Hey, everyone, welcome to Bank of America's Tech- Global Technology Conference. I'm Wamsi Mohan. I cover IT hardware here. Thank you all for joining us here today. We're delighted to welcome Western Digital today. For this fireside chat, we have the CFO, Wissam Jabre. We also have from Investor Relations, Peter Andrew. Peter is going to kick it off with a quick safe harbor.
Okay, thanks, Wamsi, and it's a pleasure to be here. Before we start, I do have to make a quick disclosure, safe harbor disclosure. We will be making forward-looking statements based on current assumptions and expectations, and I ask that you refer to our most recent annual 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 to differ materially. We will also be making references to non-GAAP financial measures, and a reconciliation of our non-GAAP to the GAAP measures can be found on our website. With that.
Thanks.
Let me turn it back to you.
Thanks, Peter. Well, to kick it off, Wissam, thank you so much for being here. Just about one year ago, right before our tech conference, you announced the strategic review, right? Can you give us an update on where we are in that process of the review?
Thanks, Wamsi. It's great to be here. Yes, almost a year ago, we kicked off the strategic review. Look, the strategic review, the process is still ongoing. It's progressing. Obviously, we can't talk much about it, given that there's a lot of the discussions are covered by NDAs, but it is progressing and still ongoing, active.
Market conditions have changed significantly. How is that impacting the way that either, you know, you're looking at the review or the actions that are possible to take? Is that eliminating certain things, maybe accelerating other options?
From a flash market perspective or from a total market perspective, we don't think of a strategic review in, as sort of, as a short-term view. The way we think of value creation is we think of it as through cycle value creation. Our strategic review is designed to, and the process is designed to really optimize shareholder value creation. It's not fully dependent on necessarily where we are in the market in the market cycle. Now, of course, you know, one has to be realistic from a capital markets perspective. There are certain things that are more restrictive today, for instance, than they were a year ago. These are things that we think through, and we navigate as we go through our process.
Okay. Okay, that's. Thanks for that update. As we, as we think about, you know, the demand environment, it's been exceptionally challenging demand environment across, you know, various companies. Clearly, you guys have not been immune to that. Two elements to that, like, from an inventory digestion standpoint, that's been a huge headwind this cycle. Can you talk about where we are in terms of or any line of sight to the end of the inventory digestion that you've been absorbing now for several quarters?
Yes, I think one way to sort of talk about this is to talk about it from a, end market perspective. As you know, we do address really the, from the consumer to client to, cloud end markets. On the consumer side, we've, seen the market, fairly stabilized. It started sort of, it was really the first market to start experiencing the slowdown, let's say, mid of, last year. We've seen quite a bit of, decline. A couple of quarters ago, we started seeing signs of stabilization. Today I would say that that market is more or less, stable.
On the client side, this was the second market, this was sort of the second market to see the effect of the downturn. We've seen really sharp inventory corrections late last year. We are probably at a stage, let's say, if you look at within client, if you look at the PC OEM part of it, we're probably at a place where the inventory digestion is, of course, depending on the player, but it's largely done, and now we're seeing shipments are closer to where the end market demand is. On the mobile side, it's also fairly stable, or it's at least stabilized.
With staying within client, when we think of gaming, for instance, which is a really emerging market segment for us, it's been doing well. Gaming has fairly done well over the last couple of quarters. We do have really a great brand with WD_BLACK there. In the cloud, in cloud, we still are within sort of. This was the last market really to be impacted by the cyclical downturn. I would say we still are in the inventory digestion phase there. We probably still have a couple of quarters through that.
Okay, that's helpful. Talking about HDDs, right? How are the shipments of 22 and 26 TB drives progressing? When you think about your largest competitor talking about introducing HAMR-based drives, you know, A, when do you get or where is your roadmap on launching HAMR drives as well?
There's a lot of excitement around the 22 and 26 TB. Those were launched last year at our Investors Day. In the past quarter, we've shipped quite a bit of 20, 22 TB drives. Actually, it is the largest capacity point in terms of volumes over the 20 TB for us. We're also going through some qualification on the 26 TB as well. Basically, the cloud customers are adopting 22 TB CMR, as well as we're starting to see adoption on the 26 TB Ultra SMR, which as you know, is a 20% increased capacity versus the CMR.
we think of the roadmap, potentially, the HAMR could be one of the next on the roadmap. Obviously, it's been in development for quite some time, actually several years. Our engineering teams have done a lot of R&D around that and a lot of development work. As you know, it requires a lot of work on the material science as well as the physics, but also a lot of work that's required in terms of commercialization, meaning being able to manufacture it at scale, improving and making sure that the yields are where they need to be, as well as the ability to sort of have a reliable product that can last for several years.
