Welcome back, everybody. Happy to be here with the management team of Western Digital, CFO Wissam Jabre, and head of IR, Peter Andrew. Peter, I think you wanted to read the safe harbor, and then we'll jump right in.
Yep. Thanks, Joe, and thanks for having us today. Before we jump into it, I've got to read the safe harbor statement here. Today, we will be making forward-looking statements based on management's current assumptions and expectations, including with respect to the separation of our businesses, our product portfolio, business plans and performance, market trends and dynamics, and future financial results. These forward-looking statements are subject to risks and uncertainties. Please refer to our most recent financial report on Form 10-K and/or other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also be making references to non-GAAP financials, and a reconciliation of our GAAP to our non-GAAP results can be found on our website. So back to you, Joe.
Great. Well, thank you. And thanks, guys, for being here. I think I was disappointed to hear you have one more presentation after this, but you know, very close to the end of the combined entity of Western Digital before the separation coming in the first quarter. So maybe if you could start with just an update on that process. And the Form 10 is out. It seems like you're making progress towards kind of doing this at some point in Q1. But just generally, where are you in the process of separating out the Western Digital hard drive business and the SanDisk memory business?
Of course. And thanks, Joe. Happy to be here. So on the separation process, we did file our Form 10 publicly a couple of weeks ago. And this is the form that is an SEC form that basically details, provides an overview and details on the transaction, proposed transaction. So in it, you'll find the details on the capital structure of the flash business, SanDisk, in addition to some additional information regarding the transaction itself. And so that's sort of one of the key milestones for us. In addition, we also launched early last week a financing of around $2 billion of Term Loan B for SanDisk. That's also been in the public domain.
When we look at what went into the Form 10 with respect to the capital structure of SanDisk, the idea is to start on day one the company with around $2 billion of debt and $1 billion of cash, with a net debt of around $1 billion, and if you sort of look at the overall context of where Western Digital balance sheet or debt levels were at the end of September, you sort of take out the $2 billion, then you could get closely to where a hard drive or the remaining portion of Western Digital will start around that sort of on the same date of the first day of the spin from a debt level. In addition, the transaction will have hard drive or Western Digital will retain around 19.9% retained stake in the spun-out entity.
The idea for this retained stake is for it to be liquidated within 12 months post-spin with the intention to continue to delever on the hard drive side. So that can be done if it's done within the 12 months post-spin. That can be done tax-free while preserving sort of the tax-free manner of the spin. So if you sort of fast forward 12 months from the date of the spin, we aim to have two public companies with stronger balance sheets and ideally best-in-class balance sheets. In parallel, we announced earlier in the quarter that we've started sort of operating in a soft spin phase, which is really running internally the company as if it's more or less two companies.
And so what this allows us to do is we can test the processes and the systems and the various sort of entities and changes we put in place to sort of make sure that we can operate as two separate companies. And the purpose is to give us enough conviction that by the end of the quarter, we can close the books also as two separate companies. Even though for calendar Q4, we plan to close the books as Western Digital, and sort of we will do internally the dry run on two separate companies, but in reality, for the outside world, we will be reporting one company.
And then once this is done, we would be starting the spin process, which we would start with the investor days and where we would be detailing more the long-term models for each of the businesses, as well as the capital allocation framework and other types of information that the investment community would be interested in, leading to the actual spin of the business. So making progress, being on track, and we still have a few more things to do, but so far, we're happy with the progress.
Is there anything that could delay that timing that you can see as a potential risk?
I mean, from where we stand today, I don't see anything that has the potential to delay the process.
Just because I get the question, I mean, your resolve to do this is very strong. Like, there's no question.
There's no questions around that, and throughout the whole process, since the October 30th day in 2023, when we announced the plan to spin and separate the flash business, we've been providing updates and basically telling the investment community what we plan to do and delivering on what we say, and the latest two milestones obviously are the ones that I just mentioned, which are filing the Form 10 and the financing process that is supposed to conclude later this week.
And then the analyst days would presumably come after the quarter is reported.
That's correct, and so we would report the quarter as one company, and then we'd have analyst days and execute on the final sort of stages. The process itself is probably a few weeks, and so we will be executing as we need to to make sure we get to that.
I mean, the annoying thing is I'm the one that has to initiate coverage, and our hard drive team takes over Western Digital, which we've already covered, because SanDisk is the new entity. But that's my problem.
You still have your old SanDisk model.
Yeah, we'll figure it out.
