All right. Perfect. All right. Good morning, everyone. I'm really delighted to have with us Kris Sennesael, CFO of Western Digital. I guess before I get any questions, Kris, you have fair disclosures you got to read.
Yes. Today I will be making some forward-looking statements based on my current assumption and expectations about our product portfolio, the business plans and performance, and the future financial results. These forward-looking statements are subject to risks and uncertainties, so please refer to our Form 10-K and other SEC filings, because risks and uncertainties could cause actual results to differ materially from expectations. We will also be talking about some non-GAAP financials, and the reconciliation is available on our website, in the investor relations section.
Perfect. Thank you for that. All right, we have about 20 minutes on this. It's a fairly short fireside chat. I'm going to kick it off with some questions, anyone in the group here has questions, feel free to raise your hand. Happy to integrate you into that as we go forward. Kris, thanks a lot for being here. Appreciate your time. There's a lot going on. The drive names have done extremely well. Western Digital has done extremely well the last couple of years. Maybe just talk about, at a very high level, one of the messages from you folks has been the underlying need for data storage is growing faster and used to be low 20%, maybe it's over 25% CAGR right now.
Just talk about what are you seeing from a data storage requirement perspective, and to the extent you've sounded a little bit more positive on the data growth in the last couple of quarters, what is driving that upside to data growth?
Yeah. It's a great time to be at Western Digital and be part of this AI data-driven economy. Let's try to unpack that. Currently, based on all the discussions that we have, and frequent discussions that we have with all our customers, we are getting more and more comfortable that the exabyte growth over the next three to five years will be greater than 25%. Very strong growth in exabytes. What is driving that? Well, first of all, there is still, sometimes we forget about that, there is still the cloud, right?
There is 8 billion people on the planet that continue to take pictures and video and upload that to the cloud through their phones and other devices. Then in many cases, multiply that through their social media, right? In addition to that, I think every company on the planet by now has understood what the value of data is and is storing all the data that's being generated inside the company. We at WD do that. T here is definitely still a lot of growth just by data being pushed into the cloud. In addition to that, yes, there is a lot of growth as a result of AI. AI, there are several factors in it. First of all, and that's what it started, was big data lakes that were created to support the training of the multimodal large language models, right?
I say multimodal because it was not just only text-based.
Also pictures and more and more video-based. That is still ongoing. There is still a lot of relearning, retraining of the models, and they are training the next generation models. Some of them are very broad, some of them are more specific, and that all still requires a lot of data. Vast majority of that's being stored on Hard Disk Drives. In addition to that, we've now moved into inferencing, right? Inferencing can have multiple forms, from simple chat bot inferencing all the way to agentic AI, right? Where one agent or multiple agents go through some very complex inferencing, and all of that. What we have seen is that the output of all that inferencing is being stored, right? It's being permanently stored. They want to remain the history of every question you've ever asked to a chat bot.
They also want to use the output and some of the logic, how they came to the output, to retrain the language models as well. Now, last but not least, and that's just beginning, you have physical AI.
Right? physical AI from autonomous cars, robotics. In the future, humanoids, right? A lot of those devices, they have multiple cameras. They shoot video footage 24 hours. That video footage is then being used to retrain and learn the algorithms. There is actually not enough video footage available today. That's now the hyperscalers and people involved in physical AI, they use AI to generate synthetic data to complement the real data to further train their models. When you combine all of that, we have, again, high conviction that exabyte growth is greater than 25% for the next three to five years.
Perfect. Data growth north of 25%, to your point, for the next several years. Talk about where do we end up storing all this data, because I think one of the dynamics has been you have this number better than I do, but 80% of the data gets stored on hard disk drives, I think traditionally. How much capacity does the industry have, how much capacity does Western Digital have, and how much of this data growth can you really support from a supply basis?
Yeah. If you look at hyperscalers, roughly 80% of all the data is being stored on HDD and roughly 20% or so is stored on SSD. By the way, both segments are growing very strong, right?
It's not that one segment is growing faster or slower than the other. Both segments are growing very fast. To the other part of your question, how do we support greater than 25% exabyte growth over the next three to five years? Well, it's very simple. We don't have to add unit capacity to support that. We can support this very strong growth of greater than 25% through technology and product transitions as we move to higher capacity drives. We have a great track record there. Just to put it in perspective, the average terabyte per drive that we shipped last quarter was only about 23 terabytes. Despite the fact that we have a 32 terabyte available, and we're actually shipping it in really high volume.
In addition to that, we are working on qualification of our next generation ePMR solution that will go up to 40 terabyte. In parallel, we're working on the qualification of our first generation HAMR drives that will go up to 44 terabyte. In addition to that, we have a roadmap that goes out multiple years, where we have a path to 50 terabyte or 60 terabyte or 70 terabyte or 100 or 100+ terabyte drives. When you take that into account, there is sufficient exabytes there to support the strong demand growth that we see from our customers.
