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F500-2021-182-Western-Digital

The San Jose-based company manufactures hard disk drives and offers data-storage products and services. In May, the company announced the launch of SanDisk Professional, a brand aimed at content creators.

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Western Digital develops and manufactures data storage devices like hard drives and external drives.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Founded in Silicon Valley at the dawn of the computer age, Western Digital is one of the world’s largest producers of hard disk drives used for data storage. The company’s portfolio of magnetic hard drives includes products designed for personal computing and for the data centers that power today’s cloud services. Western Digital spun out its flash memory business in February 2025, creating a separate publicly traded company under the SanDisk brand.

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Western Digital (WDC): Company Profile, Stock Price, News, Rankings

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Western Digital

western digital

Good day and welcome to the Western Digital first quarter fiscal 2026 earnings call. All participants will be in the listen-only mode. Should you need assistance during the conference call, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you press star then one on your telephone keypad. To withdraw your question, you press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Ambrish Srivastava, VP of Investor Relations. Thank you, and over to you.

Thank you and good afternoon, everyone. Joining me today are Irving Tan, Western Digital's Chief Executive Officer, and Kris Sennesael, Western Digital's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please 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 from expectations. In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis unless stated otherwise.

Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, our, or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving?

Thanks, Ambrish. Good afternoon, everyone, and thank you for joining us today. Across industries, adoption of AI is expanding, fueling innovation, reshaping business models, and ushering in a new wave of digital transformation marked by higher productivity and richer user experiences. As agentic AI begins to scale at several industries and multimodal LLMs become the norm, we are seeing a steady acceleration of AI use cases and applications driving robust ongoing demand for the data infrastructure that enables this growth. AI is not only a consumer of data but a prolific creator of data as well, both synthetic and real-world. It is reshaping how data is being generated, scaled, stored, and monetized. Data is the fuel that powers AI, and it is HDDs that provide the most reliable, scalable, and cost-effective data storage solution, playing a vital role in storing the ever-increasing zettabytes of data created by the AI-driven economy.

To cite an example of how AI is transforming various industries, one of the world's leading medical institutions is using an AI workflow that analyzes over 7 billion images derived from 14 million de-identified patient records. This process enables predictive analysis, improves the speed and accuracy of diagnostics to deliver enhanced patient outcomes. Such applications are generating massive volumes of new data that is being stored. At Western Digital, we are also leveraging AI internally to enhance productivity and accelerate innovation across our organization. For example, in engineering, AI is helping to modernize our firmware, enabling us to deliver new features quickly to our customers and in a more cost-effective manner. In our factories, we are seeing productivity gains of up to 10% in select AI use cases. AI tools are improving yield, detecting defect patterns through intelligent diagnostics, and optimizing our test processes.

In parallel, they are also being used to uplevel our technician capabilities, enabling them to perform higher skilled tasks, accelerating issue diagnostics and troubleshooting. Across corporate functions, AI is streamlining workflows, making the organization more efficient every day. The rapid adoption of AI and data-driven workloads at hyperscalers is driving robust demand for our products and solutions. To fulfill the demand of more exabytes of storage, our customers are increasingly transitioning to higher capacity drives. Shipments of our latest ePMR products, offering up to 26 TB CMR and 32 TB UltraSMR capacities, continue to grow at an impressive pace, surpassing 2.2 million units in the September quarter. Our ability to reliably scale our ePMR technology and transition customers to higher capacity drives is one of several ways we support the growing demand for exabytes.

We are also investing in head wafer and media technology and capacity to drive aerial density higher. In addition, we're increasing our manufacturing throughput by leveraging automation, AI tools, and enhancing our test capabilities. We recently inaugurated our system integration and test lab, a 25,600 sq ft state-of-the-art facility in Rochester, Minnesota, to enable rapid adoption of our next-generation high-capacity drives. This lab provides dedicated test capabilities that mirror our hyperscale customers' production environments, enabling collaborative integrated product development with our customers, accelerating qualification cycles, thereby ultimately shortening time to market for our products and time to value for our customers. The AI-driven growth in data storage is accelerating demand for higher capacity drives, which comes with greater manufacturing complexity and longer production lead times.

