hosting discussion about our market opportunities and how we are continuing to build the company to deliver shareholder value. With that, I will now ask Mike to share our business highlights.
Thank you, Steve and good afternoon, everyone. Our June quarter performance once again highlights the power of the Western Digital Platform. Strong demand for our products help deliver year over year revenue growth in all of our reported categories. Continued as planned, and we made further improvements in our manufacturing efficiencies. In data center devices and solutions, demand from our cloud customers drove continued adoption of our high capacity helium drives.
Particularly at the 12 terabyte capacity. Strong demand for these products reflects the needs of cloud customers to upgrade their infrastructure and build new data centers to support the unabated growth in data. Our helium drives gained further traction on a global basis in both established and emerging markets. On a cumulative basis, since the launch of our helium platform, We have shipped more than 30,000,000 drives underscoring our multi generational leadership position. We estimate that the overall exabyte growth in capacity enterprise was more than 90% year over year in the first half of calendar 2018.
And we continue to estimate more than 65% year over year growth for calendar 2018. Switching to client devices, we began revenue shipments of our latest NVMe client SSDs with additional product qualifications progressing as planned. In the June quarter we expanded our surveillance portfolio with the introduction of the Western Digital Purple 12 Terabyte Drive, which is the industry's highest capacity surveillance class product. This latest addition to Western Digital's portfolio creates new possibilities in video surveillance by supporting the capture and access of multi high resolution video streams for use cases such as deep learning and analytics. In embedded applications, we saw further adoption of our 3d Flash based products.
The design win pipeline for emerging applications in the automotive, industrial, and connected home verticals remain strong. In the Client Solutions category, the worldwide appeal of our GTech Sandisk and WD brands continue to drive consumer preference for our performance, notably in APAC and China. Last week, we announced the industry's first 96 layer 4 bits per cell QLC3d flash technology. This new 3d flash chip delivers the industry's highest storage capacity of 1.33 terabytes in a single die, reflecting the deep flash technology design and implementation expertise of our team. We have commenced sampling and volume consumer product shipments are expected to begin later this calendar year.
Turning to our flash joint ventures, the ramp of our BiCS3, our 64 layer 3 d flash technology, progressed well with manufacturing yields setting new records. The transition to Bix 4, our 96 layer technology, is also underway and for the full calendar year of 2018, we expect our 3 d flash fit output to constitute nearly 75% of our total captive bid supply. As Steve described, the flash market is continuing to normalize. In response to these dynamic conditions, we are in discussions with Toshiba Memory Corporation, our joint venture partner, to moderate the near term are done with As we have stated previously, we are continuing to rationalize our hard drive manufacturing footprint as part of our ongoing integration activities. To this point, we recently informed employees of our plan to decommission hard drive manufacturing at our Kuala Lumpur site.
Implementation of this plan is commenced and we will be moving our operations to Thailand over the next 18 months. In summary, with our unique portfolio, we are able to address and capture the opportunities presented by the growth in and the increasing value of data With the continued expansion of our is well positioned to deliver the best financial and strategic outcomes in a variety of market conditions. I will now turn the
Thank you, Mike and good afternoon everyone. I'm pleased with our financial performance in the June quarter in fiscal year 2018. We executed well across our broad array of markets with our diverse product portfolio achieved expense targets and reduced interest expense, all of which resulted in significant earnings growth. We finished the year with a strong liquidity position as a result of improving our capital structure and continued strong cash flow generation. Revenue for the June quarter was 5.1000000000 dollars, an increase of 6% on a year over year basis.
The June quarter revenue for data center devices and solutions was $1,600,000,000, an increase of 14% year over year. Our data center revenue growth continues to be driven by cloud related storage. Client devices revenue was $2,500,000,000, an increase of 3% year over year. We had significant growth in mobile and embedded products offset by client compute devices. Client solutions revenue was $1,000,000,000, an increase of 2% year over For fiscal year 2018, year over year revenue growth was 8%, driven by growth in each of our end markets.
