Western Digital Corporation (WDC) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital's Fiscal Third Quarter 2021 Conference Call. . Now I will turn the call over to Mr. Peter Andrew. You may begin. Peter Andrew: Thank you, and good afternoon, everyone. Joining me today are David Goeckeler, Chief Executive Officer; and Bob Eulau, Chief Financial Officer. David Goeckeler: Thank you, Peter. Good afternoon, everyone, and thanks for joining the call today. We reported solid third quarter results above the guidance range provided in January, with revenue of $4.1 billion, non-GAAP gross margin of 27.7% and non-GAAP earnings per share of $1.02. Sequential revenue growth was driven by increasing momentum of our high capacity energy-assisted drives and our second-generation NVMe enterprise SSDs, improving NAND flash pricing trends, along with the continued accelerated digital transformation across end markets. As we continue to manage the impact of the pandemic, we know that the world is not only more technology-enabled, but also more technology dependent than ever before. From the intelligent edge to the cloud, data storage is a fundamental component underpinning the global technology architecture. Western Digital's strengths in technology and cost leadership, expansive product portfolio and broad routes to market are providing a foundation upon which we are solidifying our position as an essential building block of the digital economy. These strengths, combined with our increased operational and strategic focus enabled by our new business unit structure, are driving results. As we continue to face a dynamic environment, we are seeing the benefits of the synergistic value in the breadth of Western Digital's portfolio, and our unique ability to deliver both hard drives and flash solutions to our diverse end markets and customer base. Let me now provide a recap of our Flash and HDD businesses. Within Flash, the depth and breadth of our product line, distribution channels, cost leadership and customer base are significant differentiators. Our ability to act swiftly and shift bits to meet customer demand in various end markets, ranging from data centers to retail, enabled us to grow both revenue and gross margin in the third quarter. Robert Eulau: Thanks, Dave, and good afternoon, everyone. As Dave mentioned, overall results for the third fiscal quarter were above the upper end of the guidance ranges provided in January. Flash revenue and gross margin improvement were the primary contributors to the upside versus guidance. Total revenue was $4.1 billion, up 5% sequentially and down 1% year-over-year. David Goeckeler: Thanks, Bob. As technology continues to advance, our powerful portfolio will remain centered on developing solutions to our customers' evolving storage needs. Western Digital's unique ability to offer complementary flash and hard drive products benefits the industry, our customers and our company as a whole. While market conditions continue improving, I believe the organization and leadership changes made over the last year are now delivering more agility, better execution and a stronger portfolio and collectively are driving results and unlocking the underlying strengths of Western Digital. We are in a unique leadership position and feel confident that we can continue to drive innovation, while delivering value for all of our stakeholders. Operator: . Our first question will come from Aaron Rakers with Wells Fargo. Aaron Rakers: Congratulations on the execution in the quarter. I guess the first question I have is, you mentioned in your prepared remarks about establishing long-term purchase agreements with some of the cloud customers or cloud titans. Can you help us appreciate that a little bit more? Can you give us any context of how those agreements are structured? Are they volume-related? Are they take and pay? Just any kind of clarity on that. And how that would compare to kind of prior engagements with those customers on product cycles? David Goeckeler: Yes. Aaron, thank you. Yes, it's something we've been working on for a while, I guess. I mean when I got here a year ago, it kind of struck me that it was a big business and it was very transactional. And the more certainty we could put around, it would be better for all of us, especially going into a world where we're going to be investing capital in this business. We're trying to judge supply and demand and get that right as the market shifts to capacity enterprise. So there are multi-quarter agreements, as you would imagine. And we talk about the amount of demand they are going to have, and we set a price for that period. So as opposed to just going quarter-by-quarter, we're extending that out to multi-quarter agreements to give us both more visibility around the business. Aaron Rakers: Okay. And I guess, maybe somewhat related to that, just thinking about the hard disk drive business as my follow-up is, I guess, a simple question is, how do we go from a 25% gross margin back to what I think is still probably the target of at least 30%, if not higher gross margin in hard disk drives? How do we think about the variables to bring us back to that 30% plus level? David Goeckeler: Well, I think -- I mean -- so the first