Got it. One of the things that's really changed, I think, in this industry is historically, price per terabyte, when you sell to your customers, would be down 10%, maybe more in a bad down cycle. That's fundamentally shifted, and a little bit of this is what you said, supply is good, demand's good. You don't want to add that much supply. How do we think about price per terabyte as we go forward? Maybe if you can contrast that a bit with what we're seeing on the NAND side, for example, where the price increases are very dramatic.
Well, first of all, our industry and the hard disk drive industry has changed drastically compared to three or five or 10 years ago, where a lot of the business was consumer or client. Some of that was cloud, but it was done through OEMs. Fast-forward to today, 90% of my business is cloud, still 5% consumer, 5% client. Within the cloud, we're now dealing directly with the large hyperscalers, all of them, in the U.S. and outside of the U.S. That has changed drastically. Our relationship with our customers and our pricing strategy is really value-based. As we provide more value to our customers, we want to get paid for the value that we deliver to them.
Moving to higher capacity drives is adding more value to our customers, because that is good for them in terms of rack density, lower real estate cost, better power efficiency, and less power consumption. As we move to higher capacity drives, we provide more value, and you will see the price per terabyte goes up. Last quarter, our average ASP per terabyte was up 9% on a year-over-year basis.
We do it slightly different than on the memory side. The memory side is more of a supply/demand-driven pricing. It goes up, in some cases very drastically, but in some cases, it comes down as well as the demand/supply dynamics change over time.
Got it. Maybe just on the pricing side, if I stick for it, for a minute, one of the enablers has been these long-term agreements, LTAs, and build-to-order processes that Western Digital and the drive industry has implemented. Just talk about a little bit of what does the LTA provide you folks, and as you look at that over the next several years, what sort of pricing visibility do you end up having?
For me, the LTAs, first of all, we're not asking for it. It's our customers who are asking for it because they see the very strong demand and need for storage multiple years out, and they want to secure the supply from the suppliers and from Western Digital. Some of our customers, they want to have LTAs all the way till 2032, five years LTAs. For us, the LTAs are important to create more visibility in both ways. We want to better understand what the long-term demand trends are from our customers multiple years out. We also want to provide visibility to our customers on how much supply we have and how we grow the supply over time, again, as we move to those higher capacity drives.
In addition to that, keep in mind that it takes on or about 52 weeks to produce a Hard Disk Drive.
9 months to produce the wafers that goes into the heads, and then 3 months to produce the hard disk drive itself. As a result of that, we've educated our customers, and most of our customers, they place purchase orders now 52 weeks in advance. We have pretty good visibility at least one year out. Even beyond that, in part because of those LTA discussions. Those LTA discussions, they have a volume component and a price component in there with some flexibility. It's not all really set hard. There is some flexibility around that. Again, the most important thing is better visibility both ways.
Got it. Perfect. You touched a little bit on the ePMR roadmap, you obviously have a HAMR roadmap as well. You touched on the areal density improvements you folks can go after. Talk a little bit on cost per bit. What does that mean for the company as you go forward, and what's the right way to think about cost per bit decline, maybe on ePMR, and then also as you go to HAMR eventually?
Again, if you look at moving to higher capacity drives, forget what the recording technology is. That's not the most important thing. The most important thing is moving to higher capacity drives. That does a lot of good for everybody.
I call it win-win situation, right? Moving to higher capacity drives, it provides more exabytes, right, for storage at a higher value for our customers, right, because you get better rack density and lower real estate cost and better power efficiency. Also, for us, it has a benefit because we can, as we provide more value, get a better price per terabyte. At the same time, moving to higher capacity drives also results in a cost per terabyte that comes down, because it doesn't cost that much more to produce a 40 terabyte drive versus a 32 terabyte drive.
Right? It's a win-win situation all over the place. Our cost, we think over the longer term, cost will come down on or about 10% year-over-year on a cost per terabyte basis. Right.
It's not necessarily going to be like that each and every quarter, but in the mid to longer term, right, we see a cost down of on or about 10%.
Got it. If I take a couple of these things together, right? You said win-win. I imagine there's a win on your revenue side because pricing goes up. There's a win on your COGS side because cost per bit comes down as well. What does that mean for incremental margin and gross margins for the company as we think about this on a multi-year basis?
At the Innovation Day in February 2026, I indicated that gross margins over the next three to five years will be greater than 50%.
We actually, in the March quarter, we entered the new ZIP code. We got into the 50% already. We are now operating in this greater than 50% environment. Incremental gross margins, depending on how you look at it, quarter-over-quarter or year-over-year, I tend to focus more on year-over-year because it's more meaningful.
It's in the 70%-75% range. Very strong, and it's driven by price per terabyte that goes up and cost per terabyte that comes down. I think we're in a very strong position to continue to see further gross margins improvements for many, many quarters to go.
Got it. You have good top-line growth. You have 70%, 75% incremental gross margins. OpEx, I assume, is going to be fairly limited as well. What does that mean from a EPS and free cash flow basis eventually for investors?