It takes time to get there, but I think, we're probably, on the HAMR side, we're probably a year to a year and a half plus, before we get sort of to the volume productions anyway.
Okay. I should ask you know, I had sort of a fireside chat earlier today with Pure Storage, whose CEO says that hard drives won't ship anymore in five years. Well, what's your reaction to that?
I think hard drives will still be shipping. Actually, hard drives will still be shipping in five years plus. Look, there's the this whole discussion around whether with where the flash prices are today, there's cannibalization of hard drive or not. We don't see it, and we do sell both. We do have hard drives, and we do have enterprise SSDs, so we're not seeing it in our business. In fact, over the last quarter or two, probably the enterprise SSD business was a little bit more impacted than the hard drive business.
The way we think of it is that our customers or the cloud customers aren't going to make decisions on very important data center architecture or products for their data centers based on a few quarters of flash pricing. Having said that, the two products have their own use cases in the data centers, and so they can In a way, they are complementary. As the cloud or the demand for storage grows, there's basically the need for both of them to grow, the hard drive and the enterprise SSD. Granted, probably the growth on the flash side is a little bit higher than on the hard drive side, but, you know, both of these things could be true.
The hard drive and enterprise SSDs could, are complementary and could grow, both of them.
Okay. Can you talk about how you think about both supply and demand growth across both of those, in terms of, you know, maybe exabyte growth or however you want to frame this?
I mean, the growth will end up being correlated to how the cloud market will evolve. In terms of the long-term trends, we don't see a really change in the long-term trends for the hard drive business growth. You know, I mean, Yes, we're going through a period of inventory digestion on the cloud side, but this is sort of. This will be over in, let's say, in a few quarters, and then the growth should resume, and over time, we'll revert to the long-term growth trends.
You think still that maybe between 30%-40% kind of growth range is reasonable, or do you see something that has changed? You said it was predicated on cloud growth. Is there something that's changing that trajectory that would now reset maybe to a 20%-30% growth rate?
I would say the 20%-40% is a reasonable growth rate. I mean, it's a wide range, it is a.
It's a very wide range.
Yeah, I mean, it's a reasonable range.
Remember, the key thing right now is the HDD industry is operating at such a low level today that, you know, you're likely going to have a nice, steep ramp. The question is over the next three-five years versus a one year.
Sure
-going up or down. The key thing we need to get is just a little bit more stability in our overall business as we go forward. I think then from there, we can make some better and more accurate predictions about the future. You know, whether it's 20%, 30%, 40%, but there's still some great opportunities in HDDs going forward.
Depending on whether it is 20, 30, 40, when you think about your cost declines relative to the growth over there, what is ongoing that is going to maybe change the trajectory of cost declines? Or does it change, or does it not change?
I think the cost declines, and on the HDD side would still be there. They won't be as high as the cost declines we would experience necessarily on the flash side as a, as an industry, but they'd still be there, and they would still be there in a meaningful way to allow for that TCO to continue to decline and make it economic for our customers to adopt them.
... we've heard a lot from, you know, many large purchasers of NAND, including large smartphone companies and PC companies, talk about doing some strategic buys. On the one hand, that kind of suggests that there's probably a bottom approaching in the NAND market. On the other hand, does it change now the near-term nature in which, you know, the bit growth is getting skewed because of strategic buys, and then we sort of struggle through maybe different kind of inventory adjustment over the next few quarters? How do you think about that?
I mean, from where we stand, from our business, we don't see much of that. Sort of, you know, to my earlier comments, for instance, in the, in the PC OEM supply chain, we're seeing more sort of, the demand is. Yeah, the shipments are much more correlated to where the end demand is.
Okay, you're not seeing necessarily from your lens, pre-buys of any magnitude that would change your thinking about the trajectory of bit growth over the next few quarters?
Yeah, we're not seeing that.
Okay. I mean, I know the industry as such has looked at profitability and said, "Wow, like, we really need to take some capacity offline." You guys have taken action around that. How much of your capacity is offline? When do you think some of that's gonna come back? Maybe you can give us an update on your underutilization charges, and how we should think about that over the next few quarters.
