Good day, ladies and gentlemen, and welcome to the Western Digital Corp Third Quarter Fiscal 2018 Conference Call and Webcast. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. I would now like to introduce Mr. Jay Iyer, Please go ahead, sir.
Securities laws, including statements concerning our future expected future financial performance, our market positioning, expectations regarding our growth opportunities, financial and business strategies, demand and market trends, our product platform, product and technology development efforts, joint ventures with Toshiba and our expected capital allocation plans. These forward looking statements are based on management's current expectations and are subject to risk and uncertainties that could cause actual results to differ materially, including those listed on our annual report on Form 10 Q filed with the SEC on February 6, 2018. Any applicable forward looking commentary is exclusive of one time transactions and does not reflect the effect of any acquisitions, divestitures or other transactions that may be announced after April 26, 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 the differences between the non GAAP measures we provide during this call to the comparable GAAP financial measures will be posted in the Investor Relations section of our website. We have not reconciled fully 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 measure guidance to the corresponding GAAP measure is not available with our unreasonable effort. In the Q And A part of today's call, we ask you that you limit yourselves to one question allow as many callers as possible to ask a question. Thank you in advance for your cooperation.
As also a quick reminder, we are also providing a concurrent presentation on this webcast and a copy of the slides and our prepared remarks will be available later today on the IR section of our website, including with our quarterly cash sheet. With that, I will now turn the call over to our CEO, Steve Milligan.
Good afternoon and thank you for joining us. With me today are Mike Cordano, President and Chief Operating Officer and Mark Long, Chief Financial Officer. After my opening remarks, Mike will provide a summary of recent business highlights and Mark will cover the fiscal third quarter results and wrap up with our 4th quarter guidance. With revenue of $3. Our operating cash flow reflected solid execution supported by healthy demand for our products particularly high capacity enterprise drives, which achieved record quarterly revenue.
Macroeconomic conditions remained supportive in the quarter The positive third quarter dynamics included strong continued strong demand for our NAND flash products. Our results in the March quarter demonstrate the power and agility of our by our global team. Underpinned by secular growth in big data and fast data applications. Rapid advancements in artificial intelligence machine learning and IoT applications are fueling creation of valuable data at an unprecedented pace. The number of connected devices worldwide is expected to grow from 9,000,000,000 today to upwards of 75,000,000,000 by 2025.
This exponential growth will require robust storage infrastructures and purpose built solutions that allow users to and ever increasing diversity of data. The Western Digital Platform is strategically positioned to play a continue to accelerate their it represents a significant opportunity for our data center storage solutions. In the mobile market, we are well positioned to capture growth opportunities with our comprehensive product portfolio. To be a continued on our strong ongoing performance He will also discuss progress towards delivering high capacity enterprise drives based on our innovative MAMR technology. In Flash, during the third quarter, we saw the market environment continue to normalize with expected price declines.
We continue to deploy our 64 layer 3 d NAND technology across our product portfolio and we'll will be ramping I am pleased to report that our joint venture operations with Toshiba Memory Corporation continued to perform exceptionally well and our plans for continued In March, we celebrated the opening of our shared memory development center in Yokayuchi, strengthening the ongoing collaboration among our engineers. I am excited about healthy gross margins and industry leading profitability. As markets evolve and grow, our ability to optimize product and portfolio mix towards higher value opportunities will continue to be an important lever for managing the business. I would like to sincerely thank the Western Digital team and our partners for their ongoing support. With that, I will now ask Mike
The Western Digital Platform performed well during the March quarter. Demand trends in the cloud data center embedded mobile and PC markets were positive, leading to strong pull for
our
hard drive and flash products. Operational execution was solid and our responsive supply chain capabilities allowed us to optimize resource allocation and product mix. We shipped a record industry leading 100 exabytes of total storage as we optimized our output during a period of strong demand for our products. Flash market conditions were as expected, which we have previously described as normalizing. We expect the flash market to continue to be constructive with possibility of a constrained supply environment in the second half of calendar twenty eighteen.