part is getting out of COVID. I think we had 1.6% impact on gross margin due to COVID, so that continues to be an issue. And we're all hoping things continue to get better there. Obviously, mix is a question -- an issue as we get more client in the work from home. That's not necessarily a bad thing, but it's definitely a different margin profile. And then getting to scale on the capacity points where we can continue to drive the costs down. And -- we can't control the pricing in the market, but continuing to deliver a strong TCO proposition for our customers. And that's what we're continuing to do. We believe we have a long road map of continued density and aerial density improvements on HDDs. They're the foundational storage element in the cloud, which I think is a very good place to be. And so we're working on it from all of those angles. Operator: Our next question will come from C.J. Muse with Evercore. Christopher Muse: Yes. I guess first question I was hoping to discuss just overall gross margins. So very nice uplift there. And in particular, your cost sales on the NAND side in the March quarter were fairly spectacular and clearly better than what we saw across most other NAND players. So can that 20% improvement year-on-year continue as we go through the year? And what other kind of drivers should we be thinking about impacting gross margins into June? David Goeckeler: Yes. So we're happy where the technology is. I mean, I think we're going to -- we're still at our -- we target 15%. In some quarters, we do better, some quarters maybe we do a little worse than that. We're in a good spot. A lot of the portfolio is on BiCS4, which is a very high-performing node for us. So we're very happy with the cost downs. Hopefully, you tuned into Dr. Sivaram's discussion of NAND technology and kind of what's driving, all of this. We do believe very strongly in our technology road map with Kioxia. Between us, we're the biggest investor in NAND. And so we have a lot of confidence in our road map and to be able to sustain that. As we look into the next quarter, we talked about it. We continue to see a good pricing environment. So we expect to continue to get good cost downs in the portfolio and in a rising price environment that puts us in a good spot to drive gross margin. Christopher Muse: Okay. Very helpful. Robert Eulau: And we're beginning to ramp our BiCS5 112-layer technology as well, which will continue to help bring the cost down. Christopher Muse: Great. And then, I guess, can you speak a bit to the rebound you saw in the enterprise HDD side, pretty strong, up 16% sequential units? Can you share with us how to think about 16-, 18-terabyte ramp and the prospect for faster growth as we go through the year? David Goeckeler: Yes. We expect sequential growth in that market. I think this quarter, we had a good -- we had basically a balanced shipment of our capacity enterprise across 14, 16 and 18, and we see that shifting strongly to 18 sequentially, and we expect that to drive -- we see sequential exabyte growth and also sequential gross margin improvement in the portfolio as we move forward as well. Operator: Our next question will come from Joe Moore with Morgan Stanley. Joseph Moore: Also, on the enterprise side, if you could talk about the enterprise NVMe progress that you've had? You're citing a cloud titan customer there. Are there prospects for more? And where would you say -- I know you had a late start with enterprise NVMe. Where would you say your share is? And can you kind of get to where your share in the enterprise is similar to your share and overall NAND? David Goeckeler: So we're working on calls with the big enterprise OEMs, so that's still in process. As I talked about last time, that's a multi-quarter process. It's going along fine. We're seeing good demand in the channel for that product. So that's a good indication. As far as where we're going to land on share, I mean, I think one of the things to -- we're really running a balanced portfolio across a whole bunch of different markets we're in from client SSD to mobility. I think the big thing for us is to get the enterprise SSD qualified and now start to ship at scale. But we're still going to run a balanced portfolio across the big markets we have, which is client SSD, mobility, enterprise SSD and, of course, retail. And then with things like gaming coming up quickly as well. So we feel good about where the product is. We think it was a major milestone for us last quarter when we got the call done at a cloud titan, and we saw the benefits of that this past quarter. Joseph Moore: Great. And then my follow-up on 330 basis points of gross margin improvement is pretty significant. Can you give us a qualitative sense of how much of that is coming from NAND versus drives? Robert Eulau: Well, gross margins were up in both -- I'm sorry, gross margins were up on the flash side. They're actually down sequentially. Joseph Moore: Yes. I mean more in the June quarter, your guidance. Robert Eulau: In the June quarter. Yes. Sequentially, will be up in both businesses, probably driven a little bit more on the flash side. Operator: Our next question will come from Toshiya Hari with Goldman Sachs. Toshiya Hari: Congrats on the strong