Good afternoon, and thank you for standing by. Welcome to Western Digital's Conference Call. Presently, all participants are in a listen only mode. Later we will conduct a question and answer session. As a reminder, this call is being recorded.
Now, I will turn the call over to Mr. Bob Blair. You may begin.
Thank you and good afternoon, everyone. And thank you for joining us today to discuss our settlement with Tashiva and the future of our Flash Memory joint ventures. This call will contain forward looking statements within the meaning of the Federal Securities And NAND Flash memory joint ventures, investments in Fab 6. Our participation in TMC's new wafer fabrication facility to be demand and market trends our expected future financial performance, our financial and business strategies and execution, our stock repurchase and de leveraging plans and expectations regarding growth opportunities. 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 annual report on Form 10 Q filed with the SEC, on November 7, 2017.
We undertake no obligation to update these forward looking statements to reflect new and from GAAP measures that we provide during the call that the comparable GAAP financial measures will be posted in the Investor Relations section of our website. We have not fully reconciled 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 measures is not available without unreasonable effort. In the question answer part of today's call, we ask that you limit yourself one question. And we thank you in advance for your cooperation on that front.
I also want to point out that Copies of the prepared remarks by our executive team will be available later today on our IR website. With that, I'll now turn the call over to our Chief Executive Officer, Steve Milligan
President and Chief Operating Officer and Mark Long, our Chief Financial Officer. In addition to discussing the details of today's announcement, we We have some prepared remarks and then we will take footing. Today, we announced that Western Digital Toshiba, TMC, and Bain Capital have entered into a global settlement that strengthens, extends and enhances our mutual commitment to the Flash Memory JVs. For the past 17 years, our NAND flash memory JVs have set the industry standard for innovation quality and collaboration industry. Since 1999, our partnership with Toshiba has achieved unprecedented success growing into a global technology leader with This announcement affirms the partner's commitment to the strong future of our world class JVs and guarantees our long term access to NAND supply.
This agreement is a win win for all parties. Western Digital and TMC have agreed to the following flash Alliance will be extended to December 31, 2029 and flash forward to December 31, 20 27. With regard to Fab 6, Western Digital will participate in all future investments, including the 2nd investment tranche. Western Digital And TMC intend to enter into definitive agreements regarding our participation in the new wafer fab facility in the Owate prefecture. On terms substantially similar to those that apply to the fabs and YOKA Ichi.
We have also renewed our commitments The 2 companies have established appropriate protections for intellectual property to adapt to changing corporate ownership structures. In addition, we have put in place equity transfer restrictions to enable the successful continuity in the flash memory JVs to TMC and to the sale of TMC to the Bain Lead Consortium. This sets the stage for TMC's eventual initial public offering. As a result, Western Digital Toshiba and TMC will withdraw all pending litigation and arbitration actions. Western Digital continues to focus on its long term growth strategy and strong business fundamentals.
Our strategy has been The power of this diversified platform has allowed us to lead the global evolution of the data storage industry uniquely positioning us to address the rapid growth The Western Digital Platform is a critical enabler of next generation technologies, such as artificial intelligence, and virtual reality that power applications, including self driving cars and fully automated factories. With that, let me turn it over to Mike.
Thank you, Steve. Good afternoon everyone. I would like to provide our perspectives on the Flash Memory industry. What I am showing here is the industry's investments in Flash as a percent of total industry revenue. The trend here is that in the early years of the industry, the ratio of CapEx to revenue was significant nearly 55% in 2008.
Versus approximately 40% expected in 2017. Over time as the industry has become larger, the overall CapEx to revenue ratio has declined, larger and more mature than before. As the size of installed capacity has grown, New CapEx has a smaller incremental impact on bid output. Also incremental capacity adds are done in a modular fashion. Allowing industry capacity to grow in different stages of industry cycles.
The Flash Industries ability to deliver annual cost declines falls into 2 categories. The first is the inherent capability of the technology and the second is the rate at which the industry can adopt the new technology into production. Comparing against the baseline of the the higher cost of manufacturing the 3d flash wafer, the longer timeline to develop the new nodes, and a longer time to install new tools all contribute to lower annual flash cost decline rates. An additional factor you see in the industry today is that several of the flash suppliers also make DRAM. Given the tightness in DRAM supply, some of these companies consequently we expect the flash industry bit growth in calendar 2017 to be at the low end Through strong execution, we will exit calendar 2017 with more than 65% of our bit output on 3d Flash.