In data center devices and solutions, demand for our 10 terabyte and higher capacity enterprise drives for cloud customers grew substantially both on a year over for this category more than doubled on a year over year basis. Just a few days ago, we launched our 5th generation Helium Drive at the 14 terabyte capacity point. Customer qualification activities for this new product have begun and we expect commercial ramp to begin later this year. Additionally, we have begun meaningful revenue shipments of our mid range capacity air based drives launched earlier in the calendar year. We now estimate that capacity enterprise market is expected to grow at least 75%, well above our prior estimate of 60 plus percent.
We're also increasing our previous estimate for exabyte growth for the full calendar 2018 of greater than 50% to more than 65%. Our long term exabyte growth estimate of 40% remains unchanged. In enterprise SSDs, our Ultrastar SN200 has been qualified and is ramping at leading tier 1 customers. This NVMe product delivers best in class performance metrics for a variety of workloads. From a hard drive technology standpoint, we are on our groundbreaking MAMR recording technology in the second half of calendar twenty eighteen with a meaningful production ramp expected in calendar 2019.
Switching to client devices, we experienced strong demand for our mobile, embedded and compute products. Sales of our 64 layer 3d flash based inan offerings expanded during the quarter. The design win funnel for our Inan solutions for the connected home, automotive, and industrial verticals deepened further strengthening our position to capture long term revenue opportunities in these sectors. Our comprehensive flash storage Solutions portfolio for the mobile embedded market covers a full range of emmc, UFS and proprietary interfaces for a diverse customer base. With average capacity in smartphones estimated to double every 2 to 3 years, we see continued long term growth opportunities for our mobility business.
From a PC market standpoint, the March quarter was slightly better than expected. We announced our first client SSDs based on new internal controller and firmware technologies. We also announced a differentiated high performance, WD Black SSD for serious gamers, leveraging the same architecture. The expansion of our product portfolio highlights the successful execution of our accelerated R&D investments. In the Client Solutions category, strong consumer preference for our GTech, Sandisk And WD Brands delivered healthy year over year Our offerings for this market continue to garner accolades.
In our Flash joint ventures, Fab 6 operations have commenced and we expect initial output The ramp of our BiCS3, our 64 layer 3 d flash technology, progressed further and manufacturing yields approach mature levels. In particular, Bix3 yields are also approaching levels achieved by our 2 d flash technology. This is a very significant For calendar 2018, we expect VIX3 to constitute more than 70% of total bit supply and the manufacturing ramp of 96 layer 3 d flash has commenced with meaningful output expected in the 3rd calendar quarter. Western Digital's estimate for industry bit growth in calendar 2018 remains unchanged at the high end of our long term range of 35 45% with our bit supply growth consistent with the industry. Publicly stated estimates of bit growth rates from industry participants as well as market analysts peer to have converged into the 40% to 45% range.
The expectations for calendar 2018 bit growth rates reflect the complexities of 3d Flash technology conversion along with some companies utilizing In summary, our strong March quarter results reflect the flexibility of our model to allocate resources and supply to deliver the optimal mix of product With our unique portfolio, we are able to capitalize on fundamental drivers of data growth and the increasing value of data as evidenced by the record setting exabyte shipments. With further expansion of our product portfolio in calendar 2018 and beyond, we continue to believe that the Western Digital Platform is positioned to deliver the best financial and strategic outcomes in a variety of market conditions. I will now turn the call over
I'm very pleased with our as we capitalized on the power of our platform, increased gross margins, achieved expense targets and reduced interest expense. All of which resulted in significant earnings growth. As a result of improving $5,000,000,000, an increase The March quarter revenue for data center devices and solutions was $1,700,000,000, an increase of 25% year over year. Our data center business continues to be driven by growth in cloudrelatedstorage. As Mike stated earlier, this was led by strong demand for capacity enterprise hard drives.
