Thank you for joining us at BofA's 2024 tech conference. Delighted to see many familiar faces over here in the room. I'm Wamsi Mohan, I cover IT Hardware . We're delighted to welcome Western Digital here to this session today. We have EVP and CFO, Wissam Jabre. We also have Jasmine Nouri from IR. It's a privilege to have you both. Thank you so much for taking the time. We really appreciate it. I think, Jasmine, you wanted to read some disclosures before we-
Yes.
-get started.
Thank you. Yes. We will be making forward-looking statements into the assumptions and expectations, including with respect to our product portfolio, business plans and performance, market trends and dynamics, and future financial results. These and uncertainties. Please refer to our most recent financial report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results quotations. We will also be making references to non-GAAP financials, and a reconciliation of our GAAP and non-GAAP results can be found on our website. Please go ahead.
Well, Wissam, I mean, you know, you had 20-year history of working in, in sort of the finance area across so many different companies, and you're sitting here at Western Digital, unique opportunity. When you think about some of the big themes and trends that are going on, particularly in AI, I was wondering if you could comment on what you see as option might be for your business, both on the HDD and flash side.
Great. First, thanks, Wamsi. Happy to be here. Great question. So, from an AI perspective, look, we in many parts of our lives, and for that, from a technology perspective, it will impact many of the sections of the markets that we target. Either on the cloud side, there will be some form of increase of storage needs. And so that basically on the additional cloud content in PCs and potentially in mobiles and even on the gaming side. And we also are starting to see, obviously, the enterprise or the cloud market come back, even though it's not necessarily AI-driven. That also has an element of potentially an AI element to it.
We continue also obviously, as more and more of the GenAI's models generate data, the need for storage will be even. Think of data in the form of movies or images. That need for storage will increase even more. And typically, with GenAI also, data itself will be even more valuable, and so as a result, people will store data for longer. So we see that helping both sides of quantifying it. We're not there yet, but we continue to work through that to enable us to understand a little bit more in a bit more sort of detailed way.
Okay, okay, that's helpful. We just had one of your competitors up on stage a little while ago, talking about sort of the favorable pricing environment and the business. Curious if you could comment on what the pricing environment looks like, both on the HDD and on the NAND side.
So, if I start with the, you know, the pricing environment has been favorable. It's mainly obviously driven by supply and demand, and as you've seen it over the last couple of quarters, we've seen some good uptake. See that supply-demand picture not changing much over the next few quarters. And so the pricing environment is expected to remain. But on the hard drive side, also we're seeing a favorable pricing environment. But at the end of the day, a lot of it also is driven by the sort of the best portfolio for our customers. And so as long as we're able to continue to develop really an outstanding set of portfolio, whether on the hard drive or on the NAND.
How should we think about the capacity on both the HDD and flash side? I know over the last few years, it's been like capacity got taken out. So as you think about incrementally investing in capacity, what are you looking at? What are your thoughts around adding incremental capacity, given it sounds like, at least on the HDD side, demand outstripping supply before year-end, and on the NAND side, clearly we're entering a much tighter market.
Yeah. So, on both sides of the business, we really are focused on, we've had several quarters of losses, and we're in an environment where we want to focus on our profitability. And so if you think of the hard drive side as reduced our manufacturing footprint, as we started seeing the cyclical downturn a little bit more than a year ago. And so we're now where we see relative to where we see the demand for our products in the midterm. And so for us, really the focus is on being able to drive the profitability on the CapEx or capital investment.
On the flash side, as we were going through the cyclical downturn, we basically reduced the utilization in our fab. Now that sort of is more or less back to normal utilization. And similar there, the profitability of our business basically achieved the target margins of the 35%-37% through cycle, and we're not there yet. So many quarters below those levels, and so we'd like to see a few quarters above those levels. But also would like to have, you know, conviction in sustainability of the demand before we're able to investments. Ultimately, any capital investment we make, it's based on an ROI would like to be able to to justify our investment, we need to return.