results and outlook. David, you talked about shortages in your NAND business as it relates to controllers and perhaps raw NAND as well. Can you talk a little bit about the actual impact you saw in the quarter? What's embedded in your June quarter guidance and when you'd expect some of these issues to be resolved? David Goeckeler: Yes. So we're working on -- I mean, obviously, we're working to get as much supply as we can. I mean this past quarter, we did see shortages in controllers, let's say, in places like Chromebooks, where we probably couldn't get as many controllers as we would have liked and could have shipped a little more into that. But in general, what we're able to do is with the supply we have is shift the portfolio around where we get the biggest return for that, whether it's moving those controllers to products in the channel or in retail -- from retail into the channel and vice versa, where we're going to get the highest return. So the agility, I think, that the team is implementing on all of our different go-to-market routes has been very beneficial over the last couple of quarters, and I expect it to be going forward as well. So we're able to mitigate it a little bit. We're not able to completely escape it, but we're going to continue working to get all the supply we can. And we definitely know what the forecast. It's matched to the supply we have. So we don't expect any surprises from that regard. Toshiya Hari: Got it. And then as a quick follow-up. I just wanted to get your thoughts on NAND supply/demand going forward. Clearly, the near term is looking really good, and you spoke to that in your prepared remarks. But as you start to plan for fiscal '22, what are your thoughts on the overall market supply/demand and your intentions from a CapEx perspective? You obviously want to make the transitions and maintain share, but at the same time, you don't want to flood the market with too much supply. So what's sort of the debate internally? David Goeckeler: Yes. So you got it right. I mean we're going to invest to maintain share. We feel good about the demand situation. I mean '22 is pretty far out. As you know, of course, we guide 1 quarter at a time, I have to say that. But yes, we continue to see demand as strong into the second half of this year, certainly. I mean we're -- we -- whether it's in the PC market or in the cloud infrastructure market, we're pretty bullish. So we'll manage it through the end of the year and be disciplined with our CapEx investment and go one quarter a time. Operator: Our next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: Dave, I want to go back to the long-term agreements on 18 TB. Is there any share basis for those agreements? And if not, how much share are you targeting at these customers? David Goeckeler: Yes. We don't go into that much detail on a customer-by-customer basis. I mean we -- it's fair to say with these customers, we have long-standing and very deep relationships given our position in their data centers and given that 90% of the storage in the cloud is on hard drive. So it's just about getting more visibility of what their plans are and get anything aligned with where we're going and making sure that our business is aligned with where their business is headed. It's kind of as simple as that to give us more visibility and try and move the market, as I said, from this transactional quarter to time to allow us both to plan for what the next several quarters look like. Wamsi Mohan: Okay. And as a follow-up, on the ACD gross margins improving in the June quarter, is that more mix related or lower cost headwinds? Can you just help us think through what you think are more transitory maybe in the cost headwind side versus an improving mix here? David Goeckeler: A big part of it is mix. I think we've been talking for a long time that 18 capacity point is a better point for us. And as I said, this quarter, we shipped pretty balanced number of 14s, 16s and 18s, and we'll see that tilt strongly to 18s next quarter. Robert Eulau: And I think the costs will get better quarter-to-quarter as well. We slowed down production a little bit in the March quarter, and we're back at full production here in the June quarter. Operator: Our next question will come from Mehdi Hosseini with Susquehanna. Mehdi Hosseini: David, it's been about a year or so since you joined the company. And remember, when you first joined, you were doing somewhere around $250 million of annualized earnings. And fast forward 12 months, you're almost at a $6 annualized earning. Great improvement, but still well below 2017, 2018, when the company was doing north of $10 of earnings. And I'm not asking you to give me forecast or guide for 1 or 2 years out. But I think it would be very helpful if you could articulate your views as to how earnings are going to improve here, assuming that you just continue to execute? And I have a follow-up. David Goeckeler: Yes. I mean, I think it's what -- I think you're starting to see the better execution. And on the flash side, build out the portfolio across a number of end markets, which I think that enterprise SSD was a big piece of getting that established with the cloud titans. We clearly have a very strong client SSD portfolio. We