This is indicative of strong operational execution and Non GAAP gross margin for flash average selling price per gigabyte declined in the mid to high single digit range on a quarter over quarter basis. For fiscal year 2018, our non GAAP gross margin expanded 470 basis points resulting from a higher mix Non GAAP OpEx for the June quarter totaled $820,000,000 below our guidance due primarily to lower variable incentive compensation. Our non GAAP net interest and other expenses for the June quarter was $101,000,000, a year over year decrease of almost 50 expense for the June quarter a decrease of $94,000,000 year over year. For fiscal year 2018, we reduced non GAAP interest expense $180,000,000 year over year, primarily due to the financing transactions implemented throughout fiscal year 2018. In the June quarter, our effective non GAAP was $1,100,000,000 or $3.61 per share, an increase of 23% year over year.
For fiscal year 2018, we increased our non GAAP earnings per share by $5.54, an increase of 60% year over year. In the June quarter, we generated $863,000,000 of operating cash flow. We continued to reinvest in our business with $225,000,000 in capital investments, resulting in free cash flow of $6.38 $200,000,000 in operating cash flow, an increase of 22% from the prior year. We deployed $1,600,000,000 on capital investments resulting in fiscal year 2018 free cash flow of $2,700,000,000. In the June quarter, we had an increase in inventory in the back half of the Kuala Lumpur hard drive factory.
In the June quarter, we returned $586,000,000 to shareholders, of which $150,000,000 was in dividends and $436,000,000 was through share repurchases. We also declared a dividend in our Board of Directors authorized a new $5,000,000,000 share repurchase program, replacing our prior programs. We are targeting repurchasing $1,500,000,000 depending on market conditions. We believe this is an attractive capital allocation opportunity and demonstrates the We closed the quarter with cash, cash equivalents and available for sale securities totaling approximately $5,100,000,000. In addition, we have $1,750,000,000 remaining out of our $2,250,000,000 of total revolver capacity.
As a result, we ended we believe that our long term gross margin model should be increased despite near term volatility in the flash market, The power and resiliency of the Western Digital Platform remains strong. We are increasing our long term non GAAP gross margin model range to 35% to 40% from 33% to 38%. I will now provide We expect revenue in Gross margin in the range of 38% to 39% operating expenses between $825,000,000 $835,000,000 interest and other expense of approximately $105,000,000 an effective tax rate of approximately 10 percent, also consistent with our updated long term outlook diluted shares of approximately $304,000,000. And as a result, we expect non GAAP earnings per share of 3 Operator?
One moment for our first question. Our first question comes from Aaron Rakers with Wells Fargo.
Yeah. Thank you for taking the question. I just wanted to kind of double click on the NAND flash assumptions that you're making looking into the back half of the calendar year. Can you just, 1, help us understand of what a healthy gross margin profile might look like in the NAND Flash business in total and maybe using Sandisk historical levels as context to that. And what are your assumptions with regard to your ability to take costs down relative to the ASP expectations for the back half of the calendar year?
You want to talk about costs and then?
Yes. So the cost declines are within our range on an annual basis. So we've talked about 15 to 20 5%. That's kind of ongoing. As you see in our guidance, Aaron, obviously, we expect ASPs to come down a bit faster than that.
And that's what's having the effect. Relative to, our flash margins, I think we continue to see them healthy the context that you just talked about relative to legacy Sand Disc, Mark?
Yes, meaning that at similar points in the cycle, if you want to refer to it, we've been able to operate at a premium, to historical Sandbisc margins. Aaron?
Yes. And so I guess, I guess, with that context, I mean, is there as we look back historically, how do you see us currently in terms of the cycle? Is there Is there a basis for that comment of what we should be looking at with regard to the cycle that we're in? And how fungible maybe the capital deployments might be or the industry's CapEx or capacity growth going into the back half of the year?
Well, I don't know if I know exactly how to answer your question. I mean, we, we are focused on really a few things. I mean, one, let's keep in mind our business model, our business was constructed to deal with dynamic market conditions. And so what we're focused on are on those things that we can control. What can we do in terms of making sure that we've got the right products in the right customer base and not only that, what can we do with our cost structure to optimize things?