Client devices revenue was $2,300,000,000, which was essentially flat year over year. We had significant growth Client solutions revenue was $1,000,000,000, an increase of 4% year over year, driven by strength in our hard drive and flash retail products. Non GAAP gross margin was points from the prior quarter With respect to operating expenses, our non GAAP OpEx totaled $850,000,000 This included ongoing investments in product development, go to market capabilities, IT transformation projects, and short term incentive compensation Our non GAAP net interest and other expenses for the March quarter was $137,000,000, a year over year decrease of approximately 33%. This includes $157,000,000 of interest expense for the March quarter, a decrease of $48,000,000 year over year primarily due to the recent financing In the March quarter, net income was $1,100,000,000 or $3.63 per share, an increase of 52% year over year. In the March quarter, we generated As part of our recent financing transactions we paid approximately $190,000,000 of interest expense in the third quarter that was originally scheduled for the 4th quarter.
We continued to reinvest in our business with $411,000,000 in capital investments resulting in free cash flow of $616,000,000 for the March quarter. On a fiscal year to an increase of 34 percent. Resulting in year to an increase in inventory primarily due to seasonality and ongoing hard drive manufacturing transformation activities. We paid clear to dividend in the amount of $0.50 per share. We bought $155,000,000 worth of shares as part of our buyback program.
We closed the quarter with cash, cash equivalents and available for sale securities totaling approximately $5,100,000,000. In addition, we have 1.75 As a result, we ended the quarter with approximately $6,800,000,000 of available liquidity Recent capital restructuring activities decreased total debt principal outstanding by $825,000,000 during the quarter, to approximately $11,400,000,000. Organic and inorganic business investments, de leveraging, optimizing our cost of capital and capital structure, while enhancing our financial flexibility and delivering returns to our shareholders through I will now provide
We expect revenue of
41% to 42% operating expenses between $840,000,000 $850,000,000 interest and other expense of approximately $100,000,000, an effective tax rate in the 5% to 7% range and diluted shares of approximately 309,000,000 of $3.40 to $3.50. I would like to point out that based on our current outlook, We remain on track to meet or exceed our prior expectations for For calendar 2018 we continue to expect revenue growth at the high end of our long term model. Previously, we had indicated that our quarterly non GAAP gross margin for calendar 2018 would be above the high end of our long term model of 33% to 38%. We now expect that non GAAP gross margin will be at least 40% for each of the remaining calendar quarters of 2018. Operator?
And our first question comes from the line of Mark Moskowitz with Barclays. Your line is now open.
Wondering if you could give us
a little more context around the data center strength, very nice number there. But just in terms of contribution to growth, how much came from disk drive revenue versus solid state drive revenue?
Mark, I the majority of it was high capacity drives. So enterprise hard drive activity. Hyperscale build out as we indicated. Okay.
And then just as a follow-up, with respect to solid state, is the composite revenue of solid state. Is that improving versus the last few quarters where it's kind of seems like it was kind of going sideways to maybe even down on a year over year basis?
Are you talking about a particular part of the market or just in total?
Just in total. Thank you.
Yes. Mark, I don't know if you can comment. I mean, I know it was down seasonally, but that's consistent with seasonal revenue trends. But we haven't provided specific breakout in terms of flash based memory or a flash based revenue versus hard drives. But we are seeing good momentum in terms of our flash based products.
And so, things are in good shape in that regard.
Okay. And then just one last question for Mark, just given the building now or the flex in the model and with the refinancing recently to buyback stock? How should investors think about the runway for the first stock buyback over the next year or so? Thank you.
Well, in terms of the buyback, as executed $155,000,000 of the $500,000,000 that we had announced. And we did that to take out the hedging shares as part of the convertible bond issuance. And the additional 350,000,000 approximately, we intend to execute on an opportunistic basis. And this is part of the broader $2,100,000,000 worth of authorized buyback that we had reinstituted following the closing of the Sandoz transaction.
Thank you, Mark.
Thank you. And our next question comes from the line of Aaron Rakers with Wells Fargo. Your line is now open.
