I think, I guess we're live. Hi, everybody. I'm back. I'm Joseph Moore from Morgan Stanley. Very happy to have with us today, the management team of Western Digital, David Goeckeler and Wissam Jabre . I'm gonna quickly read this research disclosure, and he's gonna read one, and then I said we have about half the meeting left to actually talk about the business. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
Sure. Thanks, Joe. Good to be here. We will be making forward-looking statements. I ask you to refer to our SEC filings for the risks associated with these statements. We will also be making references to non-GAAP financials. A reconciliation of our GAAP and non-GAAP results can be found on our website.
Great. Well, maybe we just jump right in. I think I know you can't talk about the strategic review process. Can you just talk about generally the case for the synergies between the hard drive business and the solid state business? You know, how critical do you think those synergies are? You know, what are the puts and takes of running the two businesses combined?
Joe, first thanks. Thanks for having us. It's great to be here. Yeah, I thought a lot about this when I first came to the company. It's almost three years ago now, this coming week. you know, I do believe that there's significant synergies between the two businesses, the way we go to market, the scale we have across a very diverse set of routes. Everything from a multi-billion dollar consumer business where we do hundreds of millions of transactions a year, to selling to, you know, $1 billion worth of equipment to the largest technology companies in the world, every OEM mobile player, and then a big distribution business.
I think that scale, and the way we can address the customer is unique in the fact that we have two large franchises to put through that go-to-market engine. I think that shows up in the results. I think in the last quarter, we just delivered in the NAND business that started to show up in ways that we could talk about maybe later a little bit. Also the way we do R&D and the way we have expertise across a broad range of technologies that showed up in the products and things like OptiNAND, we can talk about more detail. We've got two separate franchises and, you know, they're different technologies, and the way you build them is different.
That's why we've kind of organized the company the way we have over the last 2 and a half years of where we need focus, we drive focus on product development, how we build products, how we manage the P&L. We've gone to segment reporting, all the kinds of things give the visibility in the business. When we have synergies, we've left the businesses together and I think we can recognize those. Now, the strategic review is about, is there a better organization of the business that would lead to other synergies that are greater than the ones we experience today? It's like everything in life, it's a relative process and trying to understand if we organize the business in a different way, would we get synergies that are greater than the synergies we have today?
I think that's the process we've been going through for the last 8 or 9 months, in cooperation with a number of people that are part of the process. Of course, all under NDA, we can't talk about what's going on there. When we get to the end, we'll talk about that. If we reach a conclusion where we have very deep conviction that there's a different organization or strategy for the company that is gonna deliver better results, we'll go to that. We're completely open to that. We'll go to that, and we'll talk about it at that point.
Okay. Thank you. That's a very helpful answer. Maybe we could talk a little bit about just the challenges that you're facing right now. I mean, I look at this like, you know, I think the business is materially undervalued relative to the long-term earnings power, particularly on the memory side. I think this is gonna be a brutal 2023 in a lot of ways. You know, obviously there's a range of outcomes that could happen, but how are you thinking about protecting yourself from a more challenging scenario? In particular, you know, focusing on the debt agreement being restated and the convert that you've talked about. You know, how does that position you to kind of batten down the hatches and be prepared to just get through this year?
Yes. First of all, it's a very challenging market environment. That's not new-news to anyone. We have both franchises, in, you know, at the bottom of the cycle at the same time, which creates challenges. Obviously, I'll let Wissam talk about all the countermeasures we've taken, but we've obviously spent a lot of time thinking about this, a lot of time modeling the business, about what we think a recovery looks like, about what the bottom looks like, and how do we need to position ourselves from a financial position that we can weather that? We believe the business is undervalued as well, and when we come out of that, we're in a better position.
Maybe Wissam can talk about all the things we've been doing over the last three or four months.
Yes, of course. I'll start with the operational actions. We've taken a lot of actions on CapEx to start with. We've basically reduced our CapEx plan for the year by more than 40%. If you look at our gross CapEx, we're pretty much initially at the beginning of the year, we were planning around $3.2 billion range. We're now closer to the $2.3 billion and continue to take more action. On the cash CapEx, this is basically, as I said, reduced by more than 40% to help us preserve cash, but also maintain the competitiveness of the business. On the manufacturing side, on the hard drive, we did a restructure. We've taken a lot of action to reset the cost structure.