And then also what can we do from a capacity standpoint? And that gets into the discussion that we're currently having with Toshiba Memory in terms of expansion plans as it relates to 2019. That being said, we continue to expect that our margins are going to be at very healthy levels as indicated by the reset in terms of our margin model of 35% to percent. And additionally beyond that, we have high confidence in the long term cash flow generation capabilities of the business and also believe, quite frankly, that the market is I will call it overreacting to the pricing pressures we're seeing from a flash NAND perspective. And we believe that at this level, with the new share authorization, we have the opportunity to repurchase shares and an attractive level.
Our next question comes from Joe Moore with Morgan Stanley.
Yes, thank you. With regards to raising the long term gross margin profile, can you talk about the rationale for that? I mean, other than the fact that you've operated above that range for for quite a while. I guess what is it structurally that sort of makes you think that gross margins can operate over a full cycle in a higher range?
Well, the 2 main drivers are the greater mix of Flash revenue, which will be at a higher margin and then the increasing mix of capacity enterprise hard drives. So both of those drive a higher margin profile.
And I guess as you think about just as a follow on to that, I mean, as you think about the historic Sandisk margin profile. I would think that the amount of capital spending as an industry that we have to do to sort of stay on the same growth profile of a gigabit growth profile is higher. Should that drive a structurally higher gross margin in NAND as we sort of need to fund a higher level of CapEx to to stay on the bit growth trajectory or is that not part of your thinking there?
Well, I think that I think we're going to need to we're going to need to get a sufficient return on the capital that we're investing. And so obviously that is going to be subject to the pricing environment But our intent would be to work with our customers and our partners to make sure that the capital that we're deploying to provide them additional bits that we're getting a satisfactory return for that. Absolutely. But we don't I mean, let's be honest, we don't fully control that, right, because it's market based pricing.
All right. Thank you very much. Very helpful. Thank
you. Our next question comes from Joe Wittine with Longbow Research.
Hi, thanks. Steve, in your prepared remarks, you called out a soft demand for mobility. I understand there's not much growth in unit demand there, but I'm curious if you were also referencing any line in the growth rates of capacity per device?
Yes. So relative to that, you're right. The unit growth is muted. And relative to our previous expectation, it's come in lower than expectation. So I think that continued unit trend is there.
And the unit trend and the capacity mix has been below our original expectation.
And then just as a quick follow-up, it's early here, but looking out to December with price per gigabyte declining, do you still expect to see like a typical seasonal move from September going into December? Any kind of pain points in
the market that could prevent that today?
Well, right now I'll comment on that and then Mike can correct me if I stated incorrectly, but right now, we're not expecting that. As we indicated, we're I mean, there may be some seasonal bump in terms of demand. But seasonality in our business has kind of muted over time between the September quarter locations in the market, if you want to call it, that would create a different opportunity from a pricing perspective. So we do back continued as we said in our prepared remarks, continued pricing, downward pricing pressure in terms of the flash market. And that being said, we'll have the ability to mute that impact because we're continuing to see strong demand particularly for capacity enterprise.
Excellent. Thank you.
Thank you. Our next question comes from Vijay Rakesh with Mizuho.
Hello.
Hi, guys. Just looking at the flash side, the NAND side, I was wondering, how do you see, if you look at next year as you shrink to $64.96, do you see the cost downs being faster than what you're seeing on the pricing side? Or do you see the pricing stabilize into early next year?
Yes. I think in general, we think the bit growth for next year is sort of the middle of our range. And given our comments with a bias to the lower end of the range. And it's really about supply demand balance and where things in. So it's Steve just mentioned, it's market based pricing.
And so we would expect our cost per Russian to be roughly within our range as well. So So nothing untoward and really is going to be tied to the supplydemand belt.
Got it. And the pricing on the flash side has been a little bit softer. Have you seen that drive a little bit more penetration on the the hard disk drive side of the business either in client or enterprise? Thanks.
To this point, not been anything material, as things progress, we did see during the period of allocation that we actually saw a slowing of flash penetration and PC adoption, we would expect and we have seen the initial indications of that progression continuing as as we moved into this normalized period.
Thank you. Our next question comes from Wamsi Mohan with Bank of America.