Yeah, thanks for taking the questions and also congratulations on the quarter. I'm curious on the gross margin kind of trajectory of the business. You guys now talking about a 40 plus percent gross margin. So the first question on that is should we think about that as potentially raising the long term sustainable target gross margin range? And then as we think about the mix of the business, particularly around the hard disk drive business, are you now seeing a gross margin in HDDs that is solidly above what the historical range had been.
I think was past 27% to kind of 32% range.
Yes. So Aaron, this is Steve. I'll take both questions. In terms of our long term margin range, I mean, we continue to have the long term margin range of 33% to 38%. Of course, we will continue to look and evaluate whether or not that margin range should change based upon our experience and what we see from a go forward perspective.
But for the time being, we're sticking with the 33% to 38%. If you look at our hard drive margins and obviously we don't disclose, our Flash Based margins or our hard drive margins. But if you look, just to get a little bit of color, our hard drive margins for several quarters, have been very, very stable. And without disclosing the specific number, if you look at this past quarter, driven almost entirely by mix, we actually saw a pickup, a nice pickup in our hard drive margins, and that was due to the strong demand that we saw from a capacity enterprise perspective. Obviously, we'd like to see that continue, but we'll have other mixed dynamics that will affect our business going forward.
But strong margins in the hard drive space this past quarter.
And we'll be providing kind of more insights into the long term model at our Investor Day that we indicated would be in
the back half of this year. Go ahead, Aaron. But one of
the things I wanted to add is that because I think this is a really important point is that this past quarter, in my opinion, really is a very strong proof point as to why we thought that it made I mean, what we've got is we've got a portfolio of businesses or of products that allows us to play across various markets. And you see that you've got very strong margins in terms of the hard drive market. We've got a normalizing flash mark market, which means that we're seeing a little bit of normalization in terms of our margin rates there. But when you add that up altogether, our margins went up on quarter on quarter basis. I think that's pretty impressive.
Yes. I agree. Just to follow on that though is, I mean, as we look forward and you've consistently said normalizing, do we take normalizing as being a view that the company can sustain kind of the implied flash gross margin? And just remind us where you stand on kind of the cost downside. I think you'd referenced that last quarter, but I didn't hear that where you think you can execute costs down on Flash?
Yes. Well, I'll talk a little bit about normalizing. And my first comment, it'll sound like a little bit of a wise comment, but normalizing means normalizing. And what I mean by that is obviously we were in an allocated environment. With rising ASPs and that sort thing.
And when we're looking at a normalizing environment, that means that we're going to kind of more normal, more consistent ASP declines like we've seen historically in a controlled environment. So you're basically seeing the margin percentage drift down a bit. Been in a very measured way. And so we're seeing a bit of that. We're not alarmed by it.
It's still a great environment for us. And so that's really what we mean by normalizing. But as you can see in terms of what Mark said, in terms of our calendar, 2018 margins, we're still going to have margins greater than 40% based upon our current forecast. And so that's a pretty good gross margin for us. And so that's a little bit of color on normalizing.
And then I'll ask Mike to comment on the cost declines in the Flash area?
Yeah. So, Aaron, we've talked about in the 3 d era. If you think about it on an annualized basis, it's between 15% 25% And that depends on exactly where the nodal transition is and where we are with sort of capital and footprint filled out. So that's what you should expect and we remain confident with that. We expect that to happen throughout this year.
And again, a little more color to Steve's normalizing and to add where I commented last quarter, our ASP reductions are largely offset by cost reductions, which does not meet entirely offset.
And another factor I think we should just keep in mind is that, we get some margin pressure as the MCP revenue increases, which it's doing.
And our next question
comes from the line of Amit Darianani with RBC Capital Markets. Your line is now open.
Yep. Thank you. I have two questions as well guys. I guess maybe first one, your June quarter guide is essentially implying gross margins are going to be down almost 200 basis points on slightly higher revenues on a sequential basis. Just maybe help us understand, I think you were fairly positive on the HDD commentary there.