I was excited to see you resurrect the SanDisk name as well around this. Anything change about how you report the December quarter, or is that just kind of, I guess, the data that's in the Form 10, the splits? We'll have that data in December. Anything else that's different?
We don't anticipate any changes. I mean, we'll still be reporting the December quarter as one company. And so yeah, I don't anticipate any changes for December quarter.
OK, great. So maybe if we could talk about some of the businesses, can you give us a sense of the NAND market? You know, I think you guys had talked about more of like a pause in terms of the prices going up, and you're not seeing it as kind of an end-of-cycle weakness. But I know there's a lot of anxiety about what's happening in the NAND market. Just wondering if you guys could give us the lay of the land there.
Yeah, so yeah, we did talk about sort of a mid-cycle pause, if you like, in the mobile and client markets and the more transactional markets. Obviously, consumer is going through a seasonal trend now. When it comes to Enterprise SSD, however, we continue to see good traction there. And so this is sort of, I would say, how it looks like now. As we move into calendar 2025, we do anticipate sort of at some point in the year to start seeing some improvement. There's potentially a PC refresh cycle. There's other types of factors that could drive the PC demand. And meanwhile, Enterprise SSD, we still anticipate to see good traction. As we said, we were expecting to have around 15%-20% of our bits for fiscal 2025 in the Enterprise SSD market. And so that's sort of high level how we think of it.
Now, NAND is one of those very difficult businesses to predict. So we may have a couple of choppy quarters before we get there. And as we also mentioned, which is not really new news, as we mentioned on our earnings call, we did talk about calendar Q1 being seasonally, seeing seasonality in calendar Q1. So those things are still anticipated as well.
Yeah. And you had in the September quarter some pretty big mix-related headwinds, if I recall. I think you had like-for-like pricing up mid-single digits, blended pricing ended up down mid-single digits. And you had, within that, enterprise SSD grew, I think, 76% sequentially. So a huge jump in the highest price part of the stack. So maybe what were those headwinds, and do you anticipate that we reverse any of that as we move in the next couple of quarters?
Yeah. So in a way, I did talk a little bit about the headwinds. In the September quarter, we also had shipped the holiday, more or less the holiday volumes when it comes to the gaming part of the business. We also had some mobile mix that sort of contributed to the pricing that we saw with respect to sort of if you factor in mobile as well as enterprise SSD and gaming, sort of it gets you roughly what the pricing did. As we go into calendar 2025, we do anticipate later in the year to see some improvement from a demand perspective to some of the markets that I mentioned, like the client side, the client of the business, sorry, client business and mobile. And enterprise SSD, as you noted, saw a good jump in September quarter.
We still are expecting to see some good traction in that market segment as we continue to see that influenced, obviously, by AI workloads and the investments there.
Great. Yeah, I mean, can you touch on that a little bit? I mean, because I think that 15%+ kind of a number compares to below mid-single digit like a year ago. So you've clearly a very strong ramp in enterprise SSD. The market's really good, but obviously, you guys are executing well also. How sustainable is that ramp, and how much can you build around that?
Yeah. So what we've done throughout the cyclical downturn is we did preserve our investments in being able to sort of continue to invest in our portfolio. That allows us to be able to launch new products. And what we saw since fiscal Q4 is that the qualifications in enterprise SSD has moved up. It's almost doubled since that time. So that sort of gives us a bit of an idea of what to expect going forward. Now, of course, we're coming off of a smaller base, but nonetheless, it is a good traction. And when you look at the AI data cycle, the training phase and inference phases, as well as once you start generating data, those all have to do with positive impact on the enterprise SSD space. And so we continue to see good traction.
I think this is sort of obviously the beginning of us sort of ramping that portfolio. Having said this, it is always interesting for us to make sure that our portfolio is broad in the flash business. So in addition to enterprise SSD, we continue to focus on our traditional sort of client and consumer markets. When you think of the SanDisk brand name, it has great recognition, and it is really a premium brand when it comes to the consumer space. When you look at the client space, we do have quite a bit of good leadership position there as well. And so that gives us, if anything, more optionality to place products and to place bits as we go forward.
OK, great, and you guys have had remarkable margins compared to your competition really throughout the last couple of years, showing up most in the downturn. And then maybe people are frustrated that you didn't see the same upward revisions as we recovered, but that's just because you didn't have those low-value markets. Can you talk a little bit about the roadmap to support that? Again, I don't think it's consensus that you guys have leadership margins, but you do. And it's demonstrable, and now that you're separating it out, we're going to see it. Can you talk about the ability to maintain that through BiCS8 and some of the transitions going forward?