Yes. You know, early in January, we've made the decision to underutilize our fab, meaning basically run a lower number of wafers in the factory. We've taken down the capacity utilization, and we continue to sort of do that also within this quarter. Last quarter, I think on the flash side, we had approximately $160 million of underutilization charges. If you put it in context, this was around 12 percentage points of gross margin, which is quite significant. This quarter, we're looking at a range of $220 million-$240 million for total, so two-thirds of that is probably more or less roughly in line with what we saw last quarter on the flash business.
you know, we've made the decision because we look at where the demand of our product is, the level of inventories, and what we're projecting to produce. Where we wanna sort of keep a good control of where our inventory is, we don't want it to sort of get out of control. Even though when you look at it, relatively speaking, we are in a good. Our inventory is, and I'm talking relative to some of our peers, we are in a good shape. It is also about managing our inventory, managing our cash, and also, looking at the supply of our product versus where the demand for our product is.
Okay. Can you talk a little bit about pricing? One of the things that changed, that felt like changed structurally over the last few years, was HDD pricing, or price declines moderated quite a bit. This happened really, as, you know, high-capacity drives took over what was maybe unused capacity over the years that had built up from PC declines.
Mm.
As we think about the next few years, right, as there is some normalization back in demand, do you expect that that kind of pricing discipline remains in the industry? How should we be thinking about pricing declines in the near term, where there is all this excess inventory, and we hear of companies taking some, you know, pricing actions, in different areas opportunistically?
For instance, when you look at the pricing in the HDD for us, it was fairly benign over the last several quarters. We're probably seeing a little bit more pricing pressures, it's not anything outside of the historical ranges. When we look at our own manufacturing capacity, earlier this year and actually late June, early July, we've restructured our manufacturing footprint to resize it, and sort of we've reduced around 40% of the capacity typically reserved for client hard drive manufacturing. That's sort of permanently taken out. We continue to assess where our manufacturing capacity is relative to where the demand is and the long-term demand for our products.
The idea is for us to sort of continue to maintain that sort of balance between supply and supply and demand, and so that's one side of it. The other side of it is, of course, we wanna make sure we continue to manage our working capital as well as reduce our CapEx investment as we continue to preserve cash in the short term.
How about on the NAND side? Can you talk about the pricing dynamics over there?
On the NAND side, the pricing is always a factor of supply and demand. Over the last few quarters, I would say, let's say at the beginning of this cyclical downturn that we're going through, we've seen steeper price declines. But it seems to have We're still seeing price declines, but sort of the rate of decline has slowed down. There too, for instance, in our case, we decided to take action to limit the impact to our inventory or sort of to limit the growth of inventory. Reduced, as well as we talked earlier, our manufacturing utilization to sort of work on aligning our supply with where we see the demand of our products.
I would say probably, I mean, we're the rate of decline on the pricing side has slowed down.
But also to help limit the bit growth, we've also taken CapEx down sharply. Remember, coming into this year, coming into this fiscal year, we said we expected overall CapEx, now this is CapEx for both HDD and flash, to come in around $3.2 billion. I think last quarter we updated that, we said it's gonna come in somewhere closer to $2.2 billion. We've taken both HDD and flash CapEx down very sharply in order to help better align our supply with what we see as demand out there. I'd say what's another, I guess, a positive sign is, remember elasticity, especially on the flash side of the house. We have seen some elasticity pick up in a number of our consumer, client, and other end markets like that.
I'd say it's a good first sign of hopefully an improvement in the flash space from a pricing perspective.
Okay, that's helpful. There's also been One of the things that I think investors have been worried about was China and YMTC, you know, going back some time. Obviously, as a risk, now with the YMTC being on the Entity List, that's kind of gone away. Why do you think that Western Digital is maybe not getting any credit for sort of this kind of a threat going away?
Look, this is probably not a question for me. It's quite a question for our investors, more than for me. We continue to operate our business as we've always done. It could be that over time, this will become a bit more visible.
Maybe switching gears a little bit. If you think about the covenants, right? I know you guys have, in the past, renegotiated some of these covenants. We just saw one of your competitors make some significant changes as well. How are you thinking about it? What kind of flexibility are you shooting for, if incrementally you do need that? So yeah, maybe you can give us an update on that.
Yes. Well, let me first start about talking about our liquidity.
Sure.
last quarter, we ended with around $5.3 billion of liquidity. That's between the cash on hand of around $2.2 billion, plus the credit facilities that are available to us. Within the quarter, if you recall, we did raise around $900 million in convertible preferred. We also got around $875 million of the in delayed draw term loan. From a liquidity perspective, we're comfortable as we navigate through the cycle. Also in December, we did negotiate our credit agreement, and we sort of got an amendment to allow us to operate a little bit more, to give us a bit more flexibility from an operating perspective.