We've restructured our client manufacturing footprint. In addition, when you look at our fixed costs, for instance, in the manufacturing space for the hard drive business, it's down almost 10%-15%. By the end of last quarter relative to where it was at the end of fiscal 22. On the flash side, we did announce a reduction in our wafer starts, starting January. We've taken the supply down by around 30%. The focus there is to look at the demand picture and manage our supply to the demand of our products as we get more control on our inventory. If you look at our operating expenses, we've taken from the end of the fiscal year 22 run rate. At the quarterly basis, we were probably running at around $760 million.
Last quarter, we were at around 660, so that's around $100 million down by quarter. We still have further actions to take. We are planning and aiming to exit fiscal 23, basically Q4 23 at sub $600 million per quarter run rate on the operating expenses. There again, we're really focused on very high value R&D projects to maintain the competitiveness of the business, the development of the technology that differentiates us, but also manage the profitability. When you look at liquidity and credit, as you mentioned, we did amend our credit agreement to give us more flexibility with respect to our covenants for the next 7 quarters.
In parallel, we raised a little bit less than $900 million in the form of delayed draw term loan, $875 plus the $900 million convertible preferred, which gives us strengthens our liquidity as we go forward. In addition, of course, to the cash on the balance sheet at the end of Q2, which was around $1.9 billion plus an undrawn $2.25 billion dollars of revolver. We look at the business and we pretty much manage it very dynamically to weather the storm and to give us the liquidity to continue to operate comfortably.
I guess in particular on that convert issuance, you know, the reason for doing it is pretty clear. You take the 2014, 2024 convertible repayment kind of off the table as an issue. You know, what's the strategic importance of working with a strategic partner like Apollo and Elliott on that deal?
You're right. I mean, we looked at all the sources and uses of capital over the next several years, and we positioned the business for when we come out of this recovery, we're in good shape. You know, we feel really good about where the portfolio is at on both sides. We've been working on that over the last several years, and now we're making structural changes to get our cost in a better position. But the advantage of First of all, we went through this, we raised this convertible preferred when they're in the middle of a strategic review process. It was very important to us to make sure that we preserve a significant amount of optionality about the way that strategic review processes come out. We don't have the.
We don't. We're not ready to announce what the answer is. We're still doing work to finalize that, but we wanna make sure that we when we went through this process, we didn't do anything that decreased our optionality. Working with Apollo and Elliott, we were able to do a very highly customized piece of paper that kind of gave us a lot of options about the way this could play out. They also bring significant financial expertise and resources into the company that we look forward to working with them on a ongoing basis.
Great. Maybe if we could shift to talk a little bit about just the state of the NAND business. You know, you guys have taken relatively draconian action of lowering utilization. That's something that didn't seem like you were gonna do three months ago. You know, I guess what changed? We looked at obviously, the SAA data's imperfect in some ways, but the month of January, it didn't look like there was much NAND being shipped, just in general. Like, you know, what are the conditions that you're reacting to with that utilization, and how are you thinking about the puts and takes tactically?
One of the things I think has been very important in the business is put more agility into the business. That's one thing I've been very focused on, the way we've organized it, the leadership we've brought in to the, like, we have to be able to move faster than the environment we're in. Otherwise, we just get taken away with where the environment's going. We stay very, very close to what the market is, and if you go back to where we were three months ago, you look at our December quarter, we did have bits up 20%, quarter-over-quarter. The margin was relative to the market in good shape.
you know, at that point, when we looked at the business, we didn't see a need to do anything as far as underutilizing production, because we still saw the volume up. as we saw March quarter start to change, we expect now bits to be down, we wanna make sure inventory doesn't get out of control, so we pulled back on the fab, right? This is a decision we'll make on a really a week-by-week basis. We load the fab every week, so we have a chance to make this decision very frequently, and we'll stay very close to it. as we see the volume come back, we'll, you know, we'll make a different decision about how we, how we load the fab.
Okay. That makes sense. I guess as you step back and think cyclically about this, you know, we just got out of a cycle where we peaked, gross margins peaked in NAND lower than I might have thought. We're certainly troughing lower than I might have thought. You know, what do you think this all tells us about the next cycle? Because in the next cycle, we will have more consolidation because the Intel and Hynix businesses get put together. You know, China has uncertain outcomes, so you have maybe one fewer participant that's putting a lot of money into this. You know, would you expect the next cycle to look more like the sort of historic gross margin cadence that you've seen? I know it's hard to say, but, like, how are you thinking about it?
It's very difficult to say. I mean, I think what we're trying to do is put ourselves in the best position possible, right? For the NAND businesses, it starts with the technology roadmap. If you don't have the right fundamental technology at the right cost point, then it's very, very difficult. Again, I think that one of the things this down cycle has shown, one thing we continue to focus on with our JV partner is capital efficiency in our technology roadmap to make sure that it's a very explicit design goal that every incremental bit we get is the most capital efficient it can be. I think our technology roadmap has displayed that for many, many years.