Yes, thank you. Steve, the shut down up the Kuala Lumpur manufacturing and shift to Thailand. How much of restructuring charges will will be needed? How much cash restructuring charges and how much savings can you drive from this move?
Looking at Mark to help with a little bit of color on that.
Yes. So in terms of, our restructuring charges over time, we're looking at approximately $160,000,000 that'll be spread over, 3 fiscal years. So some of that was reflected reflected in fiscal 2018, we'll have kind of the majority in 2019 and then a little bit in 2020. In terms of, we haven't set out our targets for value creation publicly, but we do feel we're going to get a very good return on that restructuring. So
Yeah. To add a little bit of color on it, if you look at our hard drive margins and I recognize the fact that we don't disclose our hard drive margins or our flash margins because it's not necessarily consistent with the way that we manage our business. In other words, we don't have a we have an integrated business as opposed to a separate hard drive versus flash business. And I do know that some of the investment community wish we did disclose those margins separately, but I just to provide a little bit of color, our hard drive margins for quite a while have been incredibly stable. And we have traditionally carried a premium vis a vis our gross margins versus our largest competitor.
That absolutely continues to remain the case. And what we want to do is we want to continue to optimize our cost structure that allows us to continue to have that strong margin for 4 Right now, we have not seen a meaningful degradation in our margin performance. But it takes a while to close the factory. And so we needed to announce this. We needed to get ahead of it.
It's going to take us a while to make this happen. We've been in Kuala Lumpur for 45 years. And so right now, not a significant impact, but the effect of the restructuring that we'll be going through over time will allow us to continue to operate our hard drive margins at an attractive premium to our competitors.
Steve. If I could quickly follow-up the NAND ASB comment in the quarter of mid to high single digit quarter on quarter decline that you would miss in 2Q. How do you see that trending as you go through the September, December quarters? What assumptions embedded in your gross margin guide?
Well, we expect the pricing environment, as Mike and Steve indicated, to remain the same in terms of normalizing. So, we would expect the the declines to be roughly the same and
It would kind of be similar to maybe a little bit higher than what we saw in the last quarter. The other thing to add to that, which I think is an important point to note, is that when you look at obviously we are outlooking a lower gross margin level in our fiscal Q1 or calendar Q3, largely that entire gross margin decline, large not necessarily entirely, is due to some of the pressure that we're seeing in terms of ASPs on Flash.
That's very helpful. And sorry, one clarification. Can you just talk about any potential impact from tariffs to Western Digital and I mean, we, our main competitor has some large capacity footprint in China. I was wondering if that creates any opportunity for you guys. Thank you.
Well, yeah, sorry. How it impacts our competitor? We don't have visibility to that. But of course, we'll continue to monitor and see if there is an opportunity. We are largely not impacted by the recent tariff actions If additional actions are taken on tariffs, we could be impacted, but right now, there's really minimal impact to our operations.
Thanks so much.
Thank you. Our next question comes from Ananda Baruja with Loop Capital.
Hey, good afternoon guys. Thanks for taking the question. Just going back to one of the earlier remarks on where you think we are in the NAND pricing normalization cycle. What is your view on that just based on what is available today And just going back to Wamsi's question, if and your answer, if ASP and ASP declines are similar in December quarter, to what you think in the September quarter, would the gross margin range? Would it be reasonable for the gross margin range to be similar as well?
Those two. Thanks.
Well, I
think it's a little too early to call in terms of that. But I will and this will probably be an unsatisfying answer But there's a reason that we have a gross margin range, right? And so our margins are going to modulate over time within that 35 to 40% range. Sometimes they could be a little bit higher as we saw historically. And I guess conceivably they could be a little bit lower.
We're certainly not calling that. But we have a range for a reason. And right now in terms of how we see more conditions evolving for the balance of calendar 2018 and then into 2019 is that we are comfortable with that gross margin range as it relates to our business. But that does not mean that we are not going to experience some degree of volatility. And oh, by the way, that's okay.
Our business was constructed and our management team was constructed to deal with that kind of volatility and manage the best of our ability and generate long term returns for our shareholders.