In the near term, overall spot market pricing trends have been consistent with our expectations. We see the market stable and normalizing where modest price declines in flash are largely offset by underlying flash cost reductions. Also note that Western Digital is a product company. So the vast majority of our flash sales are based on our products, not just components. You should keep that in perspective as you think about how open market pricing trends influence our business as our portfolio of products and end markets we participate in lessen our pricing volatility.
We are also updating our expectations that the flash supply demand environment will remain healthy throughout the 2018 calendar year. I would like to We have been leaders in 2 d flash and we ended our 2 d flash scaling roadmap with our 15 nanometer node, the most successful in the industry. Over the 11 generations of 2 d Flash, we have learned immensely about the complexities of this technology and how to make it work for the broadest use cases. We are applying all of our learnings to 3d Flash and we are very pleased with where we stand today. Being implemented across our portfolio.
In fact, of our 3 d flash bit output on 64 layer technology. We are also on track to begin product shipments of our BiCS 4 96 layer technology to retailers this week. As we have previously stated throughout calendar 2017, we have accelerated our R and D investments and efforts to broaden and deepen our portfolio. This was intended to deliver Keep in mind, none of our customers account for more than 10% of our revenue. We have expanded our product line with capabilities control the technology stack's underlying form to a value added product containing our systems technologies.
This will allow us to I will now turn the call over to Mark.
On our expected financial performance On a non GAAP basis, we now expect revenue to be approximately Gross margin to be between 43% 44%, operating expenses to be between $8.50 $860,000,000 versus our prior guidance of approximately $830,000,000. This increase is entirely driven by over achievement Further, we expect an effective tax rate in the 5% to 7% range. Our diluted shares expected to be approximately $312.80. I'd also like to provide our current view of fiscal 2018 and some of the We expect to see for fiscal 2018. In addition, for all of calendar 2018, we now expect our annual revenue growth to also be at the and above our long term model throughout our non GAAP earnings per share to Beyond the income statement, let me give you some perspective regarding our balance sheet and cash flow expectations as well.
First, turning to our capital structure and debt capacity. We recently refinanced some of our loans on more favorable terms and prepaid our euro loan in full to achieve greater interest savings and eliminate expensive hedging costs. We increased our existing revolver credit facility by approximately $500,000,000 to 1 $500,000,000 to give us added flexibility. Under our previously approved $5,000,000,000 program of which $2,100,000,000 is remaining. Subject to market conditions and compliance with operating cash flow in fiscal 2017 expect a similar level of operating cash flow as last quarter.
Due to the ongoing 3 d flash conversion, as we've previously indicated, in fiscal 2018, we will likely be slightly above our long term cash CapEx investment range of 6% to 8% of revenue for both Flash and HDD combined. Following the initial conversion to 3 d NAND, we anticipate that our long term total cash CapEx investments will remain in the 6 and running our business, we haven't since our Investor Day a year ago, but we look forward to engaging with you on a more robust basis in the year ahead, beginning with today's call. We're now ready
One moment please for the first question. Our first question comes from Amit Dariani with RBC Capital Markets.
Perfect. Thanks and congrats on the resolution here. I guess maybe to start
Yes, 2 things. One is on all future investments, you should think about it on a fifty-fifty basis. And secondarily, our previous bit growth anticipated this. So we would be as we previously stated at the high end of our bit growth range for 2018.
Got it. And I guess, Steve, just given the headwinds that you've gone through with this in the last 12 months, Is there a thought to perhaps have Western Digital undertake their own fab development to own your own captive capacity? And is there something that joint ventures that prevents your concludes you from doing that as you go forward?
Well, we are our priorities through all of this was to one make sure that our joint venture interests were, protected and we're fully committed to the joint ventures. And, we have no plans to look at manufacturing nor do we have the ability to manufacture outside of the joint venture. So really this effort was to strengthen that position and get the mutual commitment to continue to make these joint ventures highly successful well into the future.