We're gonna stay focused on making sure we continue to do that as we move through BiCS6 into BiCS8. No matter what the cycle is, that sets us up for a better outcome. The product strategy stay very diversified in our product strategy. Again, we have a, I think, a very enviable consumer franchise with SanDisk Professional, WD_BLACK, which is a brand we built over the last couple of years, is doing extremely well in gaming. You know, through the client SSD business, mobile, IoT, and automotive, and then, you know, the work we've been doing over the last couple of years of being qualified at the, at the large hyperscalers on enterprise SSD, gives us a lot of diversity and able to kinda place our bits in a mix that gets us the best return.
Clearly, the industry is going through a very severe downturn. I have customers that tell me, like, "Look, we've been through this many, many times. The faster it goes down, the faster it comes up." There's all kinds of different ways people think about it. What we're trying to do is position our business so that we get the best return possible with the best fundamental technology and then the best portfolio mix that we can get, the best return for our NAND business, no matter where we are in the cycle.
I think it's been somewhat an underappreciated element of the story of, you know, your relative gross margins are actually quite good relative to the peer group. To your point, the end market exposures you have are good, and the capital intensity of the business has been low for a long time. And people, you know, the bear case for SanDisk for 20 years has been CapEx is much lower than peers. Like, if it lasts for 20 years and you hold market share, it's a good thing. Can you talk about that, like, generally, and then more specifically, you know, you mentioned the BiCS6 and BiCS8 roadmaps. You know, how comfortable are you that you can stay in that good position going forward?
Well, we're very comfortable. I mean, I think this is the thing. One of the reasons the JV is so important, and it's been so long-lasting, I mean, we're 23 plus years now in the JV because it works, and it gives us scale on our... It's not just scale on production, which we get scale on production. You know, the fabs we have in Yokkaichi and Kitakami, very, very large sites. It's one common R&D roadmap. We have the ability to have, you know, twice as many engineers for our scale in the market working on our technology roadmap. Been doing that for 23 years. The teams work hand in glove. You would think it's this one team. A very focused goal of that team has been capital efficiency.
It's not been, you know, it's build the highest performance product. It's do all of those things and do it in a way that's extremely capital efficient, and no decisions are made based on that. It's paid off. As you said, year after year after year, we're very capital efficient. You know, there's been a lot. One of the things that's always been interesting for me in the NAND business is people talk about it as some kind of layer race. It's not a layer race. Like, fewer layers is better that means better capital efficiency, less cost into your business. I think that's showing up in the downturn, that we have a very capital-efficient business, and it shows up in the margins. It supports higher margins across the portfolio. We feel very good about where that's at.
We now have BiCS8. You know, BiCS8, we talked about on our earnings call. I didn't bring it with me today, but the team a month and a half ago gave me one of the first BiCS8 USBs that's out of the fab and working. We've commercialized that technology now, and we feel very good about it. We still have to get through. Well, BiCS6 will be a shorter node for us, and then we'll go straight. There never was a BiCS7. I always have to explain that. You know, four, five, six, eight. Eight is, you know, arguably 2 quarters ahead of schedule, and we're very excited about where that technology's at and how it's yielding.
I guess how do you ensure that you stay on those trajectories in a challenging environment? You know,
Well, you continue to invest in R&D, as Wissam said. I mean, we're doing a lot of things to optimize our business, so we're in better shape when we come out of this. One thing we stay very focused on is making sure we invest in the R&D to drive the fundamental technology forward, whether it's the NAND business or the HDD business. You can't take your eye off the ball of having the fundamental technology. It's the foundation that the rest of the business is built on.
I guess just the final NAND question, for me, at least. As I look at the disparity of NAND businesses right now, there's a pretty wide range of gross margin depending on what you do. You know, if you're shipping to tier one smartphone manufacturers, gross margins seem like they're, you know, very, very far into the negative. If you ship into storage and cloud markets, it seems quite a bit better. You know, what does that tell us going forward? I mean, it doesn't seem like that low-end margin can get too much worse without people idling fabs, but does the premium that you get for the higher quality markets diminish over time?
Well, I think, you know, different markets give you different things. I mean, you're right. This is why, you know, people are idling fabs, is because either there's not demand and there's not elasticity or that demand is not worth serving, so you pull back on utilization. You know, some markets are very, very high volume markets, but they're much more cyclical. Other markets maybe are not as high. Consumer market's a good example. The consumer market is gonna be better through cycle margin, but it's not gonna be the peaks of the high, and it's not gonna be the depths of the low, and it's a stabilizing influence across the whole portfolio. That's why we spend time building brand.