And where in the cycle do you think we are right now? That's you know benefit?
Well, it's interesting. You know, the reality of it is, is that, you know, everybody always predicts the end of a recession two quarters late. So it's always difficult to predict it when you're in it. And I don't mean that to sound like a cynical. A lot of it will be predicated on let's just say the behavior of others in the industry because we only have so much.
We are encouraged by some of the actions that, for example, Samsung in terms of curtailing their investment plans. And we're working with our joint venture partner to tamper our expansion plans in 2018. If we're successful in that regard, that will make the whatever wherever we're at in the cycle, it will make it shorter and it will make it less steep. And our job is to do what we can to control and influence our aspect of our operations.
I appreciate it. Thanks a lot.
Thank you. Our next question comes from Harlan Sur with JPMorgan.
Good afternoon. Thanks for taking my questions. On the high capacity cloud drives, you know, manufacturing and test lead times are quite long there. So Given the strong demand pull from your customers looking at the recent cloud CapEx spending trends, it looks like they're wanting to enter into long term supplier agreements with some of their key suppliers, which is pretty favorable because you kind of lock in pricing and obviously you guys have control over your cost curve And so is the team starting to see some of your customers wanting to enter into these long term agreements with the team?
Yes. I think when you think about our capacity enterprise business and those particular buyers, we have a range of different commercial agreements with them. And certainly in several instances there longer than 8 quarter long. And there's different mechanisms there. But yes, I think they are looking to a sure supply over a longer horizon and they're working with us to find the right way to do that that's mutually beneficial.
Great.
And then on the Flash side, just given the continued normalization of Flash pricing, We are starting to see price elasticity kicking in, right, especially on things like smartphones where we're seeing healthy content increases and some of the upcoming flagship phones. Are you guys seeing accelerating attach rates to SSDs to client compute?
Yes. As I mentioned on an earlier question, we've seen a little bit of the resumption that was really us coming off the allocation period more into the normalized period. We'll see as the rest of this calendar year and early calendar 2019 occur. But you would expect there will be some elasticity there. That's been the case in the past and we would expect we will see some
Thank you. Our next question comes from Mehdi Hosseini with
Yes, thank you for taking my question. I have a problem with, unmuting Just want to go back to the increase in inventory due to the 2nd quarter and is having that risk impact on free cash flow. I'm just wondering whether rationale in changing your footprint at this juncture, will that be wouldn't it make sense to wait until you have better NAND pricing environment? And allocate some of that, cash flow to a more aggressive buyback given how, what the share price has done over the past 2 years? And I have a follow-up.
Well, I think that first off, we talk about a balanced capital allocation plan, right? And let's be honest, our first job is running our business. And in that regard, we have we are clearly not capital challenged, I wouldn't say. And so right now, if you look at it and I'll just give this as a point of reference, our major competitor in the hard drive space has is down 2 factories. Now we've been rationalizing our hard drive, footprint for a while because we had HST and the WD combination.
So we used to have 4 hard drive factories. Now we're down to 3 And so from a capital optimization perspective in terms of our footprint, we are not as optimized as our competition. And so we want to make sure that we've got a competitive cost structure in that regard. Now is the right time to do it. We've got things optimize in terms of those 3 factories.
In other words, the capability of the other sites to accept the volume out of Kuala Lumpur is there. We've got a solid transition plan in place that'll take us a little bit of time to execute in a way that is rational and does not disrupt supply as it relates to our customer base. And we think it's the right the right thing to do and we've got sufficient capital to do it. And, oh, by the way, because we can do both, we're also think that it's a wise use of our capital to repurchase our stock, particularly at these levels.
Got it. And most of the colleagues being focused on NAND pricing. Let's look at Half Glass 4, you have several new products coming out that 14 terabytes mammer later this year. And you I think I believe you also have a high end NVMe SSD coming out. Can you give us some ideas how these new products are going to trend.
Is this going to be more of a material impact in 2019? Or, any kind of milestones would be great so that we could with the focus on this new product ramps rather than trying to time the NAND HB pardon me?