Yeah, got it. Okay. No, that, that, that's been a very consistent message from you, I think, over, over the last several quarters. Can, can you just talk about underutilization charges? Are we expecting any to-
So we don't have much. I mean, on the flash side, we no longer have that, and on the HDD, last quarter, we had a little bit. I wouldn't say this quarter, there may be, there may be a little bit, but it's called it out.
Okay. Can we just talk about sort of what your expectation is on the cost side, both on the HDD and flash side, that you can accomplish or, call it, you know, next two years?
So, the focus for us and the targets haven't changed. You know, as we transition from technology on the flash side, as we transition from going from BiCS5 to BiCS6 to BiCS8, we continue to aim to that mid-teen % cost reduction. That obviously is something that is fully ingrained in how the memory technology that our team develops, they focus on driving that cost reduction, as well as the capital efficiency, increase the bit density. So that hasn't changed. On the hard disk drive, we continue to execute on our roadmap, which is basically continuing to increase our ePMR, OptiNAND, SMR type of products, which is a technology that is very well understood. We've been manufacturing for many, many years.
It's very reliable, and so with that, the same, you know, the picture of the cost reduction is unchanged, various prior, obviously as high as the, or so fast, low, depending on how you look at it, as the flash, but it is still within the sort of low double-digit percentage points.
Yeah, obviously, you've announced your intention to split the company up into an HDD and a flash-based company. Can you just remind us of the time progress that's being made on that front?
So, a lot of progress is being made. We have many, many people across the company working on that, whether on the sort of companies, really, meaning the legal entities in various jurisdictions, as well as systems getting the filings that we need to make as part of the process, as well as getting the PLR as we want to do it, tax-free spin. We're still targeting the spin, and there's as I said, a lot of focus and tremendous work going on that.
Yeah. About these businesses operating as independent entities, how do you think about the margin structure of these two entities? What should we think about the longer-term view on the flash side?
So look, our target margins haven't changed. We're still not at the point where we're changing our target margins. Last quarter, we delivered more than 31% gross margin. Typically, that level of margin used to be generated at a much higher revenue level. What we did during the cyclical downturn, we took a lot of action to restructure the business and improve on the cost structure, and that basically positioned it in a much better place to benefit from the cyclical recovery. And on the flash side, obviously, as I mentioned earlier, we'd love to see that through cycle achieve a gross margin to enable us to obviously drive the return on our investment. So those targets are still for hard drive through cycle and for flash, 35%-37% through cycle.
It seems as though the demand backdrop is generally improving, whether it be a hyperscaler or potentially even enterprise. It feels with that kind of backdrop where the demand is improving, the pricing environment is improving, and you're already at sort of within your long-term ranges. Will you think that, you know, these numbers, given the mix shift towards even higher capacity drives, are potentially, you know, several hundreds of basis points higher this cycle, 63%-67% gross margin ranges? How realistic is that, and do you think that we could get there over the course of the next, call it, you know, two years?
We're just getting close to where our target margins are. So it's a little bit— Let's see how we execute and perform over the next few quarters, and that will give us a better where the future could take us. But, going back to your previous question with regard to the spin and the target models, I mean, obviously, as we get closer to the date of the spin, we would be hosting investor day to talk more. The target models, of course, in addition to things like cap structures and other types of financial information that would be of interest of.
Forward to that. How should we be thinking or how are you thinking about capital allocation priorities and use of cash, maybe in the interim period, before the split?
Yes. So last quarter, and our focus is still on strengthening our balance sheet. So any opportunity we have to reduce debt, this is what we're gonna be focusing on as we get for the spin.
Can you comment a little bit on sort of the traction that you've seen on the Enterprise SSD side, right? Like, I mean, going back many, many years and originally you guys made, there's been an aspiration to really get higher share on Enterprise SSD. So can you just remind us where you are now? What's your expectation for that business?
We do have a few cloud customers qualified on the enterprise SSDs. Those were qualified before the cyclical downturn started, and unfortunately, during the down cycle, starting last quarter, we're starting to see the demand come back, and so that obviously would, we should see some improvement, products, as the year progresses. In addition, we're qualifying a PCIe Gen 5, sort of compute-focused, enterprise SSD, the AI-type workloads. That sort of is also going through qualification. From a portfolio perspective, obviously, in addition to Client , SSD, and consumer, the flash business has probably one of the best portfolios it's ever had, and that is really, really very positive because it has flexibility and the option to place our bets as we see obviously where we see the demand coming in.