Yeah. So yeah, thanks for noting, obviously, the performance throughout the down cycle and as we sort of were coming out of that. I think it's a testament to the portfolio that we have from a product perspective, but also from the BiCS technology that is developed in partnership with our joint venture partner. Look, the joint venture has been in place for 20+ years. It's been operating really nicely. It's a great thing for the two companies. It provides us scale on the R&D development as well as the manufacturing side. And so as we think through BiCS 8, or we do, obviously, our engineering teams, the teams that develop that technology usually focus on several factors. One of them is the capital efficiency.
There's also clear focus on that continuing the cost reduction, in addition, of course, to the increase in bit density so that we can continue to be able to generate more output from the same wafer. And so these types of optimizing along those three factors allows us to manufacture the technology at a very, very competitive rate. And as we've shown for several years now, we were able to, even throughout the down cycle, if you factor out some of the influence of the underutilization, we were able to continue to deliver mid-teens percent cost reductions year in, year out.
It's, I think, a combination of having that great technology, in addition to having a product portfolio that allows us to continue to optimize where to place bits and to continue to sort of place bits in markets that allow us to have a little bit more profitability. That's sort of at the high level how this works.
Great. So maybe in the interest of time, shifting to hard disk drive, you guys are also at record gross margins there, also very impressive gross margin performance on the drive side. Can you talk about what's driving that, and is that kind of something cyclical, or is that kind of the new normal level of hard disk drive profitability?
Yes. So September quarter, I think we ended around 38.1%, which is a really great point for the hard drive business. And that was around 15 percentage points increase year on year relative to the September quarter of 2023. There's a few things that sort of contributed to us being able to deliver these great margins. One is, of course, the technology and the portfolio that we have. We continue to deliver higher capacity points based on ePMR, OptiNAND, Ultra SMR, which are really technologies that have been proven throughout the years. They've been manufactured at scale with a very high reliability that our customers got accustomed to. And as obviously we continue to manufacture and to provide the competitive portfolio, we're able to provide superior TCO to our customers. And in parallel, we also get to participate in keeping some of that value for ourselves.
That's sort of one key element of it. In addition, we did restructure the manufacturing footprint for the business as we entered the cyclical downturn. We started doing that in the summer of 2022. We've taken quite a bit of capacity offline for manufacturing of hard drives. That basically allowed us to reduce our fixed cost and overall reduce our cost structure. In parallel, we've put in place more automations and higher analytics, some yield improvements to continue to focus on the cost structure going forward. That's really what drove the outperformance over the last few quarters in terms of gross margin. To the last part of your question, Joe, is this a new normal? I mean, today, we pretty much feel OK from where we are from a margin perspective.
We continue to focus, obviously, on all the elements that I mentioned to make sure that we continue to deliver our performance or margins.
Great. That makes sense. And then as to the roadmap, I mean, your competitor has invested in HAMR technology. You have argued, I think, consistently that the time to deploy that technology is later when we get to more of a 40 terabyte form factor. And you've made these investments in SMR that you've described. Can you talk about that dynamic moving forward? Is that you have to make those investments that your competitor is making now? How well positioned do you feel like you are for that? And can you maintain the better gross margin structure that you've had versus them as you migrate to HAMR down the road?
Yes, of course. And so our strategy has always been to continue to develop our roadmap and execute our roadmap on the current technologies that have been manufactured for some years very reliably up until sort of getting into the high 30 terabyte capacity points. And then we think by 40 terabyte is where the transition to HAMR from a technology perspective makes sense economically. And so we continue to execute on that approach. In parallel, the nice thing about Ultra SMR is that it does provide us, or it provides our customers who adopt it, an additional 20% capacity point from the same CMR drive. And that Ultra SMR technology, which is software-based, is technology agnostic from a hard drive perspective. So it is applicable also to HAMR.
And when we get to HAMR, we will also continue to benefit from that. And so as we sort of develop, continue to develop the roadmap on HAMR, we will be launching ePMR products to help us sort of bridge from here to where we need to be on HAMR. And that from an operations perspective, we continue to be confident that we can get there.