What's driving the downtick in gross margins by 200 basis points, while revenues are very stable sequential basis?
Yes, it's really 2 factors. It's the continued normalization of Flash that Steve referred to. And its product mix, which is higher gaming revenue for HDD and as I was alluding to, higher NCP revenue.
Got it. Perfect. And then I guess, Mike, you mentioned potential constraints in the back of 2018 on the NAND side. Wanted is that a Western Ditch comment or is that an industry comment given I think 96 layer transition maybe more complicated for everyone? And in that scenario, if it is somewhat constrained, how do you think ASPs will track on the NAND side for June versus the back half of the year if that scenario plays out?
Yes. So I think the way to think about it is you got to look the individual market sectors and how they play in the products in those markets. So it will sort of play by that. And really what we see is this progression and the challenges at an industry level of making the progression to 64 layer and then 96, that's all more difficult than was previously predicted,
such that
the bit growth rate as you've seen over time has been at an industry level being sort of moving in a shrinking direction. So, so it's those factors combined with what we expect to be strong seasonal demand in the second half of the year that lets that possibility be in play. And I won't comment specifically on ASPs in that environment. But obviously that
statement that we could be in a more constrained environment is reflected in the gross margin indication that Mark gave
Understood. Thank you and congrats on the quarter guys.
Thank you so much.
Thank you. And our next question comes from the line of Mehdi Hosseini with SIG. Your line is now open.
Yes. Thanks for taking my question. Looking into the second half and with your new product introduction, should we assume that the MAMR samples are going to be out? And how should we think about, customer sampling? Obviously, this is very critical.
And just one get a sense as to when the PR campaign is going to start and when we would be able to hear from customer and kind of comparing contrast to the alternative technology? And I have a follow-up.
Yes. So by samples, meaning we will do that in a broad based way. In the second half of the year. So that will translate to production ramp in 2019. So depending on those customers and how they feel about it, we'll see what they have to say.
But I think we'll be very active. We feel very confident in the progress we've made. So we're basically hitting our internal milestones and the milestone checkpoints we needed to get confident about both those major milestones have been reaffirmed in the recent month or so. We're feeling very good about it.
Okay. And then, Mark, you talked about inventory uptick in D2 seasonality and and hard disk drive manufacturing. Can you elaborate on it? Because the uptick was very significant. Is there a new product that you're building inventory for or what else is there that led to this uptick?
Yes, it's really 2 factors. So the seasonal builds, for flash and HDDs, one aspect of it. And then the second is what you're referring to the inventory builds for our hard drive manufacturing transformation activity. So that's our ability to reconfigure our manufacturing footprint and optimize our loading of the factories and our ability to evolve, the HDD side of the business. So
Is that for 14 terabyte that you highlighted that the ramp
just started?
Let me add color to that, Mehdi. I mean, basically what you've got you can remember that we I mean, although we've largely accomplished a lot of the integration activities, We still are working on optimization activities regarding the remaining factories that we have in our HDD space. What that means is it means reshuffling production around to get the kind of optical the optimal mix from a variety of different directions. At times that requires you to build some buffer inventory as you shift from point A to point B. That's all that it is.
Got it.
Thank you. And our next question comes from the line of Joseph Whiting with Longbow Research. Your line is now open.
Yes, thank you. Congrats on really sturdy results while the cycle kind of unwinds here. I want to start on a nearline. The I hope you could put a finer point on where the most activity is today from the perspective of capacity points. And how you expect capacity points to evolve over the course of the year and beyond, including your mid range air drives?
Yes. So let me talk about that. I think what we're seeing is very strong growth at the high end. So 10 and 12 terabyte that continues. That continues on a global basis primarily with the large hyper hyperscale players.
But in addition to that, we see very nice growth at the lower capacity point. So foursix, eight as well. So as you see more diverse workloads out there, different players optimize around a different capacity point. So The growth is really across the board, but we still see very strong growth at the high end as well.