Yes, let me talk. So first on
the capacity enterprise side, just to
be clear, the 14 terabyte is not a mammer product, but it will be ramping towards the tail end of this calendar year. And we think we're in a good position to continue to maintain our leadership at high capacity at the high capacity points in that segment. Relative to our plans around enterprise SSD, as we've talked about, we have announced a high performance NVMe product, a quarter or so ago, we just a day or so ago announced a new SaaS enterprise SSD. Those are high performance products certainly will help us gain some traction within those product revenues. But we would expect the more material capability and impact to our P and L would occur in calendar 2019 as we ramp more mainstream NVMe products.
So we're making good progress, but the things we're launching now are really good to sort of defend our position at the highest performance part of the market. And more broad expansion would occur in 2019.
Thank you.
Thank you. Our next question comes from Steven Fox with Cross Research.
Thanks. Good afternoon. Just a follow-up on that. You mentioned some interesting products coming down the road and you also have some other areas where you're productizing your core tech technologies, whether it be spinning disks or flash. Can you talk about how those are trending towards impacting the gross margin because I assume when you talked about flash prices, that was sort of a like for like, chip basis, not exactly with mix included.
Thanks.
Yes. So I think Mark mentioned that one of the drivers or the main driver of our model update was really the trend of both capacity enterprise as a percentage of the total hard drive business, which of course is a higher margin part of that business. And the continued shift to Flash as a percentage of our total as well as the mix of our Flash business. All both those things are driving that update in our model.
And the mix of when you look within the Flash business, is it generally a positive as you productize some of these areas, or are
some of them they are. Yes. Yes. Over time, the mix is positive as well.
Yes. And I would also add to that. It has a little bit more of a stickiness element to it as well.
Great. Thank you very much.
Thank you. Our next question comes from Rob Syrah with Guggenheim Partners. Great.
Thanks very much. I wonder if I could just dig back into that enterprise SSD point and a little further, which is I mean, obviously, the high cap enterprise hard drive has been great driving all the growth in data center. Do you feel like the lack of I don't know I'm not sure you won't say exactly, but whatever the relatively speaking that the lack of growth from the enterprise SSD side otherwise is a strong business. I mean, are you guys just not focusing on it much because you don't feel like you're there yet with the new sort of internal in house products or is there or do you feel like you're products aren't there? I mean, like I know, Mike, you said, there's more of a expect more of a calendar 2019 impact from the NVMe stuff.
I mean, is it just you pulling together the former HDST, the Sandisk, all the acquisitions you made, all that IP and getting new products out with internal controllers and architecture? Is it just a matter of getting there or is there something else?
Yes. So Rob, this is Steve. I'll take that question. And we talked about this fairly openly. If I look at our business, kind of scan it and give a report card in terms of execution, our execution in the enterprise SSD area has not been, as good as it needs to be.
It is a strong focus of ours. There is no question It has been a strong focus for a long time. We've had some execution issues from a product development perspective. We've talked about those. We've made some changes.
We're making some progress and you're going to begin to see some new product introductions in that area given some of the changes that we've made as we approach the end of this calendar year and into 2019. It'll begin to have a more material impact in terms of our financial results as we progress through 2019. But that is clearly an area that I have been disappointed in from an execution standpoint, but make no mistake. It is a key focus item for us as a company.
Thank you. Our next question comes from Amit Dariani with RBC Capital Markets.
Yep. Thanks. 2 as well, if I may. I guess one, Steve, when you talk about moderating the pace of supply growth and you're in discussions with Toshiba about it, how much control do you or both of you really have in controlling your capacity or like how far can you push that button? And realistically, are you comfortable seeding market share if the market remains in oversupply mode for multiple quarters?
Well, I think that we have we with our joint venture partner have I will call it complete control over what we do from a capital perspective. Clearly, we can't, control what our competitors do. And so, but yeah, we have that lever in conjunction or in consultation with our joint venture partner to affect the deployed capital in terms of expanding or converting capacity in our factories, in Japan. Now relative to seeding market share, I mean, that would be a calibration point that we would use to determine how much In terms of where we would want to end up, it's not necessarily the only metric, but clearly one of the factors that we would consider along with What sort of return we would get on that deployed capital is where would that position us from a competitive standpoint, including market share? So it's a consideration, but it's not an absolute thing that we would look at as a red light, green light kind of decision point.