As a result, our customers are providing greater visibility into their long-term needs, which in turn strengthens our partnership and helps us to support their future growth requirements. Our top seven customers have now provided purchase orders extending throughout the first half of calendar year 2026, and five of them have provided purchase orders covering all of calendar year 2026. I'm also pleased to share that one of our largest hyperscale customers has signed an agreement covering all of calendar year 2027. These commitments underscore both the essential role of our products in the AI data economy and our customers' strong confidence in our product roadmap, including the transition to HAMR technology.

We are making rapid progress in our HAMR development and are on track to start HAMR qualification for one hyperscale customer in the first half of calendar year 2026 and to expand the qualification process to up to three hyperscale customers through calendar year 2026. The key focus of our qualification efforts is to ensure the highest level of reliability, quality, and scalable performance so that once qualification is complete, our customers have strong confidence in our HAMR products and can rapidly deploy them at scale. This positions us well for the ramp-up of volume production in the first half of calendar year 2027. In parallel, we will begin qualification of our next-generation ePMR drives in the first quarter of calendar year 2026.

Building on our industry-leading ePMR technology, a trusted, scalable, and proven solution that our customers are very familiar with and that has been used reliably in their data centers. Together, our ePMR and HAMR technologies will enable high-capacity drives that meet the growing demand for exabytes from cloud and AI workloads. Our platform's business is also sharing in the upward momentum driven by overall growth of on-prem and cloud storage, including AI and social media applications. We will continue to invest in this business as more opportunities unfold and continue to scale up. Innovation lies at the heart of what we do. We continue to expand our proven ePMR roadmap even further while bringing new technologies, including HAMR, to market. In parallel, our engineering teams are focused on improving data throughput speed and bandwidth of our drives, as well as power efficiency.

Major progress is being made on all fronts, and we will keep all stakeholders, including customers and investors, updated on any new developments. Let me now turn to our quarterly results and capital allocation updates. For the fiscal first quarter, Western Digital delivered revenue of $2.8 billion, non-GAAP gross margin of 43.9%, and non-GAAP earnings per share of $1.78. Free cash flow for the quarter was $599 million. This quarter yet again underscores our business's strong free cash flow generation. We remain confident in the long-term strength of the business and our balance sheet. As a result, this quarter, we significantly increased our share repurchases, and I'm pleased to announce that we will increase our dividend per share by 25% to $0.125 per share. Kris will discuss our capital allocation in more detail later.

Looking ahead, we're excited about the opportunities AI continues to unlock for our business, even as we navigate macroeconomic uncertainties. For the fiscal second quarter of 2026, we expect continued revenue growth driven by data center demand and improved profitability led by the adoption of our higher capacity drives. Let me now turn the call over to Kris, who will discuss our fiscal first quarter results and the outlook for the second fiscal quarter in more detail.

Thank you, Irving, and good afternoon, everyone. As a strategically focused hard disk drive company, Western Digital plays a critical role in enabling the data-driven AI economy. The company is executing well, fulfilling customers' rapidly growing exabytes demand while delivering strong financial performance. During the first quarter of fiscal 2026, revenue was $2.8 billion, up 27% year-over-year, driven by strong demand for our nearline drives. Earnings per share was $1.78. Both revenue and EPS were above the high end of the guidance range. We delivered 204 EB to our customers, up 23% year-over-year. This includes 2.2 million drives of our latest generation ePMR, with capacity points up to 26 TB CMR and 32 TB UltraSMR. Cloud represented 89% of total revenue at $2.5 billion, up 31% year-over-year, driven by strong demand for our higher capacity nearline product portfolio.

Client represented 5% of total revenue at $146 million, up 5% year-over-year. Consumer represented 6% of revenue at $162 million, down 1% year-over-year. Gross margin for the fiscal first quarter was 43.9%. Gross margin improved 660 basis points year-over-year and 260 basis points sequentially. The improved gross margin performance reflects continuous mix shift towards higher capacity drives and tight cost control in our manufacturing sites and throughout the supply chain. Operating expenses were $381 million, slightly exceeding our guidance range, driven by higher variable compensation on stronger-than-expected results. Operating income was $856 million, translating into an operating margin of 30.4%. Interest and other expenses were $44 million, taking into account an effective tax rate of 17% and a diluted share count of 369 million shares. EPS was $1.78.