The other actions we've taken as we navigate through the cycle is we've taken a lot of cost out of the system. Peter talked about the CapEx reductions. We've reduced our CapEx quite a bit, not only relative to where the plans were at the beginning of the year, but also year-on-year, our CapEx spend came down quite a bit. On the operating expenses, we've taken our operating expenses as well, more than 20%, sort of down year-on-year. I think last year, for instance, we were running, let's say, on average, around $750 million a quarter. This quarter, with our number is below $600 million.
We've also taken action on the underutilization of both the hard drive manufacturing, as well as our flash manufacturing side. These are all efforts for us to preserve cash, manage working capital, and basically continue to navigate effectively through the cycle. If we need to do more, if there's a need for us to do more, we still have a great relationship with our lenders. They've supported us for so many years, we're prepared to do more if that's needed.
When you think about liquidity sources, like, what do you think is sort of the maybe prioritized options, a few options of how you think about it?
We talked about keeping CapEx as sort of as low as possible. We are taking action to also manage inventory. The way I see it, probably our inventory will probably be more or less flattish this quarter. We should expect it to start going down. That should help with as a source of cash. We continue to use all the levers that are at our disposal, you know, whether on the receivables side or on the payables side. We work very closely with both our customers as well as our suppliers, to make sure we continue to manage and improve on that cash conversion cycle as we navigate through the cyclical downturn.
Would you say you'd be free cash flow positive in the near term? Would you call for a sequential improvement in free cash flow?
Free cash flow is a big focus for me and for the rest of the team. That's something that we continue to work on, and we continue to improve. It's, you know, as you'd imagine, this is extremely important to us. We typically don't guide or project. I mean, we do project, but we don't talk about free cash flow in terms of the outlook, but that's something extremely important to us to continue to focus on. It's a major focus.
I think, you and Kioxia announced that you're starting to produce your next BiCS8, 3D NAND node, and my understanding is BiCS8 has 218 active layers based on wafer bonding manufacturing technologies, sort of different from, you know, Circuit Under Array architecture. Does this lead to any change in sort of market share or, like, cost advantages that you can talk about?
Look, this is a very exciting development. It's pretty much the next memory technology node, the BiCS8. The fact that the team managed to get it out ahead of time with the with the with the great sort of improvements in performance as well as productivity and yield and also maintaining that sort of capital efficiency in mind, is very important. The technology actually started to be we're starting to commercialize it very sort of at very low volumes this quarter, but expect it to ramp a little bit later. It's very. It's, from my perspective, it's really very competitive.
It will allow us to continue to sort of maintain that cost curve that we've always aimed for. Also, it's fascinating in terms of the technological innovation, you know, the ability to sort of build the on two different wafers, the memory stack versus the logic, the control logic, and then sort of bond them together. It's sort of really innovative.
Absolutely. I did want to go back on sort of the cash and liquidity point. When you think about your debt ratings, how do you think about it and what sort of, you know, how committed are you to sort of, you know, where you currently are [worsest], if things get were to get worse, like, you know, how are you thinking about that?
Look, the focus first and foremost is on free cash flow generation. We still have the ability, as I said, from a liquidity perspective, we're comfortable to operate. When I look at where we are and we do have, for instance, the convert that's currently current, we plan to address it over the next couple of quarters. Look, the focus on the balance sheet is big. We still have also a lot of options and flexibility.
The idea is to really continue to focus on the cash preservation, the ability to do whatever we can from a cost perspective as well, to navigate through the cycle.
Okay, that's great. Well, I just want to give you the opportunity maybe to just talk about what's most misunderstood about the WD story. Since we only got a couple of minutes left, maybe you can wrap with that.
Look, we have great technologies in both the hard drive and the flash side. On the hard drive side, with 22 TB, 26 TB SMR, we pretty much have leading technology there. On the flash side, we just talked about the BiCS8 and sort of the introduction of BiCS8 and the amazing technological innovation this sort of brings in terms of the ability to improve the productivity as well as the performance and and output as well as the sort of capital efficiency from a memory perspective, is also phenomenal.
We continue to take a lot of action, and we've taken a lot of action, and we continue to take a lot of action to make the business much more resilient and much more sort of strengthen the business as we navigate the cycle, but also, more importantly, position it for really great position of success as the as the upturn comes up to really improve on the ability to ink sort of the future profitability of the business. I would say from a breadth of markets, we, you know, we touch consumer, client, cloud. We do have basically all the ingredients and the elements required for long-term success and value creation.
Excellent. Unfortunately, we're out of time. Really appreciate your time, Wissam. Thank you so much, Peter. Thank you so much.
Thank you.
Really appreciate it. Thank you.
Thanks.