Understood. And then as we think about flash ASPs and you talked about declining kind of mid to high single digit range consistently in September December as well, how do you think of cost per bit decline? Does that actually start to slow down? Because as you migrate to 96 layer, I would imagine the cost per bits would slow down a little bit. The declines are there would slow down.
So Is that the 2nd level that's potentially compressing gross margin in September?
Well, cost declines have been well, first off, let's talk about when we talk to We've talked about a range of 15% to 25% and in terms of, per bit cost declines on an annual basis. We've also indicated that this year we expect to be at the midpoint of that. The reality of that kind of getting to your point is that that does not necessarily occur in a linear fashion as you move through a year. But and so and as we win the new node point, sometimes the cost challenges can be more acute on the front end as opposed to on the back end. And so it may have some impact in terms of our margins relates to the September quarter.
But we remain, I'll call it committed or we still believe that cost declines will be in that fifteen 25% longer term and 20% for us kind of midpoint for calendar, 2018.
Perfect. Thank you very much for taking my question guys.
Thank you. Our next question comes from Sherry Skripner and We will have one more question after her.
Hi, thanks. I guess I squeaked in. I think on the last earnings call, you guys talked about hitting the above 40% or 40% gross margins in all the quarters this year. And now you're guiding a little bit lower than that. I guess maybe what is driving that lower outlook for the second half?
Is that primarily related to the mobility that we've talked about? And going along with that with the lower outlook for the second half of the year, do you still think you can exceed the $13 in EPS in calendar 2018?
Yes. So you're right, Sherry, in terms of where we thought we would be in margins and where we are now, it is almost entirely driven by a softer demand environment, particularly in the mobility segment, which is creating a different supply demand dynamic therefore pressuring ASPs more than we anticipated. So you're absolutely right. And then I'll have Mark address the second question.
Yes. Sherry, that's a very clever way to try to give us have us give you guidance for the 4th calendar quarter. The but the answer is yes. We will we're still confident that we'll be able to exceed $13 a share in calendar 2018 EPS. So, as Steve highlighted, Earnings power for the platform remains strong.
We are going through this normalization period and the teams and the business model are constructed to manage through that.
Okay, great. And then with the buyback that you announced the additional $5,000,000,000. I know that you guys have been in the process of working down your debt levels. Is the buyback announced sort of a signal that you feel comfortable with your debt where it is? Or do you think you'll still reduce some of the leverage that you have?
Sure. So as we highlighted, we have a balanced capital allocation strategy. And we are still committed to deleveraging as one of our priorities. At this point, we do have more flexibility because we've been able to restructure our debt and we've been paying it down. So we're comfortable with where it is.
We expect to continue to de lever over time. And as we talked about, we're very happy with the way we brought down our interest expense through our debt restructuring transaction. We feel like we're able to do both and we're able to allocate the right amount of capital to running our business as well.
Thank you.
Thanks, Sherry.
Thank you. And our final question will come from Mark Miller with Benchmark.
Thank you for the question. I just wanted to talk a little bit more. I know it's been talked quite a bit, but is the expansion or the ramp of Chinese domestic and manufacturing also impacting this? Or do you expect that to be a greater factor next year?
No. No. No and no. I mean, it's a long term risk factor as we've talked about before, but it has it is having no impact in terms of the recent dynamics.
Next year either.
There's no meaningful output. There's no meaningful output coming from China. And then, and if there is any output, it's not at any, let's just call it, capacity point that would compete against our products.
I was going to say it's also at a lower, a lower, a more, a chip, a prior generation chip too. Okay.
Yes, exactly. Exactly. Yes,
exactly.
Ladies and gentlemen, thank you for participating in the question and answer portion of today's call. I would now like turn the call back over to management for any closing remarks.
All right. So thank you all for joining us and we look forward to to updating you as we move forward. And thank you for your, for your interest in our company. Have a good day.
This concludes today's conference call. Thank you for joining. You may now all disconnect