How long do you think those qualifications like Enterprise SSD?
I think it's probably gonna be sometime in the second half. They'd be probably qualified sometime in the second half of this year.
Okay, great. Can you talk a little bit about your pace and where you are, and what sort of percentage mix investors should expect next couple of years as we start to see more?
Yeah, of course. So let me first say the BiCS5 was probably one of the most, capital-efficient, nodes. This is our predominant node today that we ship, flash products on. And, to be what we call a stub node, which means it's not going to be a full node. We don't plan to convert all of the product portfolio to, from BiCS5 to BiCS6. The BiCS8, most of the, if not all of the portfolio, will be transitioned from BiCS5 to, to BiCS8. From a, from a, product perspective, we've launched, the, QLC based on BiCS6, for client SSDs. We're also, we're also, we're also working on a TLC BiCS6 for enterprise SSDs.
And so BiCS6 will be the next node that will be shipping later this year. BiCS8, the technology is more mass ready. Of course, our engineering team is still fine-tuning and perfecting it, but we're not at a point where we see the need for it to ramp the production. Obviously, we will need capital investment, and as I mentioned earlier, our capital investment decision will be based on profitability in our business. So, that's where I think the BiCS8 will come in, but it's really a matter of time at this stage.
Do you want us to give up what you're announcing next week? I think you have a very dedicated NAND presentation to the investor community. Any little snippets that we should think about?
Well, I guess I'm gonna keep the excitement. I would say, please tune in. I think it's gonna be called the New Era of NAND. It's hosted by our EVP and GM for the flash business, and it promises to be exciting.
Excellent. We look forward to that. Well, maybe switching gears a little bit to the HDD side, can you just talk growth for maybe this calendar year to start?
So, I mean, the exabyte growth for the HDD industry is still, you know, in long term, it's expected to be in the move from that. Obviously, we still see sequential improvements from where we were at the end of the March quarter. So the cloud demand has come back, and it seems to be, you know, we continue to see sequential improvement, at least for the rest of this calendar year.
So last quarter, in the March quarter, you outgrew your nearest competitor by a substantial amount. Can you talk about what some of the drivers were that created that really big turn in the quarter?
So look, I guess it starts by having we have a really great set of products on the hard drive side that help our customers, but also it helps us, you know, continue to execute, as I said earlier, on our roadmap, which is continuing to build products on the technology that we've built that allows us to deliver that continuous improvement from a capacity point perspective in a very predictable way side of things for us and provide the TCO for our customers, where we continue to obviously execute on the roadmap that we've discussed over the last few quarters, which is really going from continuing to improve, and we have line of sight getting into the high 30 terabytes using that ePMR and SMR, and SMR as part of our technology strategies.
Can you just talk about that a little bit? So I mean, a few times where you and your nearest competitor are diverging in terms of timing of launch of, you know, new technology, so to speak, right? I think you both entered ePMR, as now your productization of HAMR seems to be at a later time, would you think?— is supported by the rest of your portfolio, so it, it still supports very good profitability, and capacity set is around the 40 exabyte range. Can you just talk about, like, what is the timing that investors should expect for, WD from its, launch of HAMR? Is it, you know, the margin headwind — what would have been the margin headwind of introducing HAMR at an earlier point in time?
So, we've been developing HAMR for quite some time. Our engineers have been working on it for quite some time, but we don't think it's ready for prime time and economics. This is why we think the best sort of a good point for inflection is that 40-TB point, more favorable for the HAMR technology. But in terms of the technology itself, our engineers and our engineering teams have been working on it for quite some time. They know what is required to qualify, but we also will continue to execute on our current roadmap with ePMR because this is where, you know, it is a technology that is very well... visibility of getting into the high 30-TB point.
And it is also a technology that has really great cost down. It allows our customers to have the best TCO, and until sort of that economic, there's no need for us to really transition to HAMR.