have, I think, a very strong retail portfolio. Mobility, we've talked about. We stay qualified with all the top vendors. We very much participate in that market, maybe less than -- definitely less than some others. And then we have a lot of new products coming around gaming and smart home devices, where because of our strong relationships with those big cloud customers that also drive that portfolio gives us kind of a front-row seat as those are developed. So I think it's built out the portfolio and then use our routes to market to deliver the best return we can, given the pricing environment in the market. And I think we're able to do that in flash this quarter and balance the portfolio across all the markets and put the agility in the system to make sure that we're doing that. And I would say from a year ago to where we are now and the way we executed the last quarter, there's just much more agility in the system and to be able to react and get the best outcome we can. In the hard drive side, it's drive -- continue to drive aerial density and leadership, return to a leadership position as we did with 18 and then continue that forward. It's a good market. I think we've had a long-standing position there. And then I think there's -- we've seen the synergy between the 2 portfolios in the client space. We have a great client SSD portfolio where these technologies were substitutes for each other. We had long-standing relationships with those customers where we can manage that transition. And in the data center, they're more complementary technologies, and I think the ability to execute that synergy is in front of us. Mehdi Hosseini: Okay. And just a quick follow-up on HDD. I believe you're still are restricted with shipment to certain customers, but your primary competitor has continued to ship. How do you see that geography and specific customers there playing to your disadvantage? And I'm assuming that you're still restricted. David Goeckeler: Yes. We're -- we've been -- since the commerce rules came out, I think back in September, we stopped shipping per the rules. We talked to commerce frequently. We have our own attorneys and outside firms. We know that, that's the right position and that's the position we continue to be in. The licenses are pending with commerce, and we'll see how that plays out. I don't think there's been any -- there hasn't been any movement there recently. As far as what our competitors do, and I can't speak to what they're doing. So I only have insight into our position, and we are clearly not shipping to places where we're not supposed to per commerce department regulation. Operator: Our next question will come from Sidney Ho with Deutsche Bank. Sidney Ho: My first question is on the 18-terabyte drives. First of all, congrats on all the qualification. But in terms of the ramp, do you expect your 18-terabyte drives to cross over the 14-terabyte drives exiting this calendar year? And will 18 terabyte be margin accretive right off the bat? Maybe a follow-up to that is, how are you thinking about strategy in terms of ramping 16 versus 18? David Goeckeler: Yes. So we expect 18 to be the primary -- the highest volume we shipped this quarter. So yes, to the first question, and yes, we expect it to be margin accretive. We expect sequential improvement in HDD gross margin. What was the second question again, please? Sidney Ho: The second part, it's 16 versus 18. Are you putting all your eggs into the 18-terabyte basket and 16 is just its whatever the customers are asking for? David Goeckeler: Yes. Well, I mean, I think it's always whatever the customer is asking for. So every customer is at a different point in the evolution of their data center of what they're deploying. Some are still deploying 14 at scale. Some went to 18 as quickly as possible, and others are at different points of deploying 16 or 18. And so we meet the customers where they are in that process. So -- but we expect 18 to be the predominant point going forward. It's just a better TCO equation. So it's -- you would expect the customers to go there when they can, given their own internal architectural evolution. Sidney Ho: Got it. Maybe a follow-up to the nearline side of things. Given the improvement of -- in the enterprise side that you're seeing and, obviously, the cloud has been strong, what is your expectation for the industry-wide exabyte growth for nearline drive this year? And how do you think you'll stack up against that this year? David Goeckeler: Yes. We see a quarter of strong growth coming up. I think we're still in that around 35% exabyte growth for the year. So -- and as the market shifts to 18, I think that we're an incrementally stronger position. So that's how I expect the rest of the year to play out. Operator: Our next question will come from Tom O'Malley with Barclays. Thomas O'Malley: Congrats on the really nice results. My first question was around end markets. You guys gave some helpful color on the HDD and flash side. Could you talk to what you guys see Client Devices, Data Center Devices and Client Solutions kind of doing into the June quarter? Just any general color would be helpful there. David Goeckeler: I mean, I think in data center, we expect improvement. I mean