Turning to the balance sheet, at the end of our fiscal first quarter, cash and cash equivalents were $2 billion, and total liquidity was $3.3 billion, including the undrawn revolver capacity. Debt outstanding was $4.7 billion, translating into a net debt position of $2.7 billion and a net leveraged EBITDA ratio of just below 1/3. Operating cash flow for the fiscal first quarter was $672 million, and capital expenditures were $73 million, resulting in strong free cash flow generation of $599 million for the quarter, despite the fact that we made our final repatriation tax payment during the quarter of $331 million. During the quarter, we increased our share repurchases to approximately 6.4 million shares of common stock for a total of $553 million and made $39 million of dividend payments.

Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned a total of $785 million to our shareholders by way of share repurchases and dividend payments. Today we announced that our board has approved a quarterly cash dividend of $12.50 per share of the company's common stock, payable on December 18, 2025, to shareholders of record as of December 4, 2025. This marks a 25% increase over the dividend announced in April and speaks to the long-term confidence we have in our business. I will now turn to the outlook for the second quarter of fiscal 2026. This outlook includes our current estimate of all anticipated or known tariff-related impacts on our business in this period. We anticipate revenue to be $2.9 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 20% year-over-year.

Gross margin is expected to be between 44% and 45%. We expect operating expenses to decrease on a sequential basis to a range of $365 million-$375 million. Interest and other expenses are anticipated to be approximately $50 million. The tax rate is expected to be approximately 17%. As a result, we expect diluted earnings per share to be $1.88±$0.15, based on a non-GAAP diluted share count of approximately 375 million shares. In closing, this was another strong quarter for Western Digital, with results exceeding expectations. The guidance for next quarter reflects continued tailwinds in our business as we remain focused on strong free cash flow generation and demonstrating our commitment to creating long-term value for our shareholders. With that, I will now turn the call back to Irving.

Thanks, Kris. Our leading technology roadmap, combined with our scalable, reliable, and strong product portfolio, is highly recognized by our customers. This is demonstrated by the longer duration agreements we've signed with our major customers. Western Digital's consistent execution, combined with powerful AI-driven tailwinds, positions us to deliver strong results and robust cash flow over the long term. As data creation continues to accelerate, our innovation and operational and fiscal discipline enable us to capture these opportunities efficiently and drive sustained shareholder value. With that, let's now begin the Q&A. Ambrish.

Thank you, Irving. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator.

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star and then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has not been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of CJ Muse from Cantor Fitzgerald. Please go ahead.

Thank you for taking the question. Storage demand is off the charts, and part of the great narrative for the HDD industry is an oligopoly acting very rationally with supply. On the other hand, we're seeing SSD adoption rise for certain AI workloads given the tight overall storage supply. My question: how do you plan to meet rising customer demand while keeping supply-demand in balance?

Hey, CJ, thank you for the question. I hope all's well. Our focus is really on a couple of things. One, ensuring that we continue to quickly and reliably deliver increasing higher capacity drives. A good example is the current PMR product that we have where we shipped over 2.2 million units last quarter. That equates to roughly about 70 EB of data in total, and that product is expected to ship well north of 3 million units this quarter. It's a real demonstration of our ability to deliver exabytes to customers at scale. The second thing is that, as we've highlighted in the past, our unique innovation around UltraSMR. This quarter, our UltraSMR to CMR mix is roughly 50/50. As you recall, UltraSMR gives us a 20% capacity uplift over CMR and a 10% capacity uplift over standard SMR.

Those capabilities, plus the fact that we'll be launching our next-generation ePMR drive very soon, it starts qualification in Q1 of calendar 2026, and we anticipate it will go into ramp in the second half of calendar 2026, will give customers an ability to take advantage of higher capacity drives. We've been working very closely with customers to mix them up in terms of capacity points as well. If you go back a year, the average capacity for our top seven hyperscale customers has increased 21% year-on-year. That's a very strong testimony to how capacity points in our drives have scaled up. We also continue to invest into aerial density technology improvements and capacity as well, as we stated from the very onset of us spinning out as a standalone hard drive company.