You just mentioned, like, you know, for economic reasons, that is the timing that works, but were you to have launched HAMR earlier, what would have been the economic potentially that you're avoiding by not doing this earlier?
Well, the way I would say it, Wamsi, is obviously we're focused on our current technology, because at the end of the day, focused. You know, I started off by earlier saying that we're focused on the profitability of our business.
Right.
And so we think that our current technology and our current portfolio will allow us to be more profitable at these capacity, not only for us, but also be able to deliver a good TCO for our customers. And so, leave it at that.
Okay. 50% of shipments last quarter. How do you see the trajectory of that, and what are some of the gating factors or challenges associated with shipping SMR drives? Because there has to be some customers and to sort of qualify these drives and potentially rearchitect a little bit. So would love to get your perspective on how the trajectory of that is tracking and what kind of traction you have at multiple clients.
So, yeah, I mean, you're right in terms of working with our customers to qualify SMR and be ready for it. They have to do some work on their side, but so far it's been very well received and for our key cloud customers adopting it. And as you said, last year last quarter, it was more than 50% of our sort of high capacity drive in the future and even improve on that because we are seeing some really good traction from our customer base.
Okay, great. We will just five minutes left. Has any questions? If there are any, do raise your hand, we can get a mic to you. And if not, then I got a few more. So stepping back a little bit, Wissam, like, as you think about, you know, the last few years have been quite challenging in terms of just the demand environment and the inventory correction. Are you seeing any areas where there is still incremental inventory that exists, that needs to get flushed out anywhere within the business, or at this point, like, all of that is behind you?
The last area where we saw that sort of it came back was the enterprise SSD. So it's all the cloud on the SSD side, and it looks like this is also the last piece of the puzzle because we started seeing cloud come back on the hard drive earlier. But of course, on the consumer and client, we saw it also. If I have to guess from an inventory perspective, we're more or less there, I think, generally speaking.
Yeah. And then can you just talk about the capacity rationalization for investors to think about, you know, if you, if you step back and say: You know, we, we optimized our capacity during the downturn, given the headwinds. Even in loose terms, to think about how much capacity came out of the system, because when we spoke earlier about adding back capacity, you want to hit certain gross margin profitability metrics before that, but how much? And it'd be helpful to get that both from a capacity standpoint, but also from an OpEx standpoint.
Yes, sure. Look, what we've done, I mean, we've during the downturn to focus on the cost structure, whether on the manufacturing side or on the operating expenses side. Obviously, the whole idea was to get ourselves a much different point as and position ourselves really well for the cyclical recovery. But that also was meant to be done without impacting the, obviously, also come out with a very strong set of products as we exit the cyclical downturn. So on the hard drive is where most of the capacity reduction took place. We've reduced manufacturing footprint by 40%.
If you think of it from a cost perspective, fixed versus variable, we basically reduced approximately our fixed 50% if you compare it to where we were at the end of fiscal year 2022. And so this is why, you know, now, for, we've improved the, the operating leverage of on that business, and so it's at lower revenue levels and lower volumes. On the OpEx side, we also took out quite a bit of quite a bit of system. If you also compare to that more or less same point, end of fiscal year 2022, we've taken out anywhere between $100 million-$150 million per quarter.
Yeah, some of that had to do with some of the variable comp, but I would say, roughly speaking, we've taken out, which was done very in a thoughtful way that doesn't, that doesn't impact our investment in products. And this is how you see us today, looking at really both on HDD and flash side with a great set of products.
Yeah.
Because we continued that focus as well.
Yeah. No, we're excited to see the hard actions that you've had to take over the last couple of years. Maybe to wrap it up, would love to get your perspective on what you think the market is missing about the WD story, or what do you think is most under— misunderstood about the-
Look, for us, we're in a cyclical recovery. We continue to focus on getting the best out of it. As I mentioned, we have a great product portfolio. We continue to. We have more or less favorable, a more favorable pricing environment. In parallel, we continue to focus also on the spend and being ready to public companies and unlock value for our shareholders. So, that's our story.
Yeah. Very exciting times. Well, thank you so much, Wissam. Really, a pleasure to have you here back on stage with us and-
Thank you for having us.