Yeah. If you look at the story, right, we have very, very strong top-line growth. The gross margins and operating margins continue to increase. We have a really strong capital return policy as well. Leveraging our very strong free cash flow. The free cash flow margin is approaching 30%, that generates just last quarter, close to $1 billion in free cash flow. What do we do with the free cash flow? Well, we return it all back to the shareholder, right, through combination of our dividend program and the share buyback program. On the dividend program, we fully committed to that dividend program. We've already increased it twice. There is a lot more opportunity there in the future.
The vast majority of the free cash flow is being returned through the share buyback program. For me, there is no hesitation. Right. I do intrinsic value calculation. I look at my forecast, my strong revenue growth, my gross operating margin improvements, my free cash flow. There's no hesitation. We're buying back almost every day.
Perfect. You folks bought back some of the convert today, morning, as the 8-K at least saying, you're a bit of a redemption. Maybe just touch on that and kind of how does that play into your capital allocation process?
Yeah. In addition to the free cash flow, we also have a very strong balance sheet. At the end of last quarter, the only thing what was left was $1.6 billion of debt.
We wiped out all the other debt. We had $2 billion of cash. We were in a positive net cash position at the end of March. At the end of March, we also still had $1.7 million of SanDisk shares. Subsequent to March, we already monetized on or about 600,000 SanDisk shares in an equity for equity exchange.
We have the intention to further monetize the remaining slightly more than 1 million SanDisk shares that we have. We also have the $1.6 billion convertible out there that has a maturity in November 2028. We can call it in November 2026. The convertible is so far in the money, the convertible holders can actually put it to us as well. We are having discussions with some of the note holders, and as we've announced this morning, we did a private exchange with a good chunk of that $1.6 billion of the note holders, and we'll pay the principal in cash and pay the premium in shares.
Got it. Perfect. One of the questions I get a fair amount when we talk about Western Digital investors has been what makes them add more capacity? What makes them add more units to the ecosystem over time? Just touch on your CapEx philosophy and maybe answer the question, what would it take for Western Digital to actually add more units to the ecosystem?
Let's start with the demand, right? We see strong demand greater than 25%. I'll leave it up to you to pick what that means. It's greater than 25%. We believe that as the demand is even greater than 25%, we can fulfill that demand without having to spend CapEx for adding unit capacity, right? We will have to spend CapEx on or about, in the long term, 4%-6%, right? In some years, it might be less than that. Some years it might be more than that. In the long term, 4%-6% of CapEx to revenue, we will have to spend that in head and media, right? Because we need better heads, and in some cases, we need more heads, and we need better media, and in some cases, we need more media, right? There's no hesitation there.
We are making the necessary investments to make sure we can, again, support the growth of more than 25% exabytes.
Perfect. One of the challenges I think for folks always have with the drive space has been you're dealing with five or six, maybe a bigger number, but a considerate number of very large buyers, and how much leverage do you really have in these negotiations with them over time versus not? I think, Kris, at your prior job, you dealt with Apple as your big buyer, if I'm not mistaken.
Which probably is the toughest ones on suppliers sometimes.
Right.
Just talk about how does that engagement work, and is it just they come and tell you a price, and you have to agree to it, or is it more of a collaborative thing at Western Digital?
We have changed the engagement model as well, right? We have a very strong collaborative engagement model with our large hyperscalers. They share their multi-year data center roadmaps and technology and product roadmaps. We do the same from our side. I think we have earned our seat at the table. They fully realize, to build out this AI data center infrastructure, they need a lot of elements. They need a lot of GPUs and TPUs and CPUs. They need a lot of HBM and memory. They also fully realize they need a lot of HDDs, and that is a very critical component in the overall build-out of the AI data center, and that's why we have these very strong, mutual, respectful relationships. We're working hard to provide as much value to our customers.
We obviously want to get paid for that. I think that's a win-win.
The thing's going red on me, but I'll ask you a quick question, if you don't mind. How do you know all the stuff you're shipping to these hyperscalers is actually getting deployed in the data center versus.
Yeah
Sitting in shelves somewhere?
Oh, yeah. No, no. We have, again, a strong relationship with our customers. Customers are pounding the table. They want the hard disk drives as fast as they can. Through the collaboration we have with them, we have great visibility that all the hard disk drives we are shipped are being deployed as fast as they practically can do it.
Perfect. We're up on our time, so maybe I'll stop there. Kris, turning it back to you. Any closing comments, anything we did not touch on that you want to flag to investors? Tell us how greater than 20% really means.
No, I leave that up to the investors to figure that out. It's still improving. It's still improving. I've been with the company for 12 months now. I talk to the customers as well. Many of our employees talk to the customers. Every time they come back, it's with a forecast that continues to go up. I think we're well-positioned. We're a technology leader. We have great technology that our customers love and appreciate. We're well-positioned to be one of the winners in this AI data-driven economy.
Perfect. We'll stop with that. Thank you very much for your time, Kris.
All right.
Thank you.