Mm-hmm.
You know, if you go out and you buy a $1,000 camera, you're not gonna buy the cut-rate card to put in it. You're gonna buy a SanDisk Professional card to put in it, right? 'Cause you know it has the quality, and it's delivered every single time. Different markets deliver different things as far as volume, as far as price, as far as margin at different points in the cycle. I think that's why it's so important to have a diverse portfolio, so that you can mix across that portfolio given where you're at in the cycle and where the demand is, and why we work so hard to build out this enterprise SSD pillar. It's a big market. It consumes a lot of bits. It's a big growing...
You know, the other thing is every market has a different growth rate. It has a high growth rate. The fact that we can sell into enterprise SSD, we can sell into client SSD, we're qualified at premium mobile suppliers, and we have a very large consumer franchise where we sell worldwide, and have premium brands, puts us in a good position to mix at a different level across that portfolio, no matter where we are in the cycle.
Great. If I could pivot to the hard drive business, if you could just talk generally to the challenges you guys are seeing there. You know, are we past the worst of it, do you think? In terms of, you know, 'cause you have seen kind of general commentary that as difficult as December was, that there's maybe some improvement. Can you just talk generally to the issues in hard drives?
Hard drive is, you know, we saw the correction happen in waves across the different franchises we have. It started in consumer, then moved to PCs, and finally moved to data center, it was kind of the last one in. You know, we're in the depths of, you know, last quarter in the hard drive business was the lowest revenue quarter we've seen in, I don't know, 10 years or more. We had to go back before the HGST Western Digital merger to find a quarter that low. You know, you have 2 really big factors, is you've got China has had suppressed demand for quite some time. You know, optimistic about that coming back as we move throughout the year, it's still depressed.
You have the big hyperscale suppliers that are coming off of a pandemic where they were consuming an enormous amount of product and now are more cautious on their own, how they're using their own capital, and we see that across many different dimensions, have pulled back and are going through a rather significant digestion phase. Those two things together, those are two very, very big pieces of the, of the drive business. You know, I think we probably have another quarter or so to go, but we think the December quarter was the low quarter, and we'll see incremental improvement on that as we move throughout the year. It's gonna be a couple quarter before it's back to where it was.
Okay. How are you thinking about market share? I mean, it seems like in 2022 you held your own reasonably well. I know you weren't happy with every aspect of 2021, but last few quarters you've been tracking or doing better than your primary competition. Can you talk about that?
Share has changed. There's been a lot of share shifting in the last couple of quarters because the revenue is so low in 1 particular order or 1 customer buying and another customer not buying can, like, have share go up and down quite a bit. When you look at it over a 6 or a 12-month timeframe, it's pretty level. That's the way we manage the business. We've talked about this extensively. We're managing the business more for profitability than we are for share gains. We wanna maintain our fair share of the market. You know, we're really focused on... We've got a lot of R&D in this business. We've driven a lot of innovation over the past couple of years, whether it's OptiNAND, UltraSMR, EPMR.
We now have market-leading products in the drive business, again, which we think puts us in a very good position as the market comes back throughout the year. We wanna make sure that we drive you know, the right value pricing environment for that. We are, you know, working with our customers, we are giving them a very, very good TCO proposition, and we wanna make sure that we continue to drive the profitability of the business, we can continue to invest in R&D, and, you know, we're not so focused on just gaining share.
Can you walk us through a little bit the technology roadmap? I mean, it seems like you're shipping 22 TB now, qualifying 26 TB UltraSMR. Can you just talk to your confidence that you have a competitive roadmap? You know, maybe talk a little bit to the HAMR migration.
Yeah. You know, when I came into the business 3 years ago, the team kind of sat me down and we went through the HD roadmap. Really, I'm At heart, I came up through the world as a product person, right? I've built product my whole life, really wanna understand where we are on the product roadmap. 3 years ago, the team kinda told me, "Look, the next... We've got clear line of sight to 20 terabyte, right? You can just The way you put drives together, you can put 10 platters in the form factor. We can get 2 terabytes per platter, you know, 10 times 2 is pretty clear what you get. You know, at that point, we're gonna start running out of real estate.