Okay. And then along similar lines, the $72 hard drive ASP obviously jumped off the page. There were some of those component shortages throughout the quarter. So I'm curious if you saw those and to what extent shortages either at the component level or the end device level serve to boost those ASPs or is that ASP jump mostly on the natural benefit of rising cap per drive?
Yes. So it's mostly on the mix and capacity per drive, but I would describe the overall market as tight. So that demand was very strong and the supply versus demand balance was quite tight.
Okay. And then a final quick hit for
Mark, if you could just remind us of the jump tax rate you expect in 2019? And I'll step aside. Thanks.
So we expect the tax rate as a function of tax reform to go to the high end or just above our, long term model. So in the sort of 12% range.
And our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open.
Yes, hi. Just wondering on the NAND side for TD NAND. What is your mix and 64 layer here and where do see that exiting the year. And if you could remind us on what the cost benefit was with the transition?
Yes. So I said in my statement, 70% exiting.
And the cost benefit was?
What we said about cost is the nodal transitions allow us to maintain this 15% to 25%. So we haven't been explicit around the nodal benefit.
Got it. And I know you mentioned second half twenty eighteen potential for tighter NAND, could happen. But if you look at this cost 15 percent, 20 percent down, wouldn't you expect margins to be continued to trend up, unless pricing comes in a bit more. I'm just wondering, which we're assuming your guidance on margins a little bit conservative here.
I don't know if I would characterize it that way. I mean, one of the things is that's part of the normalization trend. We have been operating an allocated environment. And as we move to a more balanced scenario, we will see a bit of normalization in of our gross margin. But on a collective basis, for the balance of this calendar year, our gross margins, we expect to exceed 40% 40% or greater.
And that is not that 40% rate per quarter, does not anticipate or does not contemplate a, return to an allocated environment.
Perfect. Thanks.
Thank you. And our next question comes from the line of Sherry Skripner with Deutsche Bank. Your line is now open.
I was hoping you could maybe provide a little detail on how you're thinking about the calendar year playing out in terms of HD versus the NAND business. And the HD business drove all of your growth this quarter. And helped you reach the high end of your range. Do you expect the cloud business to continue to be strong through the calendar year or do you think that NAND business will get a bit stronger as we move into the back half?
Yes. So really both. So as we stated on our expectation for CAF Enterprise, The growth is strong in the first half. We'll remain strong in the second. That was really drove our upgraded Xfi growth commentary.
And we would expect that the Flash based product growth will be traditionally seasonally strong in the second half. So everything we see leads us to that conclusion. I think our visibility is pretty solid.
Okay. So in terms of the year over year growth in the back half, you would expect NAND to accelerate in terms of the growth rate versus the March quarter. Okay.
Thank you.
Thank you. And our next question comes from the line of Rob Sierra with Guggenheim Partners. Your line is now open.
Great. Thanks very much. A couple more, not surprisingly any questions on highcapenterprise and cloud. So I mean, the question obviously for cloud CapEx is booming here, which is great. What kind of visibility do you genuinely have beyond the next couple of quarters, which I mean, you obviously need some for your own capacity planning and whatnot.
How do you get visibility and how do you get or can you get commitments beyond a quarter or 2? And I have one quick follow-up if that's possible.
Yes. So Rob, I think our expression of our estimates for the year would lead you to believe for the calendar year. We believe we have pretty good visibility And that comes from a variety of things. Some of our customers, we have longer commercial arrangements and some we have just more tightly integrated sort of a view of their demand and their CapEx plans. So it's a combination of those things that give us confidence in that increased estimate.
Okay.
Yes, I would add to that, Rob, that and this is at the expense. I don't want to sound too optimistic, but there's nothing on the horizon that at this point that would indicate that, we're seeing any weakness, if you know what I mean. So there's no kind of storm clouds on the horizon regarding the cloud build out.
Right. Okay.