I'm trying to think here around modular seasonality. I mean devices are very strong. I mean we saw a lot of strength in PC and client, and I think we continue to see -- we saw -- this past quarter, we saw decline but the way better than seasonal decline. So we expect that to continue. We think that market is strong. Our customers are telling us that market is strong. The number of units shipped is up. So that continues to be a good market. I think data center with 18 ramping stronger. You're going to see growth there. And I think in the retail space, we'll see sequential growth, but probably a little smaller than the others, but still very good performance. Thomas O'Malley: That's helpful. My follow-up was really around the cadence of gross margins. You guys indicated that you should see some HDD gross margins that are improving sequentially. But can you talk to the cadence for the year? I think that the target longer term is $30 million and even above that. But obviously, with nearline drives becoming a bigger part of the mix and some of this COVID headwinds coming off, can you talk to the progression that you guys are expecting internally? And just kind of the progression from here to the 30s? David Goeckeler: Yes. I mean, I think we're going to forecast at 1 quarter at a time, but we're working -- the teams are working very hard to do that they're going to do in any storage market, which has continued to bring down the costs. And as you scale the products, you'll bring down the cost. So I think the whole industry is driving back to 30% gross margins. I think we're going to get there one step at a time, but we're going to work on both sides of it is make sure we've got good supply/demand matching on kind of what the demand is in the market. And then we talked about multi-quarter supply agreements, I think, which helps give some certainty and then work on the cost side a bit. So we're -- every quarter, we're focused on all those elements, and we'll continue to drive it. Now it starts with delivering a great value proposition for our customers and continuing to drive a better TCO equation as we drive higher and higher aerial densities. And we've got a long road map on aerial density improvement. A big piece of that was us implementing or introducing energy assist. And that was a big thing with our 16, 18. As we're now just starting to ramp the '18, we've got energy assist in the market. That's -- there's well over a decade of research behind that, and we've now commercialized it. And so that gives us many generations on that technology to continue to improve aerial density, which is going to improve the TCO equation for our customers. Operator: Our next question will come from Shannon Cross with Cross Research. Shannon Cross: I'm just curious with regard to your cloud customers. If you believe they're pretty much through the digestion period of the excess capacity? I know we've seen some on a couple of weeks over that they're starting to ramp up CapEx again. But I'm curious what you're hearing from them? And then I have a follow-up. David Goeckeler: Yes. I think the word I used last time was cloud digestion abating when we talked about this. But they're all in a slightly different spot, but we're into an ingestion phase for the most part. Shannon Cross: Okay. And then I was curious in terms of the tightness in components in overall market. What kind of impact is that having on your working capital? We're looking at some of the movements in AP and inventory. Robert Eulau: Yes. No, that's a good question. And we definitely are carrying a little more inventory than we normally would, particularly on the hard drive side because of the tightness on controllers. And also, frankly, because of the logistics costs associated with COVID-19, we're putting more products on the ocean and not in the air. So it's definitely having an impact in terms of working capital in that respect. Our accounts payable did go down this quarter. I mean that really was a result of a slowing down on the production in the March quarter, and I think it will come back up again this quarter. Operator: Our next question will come from Tristan Gerra with Baird. Tristan Gerra: Just following up on the earlier question about supply/demand. We've had some peers talk about their concern around seen some excess capacity coming in NAND. I know it's too early to pull out an outlook for the next fiscal year, but is capacity in that industry-wide a concern in your view? Or do you see a path that ultimately could get you back to the type of peak gross margin that you reported in earlier back in the 2018 time frame? David Goeckeler: Yes. It's not something we're overly worried about at this point. I think the industry has been pretty disciplined for the last several years. And I think there's now pretty strong demand in the market. So I mean, we feel pretty good about the balance of supply/demand in the market going forward. I mean, again, there's -- even the -- well, let me just leave it at that. We're pretty happy with where supply/demand balance is. I mean, I think everybody is trying to figure out what's the long-term demand for technology coming out of pandemic. It's kind of a unique situation, so -- but we're staying very