We've got this new technology, HAMR, that's gonna really give us more density, but that's a number of years away. That's like a 2025 and beyond type technology. We've got this gap of how do we drive from 20 to 30, and, you know, here's how we're gonna fill that gap. They started telling me about EPMR. We're gonna increase aerial density per platter, you know, to 2.2 TB per platter. Now, you know, 9 times 2.2 gets you to 20, and then 10 times 2.2 gets you to 22. We're gonna do this thing called OptiNAND, where we're gonna change the control plane, we're gonna put more software in drives so we can optimize it better.
We have this technology SMR, where you can change how you know, you can change how you record the bits on the media. You know, you put all these together, we can have this thing called UltraSMR, where we can get an extra 20% with EPMR plus OptiNAND and SMR gets you UltraSMR, which is +20%. Now you can start looking at the roadmap, and now we have 2022, and we have 2026. You know, we'll be able to drive aerial density a little bit higher. We have this very stepwise plan using you know, this new innovation to drive this 20%-30% until we get to HAMR, and then that's available.
HAMR has been in the lab. You know, HAMR's been under development for over 15 years. What I would say is we're in the final stages of that development. You know, you're starting to see it show up at customers a little bit, but before it's still a couple years away from re-reaching mass production. I think everybody in the industry would agree with that. You know, we're in that same 15-year-plus development timeframe. When it's needed in 2025 and beyond, it'll be there.
Until we get there, we have all these other technologies we've been working on over the last five or eight years that when you start layering them together, you know, individually, you may not understand what they all mean, but when you put them all together, what they do is they give you that bridge from 20 to 30. It allows our customers with a high degree of confidence, 'cause all these technologies have been commercialized now, and they're being now qualified for deployment in the largest, most sophisticated data centers in the world. I feel extremely positive about where our drive roadmap is and kind of the deep level of thought over the last decade that went into kind of building this plan that gives our customers an enormous amount of confidence that they can continue to drive higher density storage into their data centers.
I mean, I'm not a hard drive guy, it feels like, to me, it's a little bit similar to the conversation about layer count in NAND, where, you know, people want the headline of higher layer count. Some ways, HAMR is something new, we need to move there quickly. It feels like to me, you guys are almost agnostic to the timing. You just want to have the best returns at every capacity point.
Yeah, exactly. We want to be able to allow our customers to build the most sophisticated data centers in the world. I mean, we take our role in the technology stack very importantly. You know, 29-30% of the entire data center TAM is storage. You know, a huge percentage of that storage, 90% ±, is on hard drives, will be for a long time.
Mm-hmm.
Continuing to drive that roadmap is a big responsibility to the industry, so we can all benefit from the cloud and all the great things that are going on. Yeah, I mean, I think we've had a team that have been doing this for many, many decades. The technologies that go into the hard drive, you know, physics, material science, this is very, very complicated stuff. It takes decades to mature. Making sure we have the right technology with the right capacity point at the right time, that's the essence of how you manage a product roadmap, and I think the team has done it extremely well.
Great. Let me pause there. I have a couple more questions. Let me see if we have questions from the audience first before I go forward. No? Oh, over there. There we go.
Hey, just an awkward question on the SSD space, where we're starting to see some of the cloud players build their own SSDs, and they've obviously done the same in CPUs. Do you see that, I guess, number one, is how much of a threat is that if they decide to go in-house completely? Secondarily, how do you see that evolving?
It's not really a threat because you still have to buy NAND, right? You have the opportunity to now sell two things to the customer. You can sell them enterprise SSD, you can sell them NAND for their own SSD. I think most customers are not going to. On most anything, you're gonna want multiple sources for everything you do. I think it just creates more optionality for us, and ways to work with them on a broader portfolio, quite frankly.
Is anything changing there? Because, you know, it seems like a lot of the NAND companies have built their own controllers because it works well to be tailored with your own NAND and things like that.
Yeah.
Someone taking more of an ASIC approach to controllers to try to buy cheaper raw NAND, is that easy to do? Is that something that's changing at the margin?
I can say, you know, it's not easy to do. Building an enterprise SSD is extremely difficult. There's not very many companies in the world that has actually done it and has gotten qualified in the places. Again, the most sophisticated data centers in the world, it's extremely difficult to build a product that can go into those. You know, you just kind of deploy it and forget it. They're going so fast as far as how much they're building, the qualification process is extraordinarily rigid for good reason.
I think to get through that process, having gone through it now and been successful, the team was working on it before I got there, and then I kind of like helped in the last year of get it over the line. It's extremely daunting process.
Great. Well, I think we should probably just wrap it up there. We have a few seconds left. Dave.
All right.
Thank you so much.
Thank you, Joe. Appreciate it.
Thanks, Joe.
Thanks, everyone.
Great having you here.