I mean, it still doesn't seem like HAMR is a defining feature in 2025, right? I mean, I think we're talking about less than two million drives in a market that's over 60 million units. So it doesn't seem like there's much of a change. It's just, and you guys have thrived literally from making the decisions that you made. So I guess when you do put HAMR into production, do you anticipate that you would have some of the same struggles that they've had? Or do you think that having more time in the lab and getting it refined will allow you to avoid that?
I mean, this is where when we think of how we've executed, we've executed our strategy. That's pretty much the intent. The intent is for us to continue the development process until we get to a point where, one, from an economics perspective, it makes sense. Because at the end of the day, we're obviously, our goal is to be economically profitable, but also to provide the best solution from a TCO perspective to our customers. And this is why we continue to execute on our ePMR roadmap. And so as we continue to execute on our roadmap, and in parallel, we're developing HAMR, we would be the HAMR technology. We would be at a point where that sort of intersection makes sense economically. We should be also ready from an operations perspective to be able to transition without major challenges.
Great. And you talked about AI being a driving factor for enterprise SSD. Is that also true on the hard disk drive side? Are you seeing that as a demand driver? And is that part of why the market feels kind of tighter than it's been?
So I mean, today, from a hard drive demand over the last few quarters, it's been, from our perspective, we think it's been a return to normal ordering patterns as more and more data centers are being built. Now, we did publish a piece on the AI data cycle, and in it, we sort of shared our view of how the AI data cycle influences the various parts, whether ESSD or hard drive, so on the training, inferencing side, it's mostly accretive to the enterprise SSD. But as these Gen AI engines start generating data, this data is expected to be stored on hard drives, so from a long-term perspective, we do see a positive trend for really both the enterprise SSD side as well as the hard disk drive side as sort of the AI deployments continue to take hold.
OK, great. Let me pause there and see if we have questions from the audience. And I'll keep going. Anyone? No? You talked about the capital structure decision around the two businesses. I guess what's the underlying thought process there? And having a slight net debt on the SanDisk business, do you feel like you've talked about NAND can be unpredictable? If we actually go into a downturn, how do you feel about having that structure? I think some people thought you might give cash to that business. Just how did you think about those decisions?
So look, we've sort of part of the process of developing the capital structure, we did look at, we did sort of, of course, stress test the model to see what makes sense from a leverage perspective. But also, when you look at where the business is starting, it's starting with $1 billion of cash. In addition, it will have $1.5 billion of revolvers. So in total, it will have $2.5 billion or so from a liquidity perspective. And so that should be ample liquidity for it to be operating comfortably.
The capital spending for that business, I mean, you guys have been pretty clear that you're going to be very measured in your spending until we get to the economics that you want to have. Does that continue to be the case? And I mean, it seems like I know the NAND market has had its ups and downs as we've brought utilizations back up. But it seems like this lack of CapEx should be a very bullish long-term factor as we think about what the next cycle looks like.
I mean, if you think of the CapEx picture, at least for our business, when we look at what we've done over the last couple of years, we pretty much reduced CapEx to a strict minimum. In fact, I think we've run over the two years, we've probably run at historical lows. And so that, and you can see that across various players of the industry. I mean, it is reflected in the semicap equipment numbers that we've been running at historical lows. And we don't see sort of, at the end of the day, our capital decisions will still be based on economics and based on us gaining confidence and conviction that the demand picture is more sustainable as well as the profitability.
Before we sort of transition or spend a lot of capital investment on transitioning technology, we would want to gain confidence that the demand is sustainable as well as the profitability. That hasn't changed from the way we think about capital investments.
But also, Joe, from following the capital equipment companies, from the time an order is placed on a tool, it could be three, four, five, six quarters before that tool is actually bought, built, installed, tested, starting to produce bits. So there's also a bit of a lead time or lag time, might be the better term, from the time you actually see an equipment order show up at one of your capital equipment companies and then it finally starts producing bits at the other end.
Yeah. Yeah. All right. That makes a lot of sense. So we have like a few seconds left. You guys have any closing remarks? If not, we can wrap it up there.
Thanks for having us. It's great to be here. We're very excited about the upcoming spin. We're getting ourselves totally prepared. We're on track. As we think of next quarter, as I said, and as we mentioned on our earnings call, we do anticipate some seasonality in both, actually, the flash and the hard drive business. But we don't see that as an underlying issue from where the demand picture is for our products. Thanks for having us.
It's been great working with you. We'll keep in touch once you go over to the hard drive side and we're covering memory. Congratulations on everything.
Thank you so much, Joe. I look forward to continuing to work with you as well.
Appreciate it. Thank you.