Thank you. Our next question comes from Aaron Rieker with Wells Fargo.
A full year guidance for fiscal 'eighteen on EPS any updates on how you're thinking about that full year at this point?
Yes. So as we mentioned, for fiscal 2018, we now see EPS exceeding $13 a share.
Okay. And then as we think about the capital return side of the story, sitting on $6,900,000,000 of gross cash investments on the balance sheet exiting this last quarter, given the consistent strong free cash flow metrics, how do you think about repurchases here prior to today's announcement
So, as we have previously stated, we are committed to de leveraging and also optimizing our balance sheet. So we've done a number of transactions to improve our cost of debt capital. But with respect to negotiations with Toshiba, we were not able to be in the capital markets So that was one constraint we were dealing with. The second constraint we have is our credit agreements. So we have a limited amount of flexibility in terms of how much we can buy back, depending on where our leverage ratios are.
So we navigate both of those sets of constraints Now with this announcement, we have the, the constraint around and the requirements of our credit agreements with respect to future stock buybacks.
Okay. And then the final question is as you kind of think about calendar 2018 at this point. And you note specifically that you expect a favorable supply demand dynamic has your thoughts changed at all over the last couple of months and why what changed your mind to say that that's the case through calendar 2018 at this stage?
Yes. I think the key thing is increased visibility in terms of both our own product execution and then in demand opportunity for us in both dimensions.
Okay. Thank you very much. Thanks, Aaron.
Thank you. Our next question comes from Mehdi Hosseini with SIG.
Yes. Thanks for taking my question. A couple of follow ups. Just want to better understand the dynamics that led to this agreement from outside, it seems like you are getting your NAND supply and also Toshiba is can proceed forward with the bank consortium. But again, what happened that led to, those parties to a mutual agreement and I understand there's confidentiality, but if there is any way you can share with us some of the high level points that led to this agreement would be appreciated?
And I have 2 follow ups.
Well, I think that Mehdi, the I can't speak for Toshiba or TMC or for that matter, Dane, in terms of their motivations. But I can tell you that if you go back from our standpoint, I mean, the first point that I'd like to make is that as we at some point in the process moved down the litigation path. That was not our preferred path. That was not really what wanted to do. Ultimately, we what we wanted to do was we wanted to make sure that our interest in the joint ventures were sufficiently protected and we had the right kind of protections.
And the right kind of access to NAND some of the things that you've mentioned going forward. As the process was going on, we did not feel like we were getting appropriate responsiveness on the other side to those concerns. But as things progressed, and the dialogue became more constructive, which we were always open to a constructive dialogue, we believe we began to get good traction. And that traction led us to where we are today. And we're pleased and in fact, very pleased to be able to resolve this, put us behind us and, and look forward to the future not only for ourselves, but for, the joint ventures with TMC.
Got it. Thank you. And then 2 follow ups. Does the agreement include a joint IT development or work outside of NAND Manufacturing? And then that is behind us, if you could go back to the Analyst Day of December of last year, there were a number of items that you highlighted.
It's almost like we have 12 months past and is history and as if nothing happened, last time. And I just wanted a bit to understand how you look at priorities looking forward?
Yes. Regarding the first question in terms of IP, I mean, the the IP we jointly develop and we have this goes back in time jointly develop the NAND memory with with Toshiba. We both contribute in that regard and we are both respectively cross license to each other in terms of that IP. There's no change in that regard. There are some enhanced IP protections associated with this settlement because of potential changes of ownership and that sort of thing as contemplated with the consortium, that provides us with sufficient assurance that our IP as well as Toshiba and TMC's IP will be sufficiently protected, going forward given changing circumstances.
So that's kind of the answer to the first question. Second question and I'll do respect, Mehdi, I'm not quite sure I followed what your question was. Can you help to rephrase that a little bit so that I can better
shipper settlement that is now reached. And if I were to use the Analyst Day of last December, you had highlighted a couple of items, short term long term targets. And I wanted to just didn't understand how you were going to prioritize those milestones, so that's better attract the company's execution, it seems like 12 months passed and you were distracted, but now perspectives go on and get back to execution. And I want to understand what are the priorities so that I could track your your record moving forward?