Those investments will continue to be able to deliver greater aerial density improvements without the need for any additional unit capacity. We're also looking at increasing our manufacturing throughput by leveraging more automation, AI tools that we highlighted in the script, and also enhancing our test capabilities. This increase in the productivity of our existing footprint will enable us to deliver more exabytes to our customers as well. Last but not least, as we highlighted in the script as well, the investments that we've made into our SIT Labs to accelerate qualification is a key part of our ability to bring higher capacity drives faster to customers and therefore fulfill the need for exabytes as well. Maybe just let me end my comments by being very clear about one statement. We are not adding any unit capacity to our portfolio right now.

I did, Ambrish. Thank you. I guess on gross margins. Great 660 bps uplift year-on-year, but obviously, we're always looking forward. How should we think about incremental gross margins from here? Is there a framework that we should use? Thanks so much.

Yes, CJ. I'm really pleased with the gross margin in Q1, delivering 43.9% gross margin, which, as you point out, was up 660 basis points year-over-year and 260 basis points on a sequential basis. Even when you look at the incremental gross margin in the quarter on a sequential basis, it was approximately 75%. As you have seen in the prepared remark, we've also guided for Q2 fiscal 2026 with further gross margin improvement in the range of 44%-45%. That gives you 44.5% at the midpoint, which gives you on or about 65% of incremental gross margin on a sequential basis. Looking forward, obviously, as a company, we're going to continue to focus on further gross margin improvements, and I'm comfortable to have incremental gross margin on a sequential basis of approximately 50%, and that will drive some further gross margin improvement.

Thank you, CJ. Operator, we can have the next.

We have the next question from the line of Aaron Rakers from Wells Fargo. Please go ahead.

Yeah, thanks for taking the question and congrats on the quarter. I think in the prepared remarks, you alluded to even further extending out UltraSMR. It's good to hear kind of a reaffirmation of the HAMR roadmap, but I'm curious if you could unpack that a little bit more. If there's further room above and beyond the 36 TBs that you see for UltraSMR, is there a 12-platter stack? I know one of your smaller competitors recently made some announcements around that. I'm just curious of how far, before we can get to HAMR, if there's further potential upward expansion on average capacities.

Yeah, Aaron. As we've highlighted in the prepared remarks, we've pulled in the qualification process of our next-generation ePMR product to the first quarter of calendar 2026. Initially, in our roadmap, it was in the first half of calendar 2026. In the current roadmap, the capacity points are scheduled to be at 28 TBs CMR and 36 TBs UltraSMR. I'll say we have very innovative and creative engineers, so they will obviously continue to push the capacity points, and we'll see where we get to by the time we actually get to production ramp and qualification completeness. On HAMR, as you mentioned, we also pulled forward the qualification process by half a year. As we've highlighted in our roadmap in the past, the plan was to start HAMR qualification in the second half of calendar 2026.

We've now pulled that into the first half of calendar 2026 with one customer, and we look to expand that to up to three customers by the end of the calendar year. That's really testimony to the comments I've made last quarter, where I said I was very pleased with the progress that we've been making in terms of aerial density improvements, in terms of our capability to build a highly scalable product. Our focus now is ensuring that we are able to deliver products with the right reliability and right yields that are similar in sort of capacity and capability to our ePMR portfolio, which is what our customers expect of us.

I do. I guess thinking about kind of sticking with CJ's comment, we're always kind of looking forward. Historically, there's been some attributes of seasonality to think about into the March quarter, but it sounds to me like you're pretty much stocked out from a capacity perspective through calendar 2026. Curious if you have any thoughts on how we should maybe think about seasonality or whether or not that even applies for the March quarter at this point. Thank you.

Yeah, I mean, CJ, we go like one quarter at a time, but I would say the business has structurally changed. Close to 90%, 89% of our business is data center right now, so there isn't really any seasonality associated to it. It's really driven by the deployment schedule of our large hyperscale customers. If there's any seasonality, it really applies to the 10%-15% of our business that we have in the channel and our client and consumer portfolio. I think your comment is a fair one. There really isn't by and large any material seasonality to our business going forward.

We have the next question from the line of Erik Woodring from Morgan Stanley. Please go ahead.