close to it. And our view is that industry has been pretty balanced on the whole topic. Operator: Our next question will come from Jim Suva with Citigroup Investments. James Suva: And I'll ask both my questions at the same time, and you can answer in any order you want. But the data center softness, is the visibility there getting better, the digestion phase? And are we a long ways to go or kind of mostly through the worst part? Or is demand coming back for that kind of on the data center? And then you mentioned longer-term relationships and contracts with cloud titans and hyperscalers. Do they allow for flexibility and pricing? The reason why I ask is recent NAND pricing came out and it was quite positive. And we just want to make sure that you're not missing the opportunity for better economics from pricing. And so I was just kind of wondering without any specific some of your relationships of quantity and volumes and pricing, are there some abilities to adjust it? Or do you get locked in and maybe pricing will or won't help you? David Goeckeler: I think your second issue is, without going into all the details, is not a concern for us. On the first issue, I mean, I think we saw, first of all, very strong sequential growth in data center for us this quarter of 53%, although it was down -- I get your point year-over-year. I was very strong compared a year ago on exabyte shipment, but we expect sequential growth there in exabyte shipments on the drive side and I think up on flash as well, maybe not as strong as the expected growth we expect in hard drives as 18 really starts to be the major point in the industry. But we see sequential improvement there, Jim. Operator: Our next question will come from Ananda Baruah with Loop Capital. Ananda Baruah: Congrats on the strong results. I guess just going back to the flash gross margin and the balance that you guys are seeing right now, do you feel like you're sort of to 30% sooner than expected, which is a positive thing? And if so, how would you like us to think about if supply/demand remains balanced on the flash side? How to think about margins going through the second half of the calendar year? And then I have a quick follow-up. David Goeckeler: Yes. I guess one way to think about that is we delivered above what we guided. So I think we're ahead of where we thought the market would be when we walked into it. And a lot of that is we have really strong exposure to a lot of transactional markets in the channel and in retail. And as price tightens, it allows us to move pricing in those big markets, much faster than other markets, OEM markets, which are quarter-by-quarter phenomena -- I mean, not phenomenon, quarter-by-quarter negotiation. So yes. I mean, I think the market was good for us. And as I said, the go-to-market teams and the BU teams were very agile as far as shifting our supply around on where we could get the best return for it in the quarter. As far as going forward, I mean, we're guiding for sequential improvement in flash gross margin. We're seeing that. We saw the pricing strength that we -- or firmness that we saw in the transactional markets translate into the negotiated markets. I think last quarter, we were waiting to see if that was going to happen. We see that going into Q4. And so we're definitely forecasting incrementally stronger flash margins in this current quarter. Ananda Baruah: Okay. And it sounds like just structurally, it feels like maybe that could actually follow through just because it feels like the dynamics are more at the beginning as well. I guess my follow-up is, it seems like on your CapEx, it seems like you've lowered the CapEx expectation just slightly for fiscal year '21, if I'm seeing that accurately. And I was just wondering if there's any direct reason for that and what would be underpinning that if there is. And that's it for me. Robert Eulau: Yes. No, that's a good observation. And we expected CapEx to be around $3 billion this year, pretty much all year. The main delta is we actually sold some real estate this past quarter to the tune of about $100 million. Operator: Our next question will come from Nick Todorov with Longbow Research. Nikolay Todorov: David, if I heard correctly, you talked about seeing cloud titans also starting to use your client SSD products for their consumer base business. I think that's the first time we hear about that. So can you maybe impact that a little bit? How should we think about the opportunity? And are you addressing those -- that opportunity with your existing portfolio? David Goeckeler: No, not necessarily our client products. There is some of that because I think the easiest way to think about it is a lot of these big cloud titans also have big consumer portfolios. Whether it's gaming, tablets, VR headsets, that's what I'm talking about us participating in those builds, in those parts of the market as well. And as part of that go-to-market synergy we've talked about, I think we tend to only think of it as HDDs and enterprise SSDs, but it's much broader than that, given the relationship we have from the HDD business with these customers and the depth of the relationship. And they all -- where most of them also have big consumer portfolio as well, whether