Yes. Well, that's a broader question that probably requires a deeper discussion and maybe a future investment day, kind of topic. But I would say that our priorities have not changed And really what we want to continue to do, not only hard drives, but also NAND flash memory, We're going to continue to invest as Mike alluded to in his prepared remarks in that regard. We're continuing to and we've got leading client solution products with both the WD, GTech and Sandoz brands. That's performed quite well for us.
And we're also continuing to focus quite a bit on expanding But you do ask in essence a fair question in terms of how we would score ourselves in that regard and what our priorities Largely, it hasn't changed. And I would say, aside from, I hate to belittle it in terms of calling it the distraction of the Toshiba situation, We've and the team has stayed very focused on those priorities.
Got it. Thank you and congrats.
Thank you.
Our next question comes from Wamsi Mohan with Bank of America.
Yes, thank you. Congrats on getting this resolved. Given your comment on NAND supplydemand, and also comments around some potential NAND price reduction, but also cost declines. Is it fair to characterize that although the flash pricing could decline the gross margins could still be relatively flattish over here in the near term? And I have a follow-up.
So I think what, what Mike highlighted in terms of the dynamic as the NAND industry normalizes, likely to result in a strong gross margin. We indicated that both for the fiscal year and for the calendar year, we expect, gross margins to be above our long term model. So that's a, I think, a statement of confidence in our platform and in our enhanced visibility.
Okay. Thanks. And as my follow-up, there any minimum time where this ownership structure, could not change under the bank consortium and the IP, could you elaborate on what sort of IP risks that might might have, come across, how are you sort of making sure that that does not change far given that there was a lot of concern to this process that some of the members of the vein consortium adds in this risk around IP? Thank you.
Yes. So, we one of the things that we talked about a bit in the prepared remarks is some transfer restrictions on share. And also some enhanced IP protections. What I would ask you to do is refer to our 8 K filing that was done in conjunction, with this announcement that contains some details on that. And then as we go through subsequent public filings, including some of the agreements, albeit redacted under elements of that as comments will be redacted.
More of the details regarding those topics will provided, in public filings as appropriate.
Okay. Thanks Steve.
Thank you. Our next question comes from Vijay Rakesh with Mizuho.
Congratulations on settling this. Just a couple of questions. When you look at the, when you look at TMC, obviously, there's a lot of investors in it. With NPDA and Seagate. Just wondering if they get to share the IP once this deal is done.
The answer is no.
Got it. And also really increased CapEx, can they increased CapEx on their own side or will it always be fiftyfifty shared between you and your partners?
Sure. So the model for future fab investments is that the JVs have priority and that the model is a fifty-fifty joint investment. So that is the model And within that, we the operating teams work together and can sort of manage the JBS priority and we do them fifty-fifty.
And then I think it bears, to be mentioned that that is consistent with the way that it's always been So there's no change in the way that that works.
Got it. I was just wondering if the partners can increase CapEx significantly versus what your input would be? That should happen, right?
Like I said, there's no change in the way that it's happened before and it's in the And the proposition is it's fifty-fifty. What you're asking for is, is in fact, a hypothetical situation that we've not traditionally seen.
Got it. Thanks a lot.
Thank you. Our next question comes from Nehal Chokshi with Maxim Group. Thank
you. Thanks for providing that additional visibility to the rest of calendar 2018. I understand that the demand gives you visibility and also been able to achieve relatively stable gross margins due to willingness to run the factories below 100% utilization. I guess between you and your JV partner, do you have that same willingness to do so in order to maintain disability in the case that that demand visibility does not play out the way that you expect?
Yes. So let me take a stab at that and then Mike can chime in a bit. One of the things that is very important to under Dan. And when I say very important, this is critical. The fact that we were able to have stable gross margins is because of a variety of different factors, including that we had a leading product portfolio a broad product portfolio, broad and diverse customers and also an outstanding execution engine that enabled us to manage our costs in a very effective way.
Yes, we did have some added flexibility to maybe run at less than 100 percent of capacity in order to manage variability from a demand perspective that to attribute our ability to have flat gross margins or stable gross margins to that last factor alone is missing the essence of how we manage our business and we intend fully to bring that same discipline and have brought that same discipline into how we manage our Flash business.