Makes sense. And then if I could just ask a quick follow-up, do you see Obviously, the upside in nearline, you had weaker even in seasonal drives and sort of desktop and consumer electronics Obviously, there's seasonality there. But was there any amount of you needing to allocate head and media capacity to the higher margin near line that maybe takes away from where you sort of selectively, maybe not shipping as much in terms of desktop and consumer electronics or was it just seasonality? Thanks.
Yes. Well, I mean, Rob, you really you hit on a good point, which I was kind of alluding to earlier in that. We're going to use the power of our product portfolio, the strength of our product portfolio, the depth of our customer relations to allocate our resources to those areas where we think we can drive the most value. And in this case, clearly, because of the strong demand in capacity enterprise, we felt that it served us and our customers, best longer term to allocate our heads and media to those capacity enterprise opportunities. So you're absolutely spot on.
Thank you. And our next question comes from the line of Mark Miller with Benchmark.
Congratulations on another strong quarter. I'm just just wondering, your projections for tightening or constrained NAND supply, how much of that is projected to be due to improved smartphone shipments?
So I think from our standpoint, we have probably a reasonably So we look at it as bit consumption and albeit that unit growth rate has muted in the smartphone industry We still are seeing the benefit and as we did in the quarter just completed of a better mix. So that's what's feeding into our view of demand in the back half of the year.
And as NAND pricing has moderately declined, are you seeing an expansion in terms of the elastic demand for the product? Are you seeing some new opportunities come up because of the lower pricing?
Yes, I think what's really happening is that was if we go back into calendar 2017 because of allocation, it was actually delayed in 2017. What we've really seen in 18 as we've entered is a continuation of the penetration of Flash into certain markets, such as client SSD as an example.
Thank you.
And our next question comes from the line of CJ Muse with Evercore. Your line is now open.
Hi, This is Ada calling in for CJ. You had talked about nodal transitions getting you about 15% to 25% cost reductions. Can you talk about that about how that changes as you get past 96 layer and as QFC enters the mix?
So in general, we see that 15% to 25% to be a long term
Thank you. And then in terms of your JV with Toshiba, are
there any
implications, as for the JV, if the sale to the bank consortium doesn't go through?
The short answer is no. When we constructed our, if you want to call it, settlement agreement. It was, constructed with the intent that it simply protected our long term interest effectively no matter who the buyer or owner was of the asset of the TMC asset. So, we're not affected one way or the other in that regard.
Thank you.
Thank you. And our final question comes from the line of Ananda Baruah with Loop Capital. Your line is now open.
Hey, thanks guys. Congratulations on strong results. I guess 2 for me, the first as a clarification, I believe that the past couple of quarters, at least quarter and a half, you guys just talked about costs offsetting their phrase decline such that you expect the gross margins to be stable. And I just want to say if you're altering that outlook at all here, then I have a quick question after that. Thanks.
So what we said previously as we talked about the normalizing market, was that the cost declines would largely offset the ASP declines. And that's what we've seen.
Got it. So, no change in what you were expecting. And so,
yes, just for clarification, largely does not mean entirely.
Got it. Understood. And then just my question would be, so with regards to Nance apply constraint potential in the second half of the year. And this is particularly because of the comments that Mike made is not baked into the gross the thought process right now. I think we're minimal if this should happen.
Can you just walk us through what you see? I know you touched 1 or 2 of them, but could you walk us through what all the signposts can be as you see them that could lead a supply constrained environment
Yes. So signpost number 1, we've already talked about, which is our expectation for bit growth at an industry level. Which has been coming down sort of quarter over quarter in terms of the estimate for the year. That combined with what we think the demand side is going to look like So I think we will see, actually see more clearly in the coming months, but I think there remains that possibility. And obviously at this point, for the majority of our business, we are still not booked out in the second half of the year.
So as we progress through this quarter, we'll have a better feel.
Okay. That's really helpful.
All right. Thank you. So thank everybody for joining us, today. And we look forward to speaking with you going forward. Have a great rest of the day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.