it's home automation or the kind of things I talked about. So our ability to participate in those parts of the market for flash is just what we're talking about. Operator: Our next question will come from Srini Pajjuri with SMBC Nikko Securities. Srinivas Pajjuri: On the NAND gross margins as well. I didn't hear you talk about K1 costs. So I'm guessing they came down pretty meaningfully. But I guess my question is, as we look through the next few quarters, you do have additional fabs coming online, either it's K2 or Y7. I'm just wondering how we should think about any potential incremental costs from those new factories. Robert Eulau: Yes. So I don't think we heard quite all the beginning of your comment, but you're correct that the K1 period expenses are immaterial now. We've ramped there to normal volume levels, and so those costs are getting inventory. So it's -- I think we're kind of in a normal state. As New York fabs come on, it's not going to have as big an impact from a start-up cost standpoint as the greenfield that we did with K1. So definitely, you're bringing on some fixed costs, but we'll also be bringing production volumes up and amortizing those costs over a bigger base because we have multiple fabs on a given campus. Operator: Our next question will come from Steven Fox with Fox Advisors. Steven Fox: Two questions real quick. First of all, on the taxes, Bob, is the 17% tax rate kind of here to stay? Do you think it can go a little bit lower? And then secondly, I apologize if I missed this, but have you talked about sort of the recent trends in high capacity video HDDs? And what you're expecting going forward? Robert Eulau: I do taxes, and Dave didn't talk about video. So yes, and we -- this has come up in prior calls. I mean we've been in a situation over the last couple of years where our operating profits have been below what we expected. And we have minimum taxes that we have to pay around the world. And so our rate was higher than what we would consider normal the last couple of years. Now as we're forecasting the rest of this fiscal year with the profitability we're expecting, we're very confident in the rate of 17%. And it will be -- as we look to future years, it will be a function of how profitable we are in those years. But right now, I think a good planning number is 17%. David Goeckeler: Yes, Steven, we haven't talked about high-definition video or in particular, but I mean, one way to think about it is just driving more demand for storage. I think all the devices we carry have more and more capability to store higher definition video, which is just driving the need for more storage per device. So if you have something more specific than that, I'm happy to follow-up on and go... Steven Fox: Yes. Yes, I just was -- if you could just maybe expand on what you're seeing into the June quarter, like, I think there was some seasonality last quarter. How you have availability to ship to that market? David Goeckeler: Smart video, the smart video market, I'm sorry, I misinterpreted. Smart video right in the HDD market. We see -- that market has been pretty stable. I think we see some improvement in it. But I mean, I don't think there's anything that's particularly noteworthy, except that it's a good market for us and continue to move forward. Robert Eulau: Yes, it's a growing market. David Goeckeler: All right, everyone. Look, we really appreciate you spending time with us. We'll follow up with you throughout the quarter. And again, thanks for joining us. Take care. Robert Eulau: Yes. Thanks, everyone. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect, and have a wonderful day.WDC Ratings Summary
WDC Quant Ranking
Related Analysis
Western Digital Downgraded at Raymond James
Raymond James analysts downgraded Western Digital (NASDAQ:WDC) to Market Perform from Outperform, citing the company’s current valuation as the primary reason. The analysts noted that although the fundamentals in the HDD and NAND markets are expected to continue improving, Western Digital’s stock has already surpassed the firm’s price target and is now trading at eight times the previous peak earnings per share. The stock’s rally, the analysts suggest, already reflects a reasonable recovery in these markets.
Using a sum-of-the-parts (SOTP) valuation approach, which the analysts consider more appropriate considering the company’s upcoming business separation, they see less than 10% upside potential. This is based on the assumption that the HDD business will trade in line with its peers like Seagate Technology (STX), and the NAND business will trade at about a 50% discount to other memory peers on an enterprise value to sales (EV/S) basis.
The analysts pointed out that the pure-play NAND business is likely to be valued significantly lower than memory peers primarily involved in DRAM, due to the NAND sector's fragmented nature and limited benefits from generative AI technologies.
Western Digital Shares Drop 3% Despite Q2 Beat
Western Digital (NASDAQ:WDC) delivered its fiscal second-quarter results on Thursday, outperforming analysts' expectations despite experiencing a decrease in margins. However, following the report, Western Digital shares saw a more than 3% decline in pre-market today.