I guess just to make sure I do appreciate that the leading portfolio and the breadth in the diversity of customers is the main contributor to that flat or stable gross margin. But the key question I do want to understand is whether or not you and your JV partner are willing to operate at less than 100% utilization if that case arises?
Well, what we'll do is we'll make economic decisions that make sense for both of our partners. And if that ends up being the right economic answer, course, we'd look at it. Great. Thank you.
Thank you. Our next question comes from Mark Miller with Benchmark.
What are we looking forward? Well, first of all, congratulations on your settlement. I'm sure you'll be welcomed by everyone. Looking forward, are there any factors such as synergistic, further synergistic savings, debt pay down that could significantly leverage the bottom line over the next year and a half, two years?
So that is the way we run the business. As we mentioned, we have, achieved our synergy targets for both the HST and the Sandoz deal. As of the end of this quarter. And that's not the end of the synergies. We'll continue to drive synergies from those deals as well as look for new opportunities to enhance efficiency.
So That's really an ongoing process for us. The opportunities to continue deleveraging are certainly an area of focus. As we indicated, we've done some things to improve the the cost of debt and our liquidity and our flexibility, and we will make that a continue to make that a high priority, both to improve our bottom line and to improve the strength of the balance sheet and the flexibility
And from your statement that you seem to be pleased with the 64 layer of big ship ramp, but also appears that you feel there's more coming in terms of yield improvements and cost reductions. Is that a correct statement, fair statement?
Yes, yes. We continue to climb the yield curve and the throughput curve. So those continue to be good. And we also continue to transition from 2 d to 3 d and that will happen throughout calendar 2018, all our benefits for us.
Thank you.
Thank you. Our next question comes from Christian Schwab with the Craig Hallum Group.
Hey, congratulations guys on getting this deal done. Steve, my question is do you believe, that you would not have been able to get the important extensions on the different tranches of the joint venture volume agreements without taking all the legal actions that were taken over the course of the last year?
It's an interesting question, Kristen. And quite frankly, it's kind of an impossible question to answer. Now I will say that, part of what we were focused on was to make sure that we had the right protections. So it's not just simply the extension of the joint ventures, although that's an important element of the settlement. But there are other provisions that where we were able to resolve as part of the settlement, that are critical.
And again, our first priority was not or our preferred course of action was not to go the litigation route, but one can reasonably conclude that our discussions prior to initiating litigation were not being sufficiently addressed until we brought that litigation action put it into play.
Okay. That's fair. We talked about, earlier in our prepared comments, this is my follow-up question, that spot NAND pricing has come in as expected. And we all know the difference between OEM pricing and spot pricing at the rate of which they move. But what you talked about was offset by cost reductions.
And so instead of just trying to ask a tricky question, I'll just get to the question I really want to know. Which is how much, cost reductions are left as you mature the 3 d technology as well as migrate to a different layer level, should we move beyond calendar 2018 guidance. And I don't want to make you obviously make a statement well and above guidance. You usually never like to give anyway. But let's say your revenue growth trajectory was similar to your long term targets of 4% to 8% in 2019.
And we saw a return of normal commodity declines with the offset of cost reductions, is it logical that earnings
are annualized expectations for cost reductions? Which was actually on one of the slides that we shared here in the transition era of 2 d to 3 d, it's 15% to 20%. And during once we're all on three d across our capacity, it's 15 to 25, that would give you an expectation for our capability going forward. Both ourselves and the industry for annualized cost reduction. That's a little bit as we were referencing the modest price declines with be roughly in line or compensated for with those cost reductions.
Yeah. And I'm sorry, but going out to 2019 is a little beyond where we're comfortable providing even the theoretical guidance. But I will say that, the trajectory of meaningful cost declines, coupled with good revenue growth is exactly what our targeted. That is how we're trying to position the business. So, as we said, we see calendar 2018 as taking advantage of both those dynamics.
And as a result, we feel good about the outlook as we said. So
That's the best we can do right now, Christian.
No, that's all I have. Thank you guys.
Thank you.
Thank you. Our next question comes from Stanley Kovler with Citi Research.
Hi, good afternoon. So, I
guess there's still opportunities in the modern world for Hanukkimericals. So, I just wanted to ask you guys in terms of the products that you feel exceeded the plan from this quarter. And Mike, you mentioned visibility has improved in the industry and then for you guys as well. Is this related to any potential contract extensions where you may have had long term customer extensions in the past, you said first half was where the visibility stopped and you extended that out into the second half of twenty eighteen? Is that a function of discussions with customers where you feel comfortable or there's been formally extensions of maybe supply agreements?
I'll start there.
Yes. So on the demand elements, it's sort of a combination of the 2, right? Some of our negotiations cover the entirety of the calendar year. And then some of it is just the ongoing demand expectations. I also mentioned, which may have been part of the other question, our sort of view of our continued progress on customer our product portfolio expansion.
So we'll bring we'll be broadening further in 2018 our market participation That will also help with our view of 2018.
Thanks. Which areas if you can share in particular? Or do you feel like you have the opportunity to expand the portfolio?
Yes. So I think where we would see it. 1st, we see, as we talked about in earnings, we see initial good signs of capacity enterprise sort of reinvigorating as we enter calendar 2018. So that's a hard drive statement. And then on the Flash side, it's really across our various businesses, so enterprise client and embedded.
All of them will see product line expansions throughout the year which will allow us to participate more broadly in growth potential.
Thanks. And one follow-up P and L specifically on variable comp. When we think about the outlook for the next fiscal year, how should we think about the OpEx should we pull back on the additional $25,000,000 a quarter of variable comp that you're over earning on as you rerate the performance quotas for next year?
So there are going to be kind of 3 three dynamics that you'll see, kind of separate from the variable comp, right? So one of the things Mike talked about was we have been accelerating investment in new product development. And that really will position as well as Mike was just articulated. So that will continue. We have further OpEx reductions that we can achieve, some of which, as I said, are a function of the ongoing synergies from the deals beyond our targets for this quarter.
And then Lastly, I think Steve's point earlier was we have a culture of discipline around OpEx and broader COGS management. And so we'll continue to to focus on that. So the combination is stable OpEx, but, there are some of these dynamics last earnings call, we talked about there's slightly higher OpEx due to the payroll tax reset in the first quarter of the calendar year. So things like that. So little variability, but it's still good discipline around OpEx is a key part of the model.
Thanks. If I could just
squeeze one in, on the agreements TMC. Can you help us understand if some of the participants in the TMC investment in the main consortium are customers potentially of TMC. Are there clauses that preclude those guys from getting some sort of preferential pricing that there'll be some market based structures. Even if there's a long term agreement, just natural to give maybe pricing for that type of volume or length based pricing, but not necessarily because they're part of the ownership structure or the debt structure there? Thank you.
That's all for me.
Yes. So you would have
to direct that question to Toshiba or TMC. That was not a topic of discussion for us.
Thank you. Our next question comes from Rob Syrah Priya with Guggenheim.
Hi, thanks. This is Rob Syrah. Just two easy ones, I guess, on the IP licensing, I know you already addressed the fact that you're sort of ongoing cross licensing with Toshiba. Continues. Is there any reason to think that anything in these changes would impact your 3rd party licensing revenue streams?
And then I had a quick follow-up, which was just the capital allocation plans. You did address it a little bit as well, but just from a point standpoint, you had at one point, I thought, post the Sandisk acquisition targeted debt to EBITDA being, getting down to, I think, 1.5 times. I was just curious if that was still an actual target number wise and if it's changed since then given the good cash flow you've had? Thanks.
Sure. So, with respect to the first question, the answer is no impact to 3rd party license and royalty revenue. And the second question is, that the answer is 1.5 times leverage ratio is our target, has been our target, remains our target. I think originally we gave a 3 to 5 year time horizon and, we've been in a position where we've been meeting or exceeding our cash flow generation targets. And, as we said, we will continue to press forward with our commitment to de leveraging?
Again, we thank you all for joining us today. We look forward to staying in touch with you in the months and the years ahead as we continue to execute our strategy. I would also like to extend my heartfelt thanks to all the Western Digital employees for the hard work and dedication dedication during the past year, I greatly appreciate that effort. Have a great day and a great holiday season. Thank you.
Thank you. This concludes today's conference call. Thank you for joining.