The company reported a loss per share of $0.69 on revenue of $3.03 billion. This result was more favorable than the loss of $1.13 on revenue of $2.99 billion that analysts had predicted.
The company's cloud revenue decreased by 13% in Q2 compared to the same period last year, primarily due to a reduction in eSSD bit shipments. In contrast, revenue in the client and consumer segments saw an increase of 3% and 6%, respectively.
Looking ahead to fiscal Q3, Western Digital expects adjusted EPS to range from -$0.10 to $0.20 on revenue between $3.20 billion and $3.40 billion. This forecast surpasses analyst predictions of a $0.50 loss on revenue of $3.09 billion.
Western Digital Stock Jumps 13% Following Q1 Earnings
Western Digital (NASDAQ:WDC) shares rose nearly 13% in pre-market today after beating quarterly earnings expectations. They reported a Q1 loss of $1.76 per share, which is $0.15 better than the anticipated $1.91 loss, and revenue was $2.75 billion, surpassing the expected $2.66 billion.
While revenue increased 3% quarter-over-quarter due to 11% and 14% rises in Client and Consumer revenue respectively, Cloud revenue fell 12% quarter-over-quarter.
For Q2/24, the company forecasts a loss per share between $1.35 and $1.05 and revenue between $2.85 billion to $3.05 billion, compared to Street estimates of a $1.39 loss and $2.92 billion revenue.
Western Digital Stock Jumps 13% Following Q1 Earnings
Western Digital (NASDAQ:WDC) shares rose nearly 13% in pre-market today after beating quarterly earnings expectations. They reported a Q1 loss of $1.76 per share, which is $0.15 better than the anticipated $1.91 loss, and revenue was $2.75 billion, surpassing the expected $2.66 billion.
While revenue increased 3% quarter-over-quarter due to 11% and 14% rises in Client and Consumer revenue respectively, Cloud revenue fell 12% quarter-over-quarter.
For Q2/24, the company forecasts a loss per share between $1.35 and $1.05 and revenue between $2.85 billion to $3.05 billion, compared to Street estimates of a $1.39 loss and $2.92 billion revenue.
Mizuho is Enthusiastic About Western Digital
Mizuho analysts are enthusiastic about Western Digital (NASDAQ:WDC) as a strong long-term investment. They see the company as a compelling opportunity due to under-ownership and the positive impact of NAND production cutbacks on spot pricing.
The analysts believe that Western Digital's NAND business is poised for growth, with rising spot pricing and increased NAND demand from smartphone manufacturers. Additionally, they noted the impending split of Western Digital's business, with the NAND division set to merge with Kioxia, potentially boosting its valuation.
Western Digital Reports Weak Outlook Despite Q4 Beat
Western Digital (NASDAQ:WDC) is facing challenges as it guided for a larger loss in Q1/24, despite reporting Q4 results that surpassed Wall Street estimates.
For Q4, Western Digital posted an adjusted loss of $1.98 per share on revenue of $2.70 billion. Wall Street analysts had predicted a slightly higher loss of $2.02 per share on revenue amounting to $2.53 billion.
Looking ahead to Q1, the company's guidance indicates a projected loss in the range of $1.80 to $2.10 per share, with revenue expected to fall between $2.55 billion and $2.75 billion. These estimates are below what analysts were expecting, with Street estimates predicting a loss of $1.43 per share and revenue of $2.26 billion.
Western Digital Corporation Downgraded to Hold at Deutsche Bank
Deutsche Bank analysts downgraded Western Digital Corporation (NASDAQ:WDC) to hold from buy and lowered their price target to $40 from $56.
The analysts believe the company's Q1 revenue and EPS are tracking below the low end of guidance, and the Q2 outlook is also likely to be meaningfully below current Street estimates. According to the analysts, it is quite possible that, over the next few quarters, the company will re-test the trough margin (operating margin of 4%) and EPS ($0.17) reached in Q2/19.
Of particular concern to the analysts is that the company now expects its free cash flow to be negative in fiscal 2023. While the analysts do not see a significant downside to the current share price given the stock is trading at approximately 1.0x EV/Sales, the analysts don’t see any meaningful upside in the near term as oversupply in the flash memory market persists and macro concerns escalate.