Hey, guys. Thank you very much for taking my questions and congrats on the results. Irving, your February analyst day feels like it was in a completely different time in the market, even though it was only eight months ago. At the time, you talked about kind of 16%-23% exabytes growth and something like 7% annual price per terabytes deflation. It's probably safe to say that the market has inflected since then. I'd love to just get your updated thoughts on how we should be maybe thinking about the growth of these two metrics over the next few years. Just any update you could share. Thank you very much.

Yeah, thanks for the question, Erik. I think we gave a base case of 15% CAGR exabytes growth, with an AI uplift case of 23%. We're definitely seeing exabytes growth trend more towards that 23% growth rate, especially as we get into these longer-term agreements. In fact, firm POs we have pretty much throughout all of calendar 2026, and we have agreements now for 2027 and discussions with customers for durations even longer than that. We are clearly seeing demand trending more towards that 23% range. On the cost side, I think the sort of mid to high single-digit cost down is probably still a safe assumption.

Thank you very much, guys. Irving, I'd just also love to get your perspective on how short you think supply is relative to demand today. Based on your new product introduction timeline, when do you think that supply can maybe more materially expand such that your EV growth really reflects more so demand than supply? Thanks so much, guys.

Yeah, thanks for the question, Erik. I think calendar 2026, the supply-demand balance is going to continue to be very supply-constrained. With the ramp-up of the new capabilities, both on the ePMR portfolio and HAMR, we expect to see more exabytes probably coming on stream in the second half of calendar 2027.

Thank you. We have the next question from the line of Amit D. from Evercore. Please go ahead.

Thanks a lot. I guess maybe to start with, Irving, it sounds like you're pulling in at least the start of the HAMR qualifications a bit earlier than expected. Can you just talk about how long does it normally take for a product to go from qualification to deployment? Do you see HAMR being roughly in line to that, or could it be done quicker?

Yeah, thanks for the question, Amit. Yes, we are pulling in our HAMR qualification by half a year, as I mentioned, from the second half of 2026 into the first half of 2026. If we use our ePMR portfolio as a proxy, we typically are able to go from start of qualification to completion and ramp in roughly two to three quarters. That's the sort of target that we're working to. That's why we talked about ramped in the first half of calendar 2027 for our HAMR products. I reiterate, our focus is really on ensuring that we not only qualify a product and can ramp it, but we're delivering a reliable product to our customers as well. The last thing we want to do is qualify a product, ramp it up, and then we have production-level challenges with our customers. That's what our focus is on.

In the meantime, we still have our next generation of ePMR that we are starting qualification in calendar Q1 of 2026 that we anticipate to qualify in two quarters and ramp very quickly thereafter as per the current generation of ePMR that we've delivered as well.

I do. You folks talked about leveraging AI internally. Can you just talk about what sort of productivity savings you think Western Digital can realize as you deploy AI internally? Does that sort of imply that as revenues keep growing, you can actually keep OpEx flat in this $370 million, $375 million range? I'd love to just understand what does AI implementation internally mean. What does that mean from a productivity or savings basis for the company? Thank you very much.

Yeah, thanks for the question. We have a series of AI initiatives that spread across the enterprise, as we've highlighted in the prepared remarks as well. We are clearly seeing benefit in our manufacturing operations for AI use cases where we're seeing 8%, 10% productivity gain. It's really resulting in better yields and faster throughput of our products. We've also started to use AI in helping us rewrite some of our firmware. We're seeing gains in the space of about 20%. Productivity gains there as well. It's still early days. I think there's still a fair amount of experimentation and exploration. We see tremendous opportunity in the sort of early use cases that we've been able to apply AI into. The enterprise has yielded very positive results.

Thank you. We have the next question from the line of Wamsi Mohan from Bank of America. Please go ahead.

Hi, this is Joseph Leeman on from Wamsi. How should we be thinking about the mix of the 2.2 million ePMR drives you shipped in the quarter? I'm not sure if I heard correctly, but I think you said it was about 70 EB, so that's about 31 TBs per drive. Does the mix change from quarter-to-quarter, or is that just going to trend higher, especially once the next qualification comes through?

Yeah, your numbers are right. It's 2.2 million units that delivered roughly 70 EB. This quarter, we are planning to ship over 3 million units. We don't anticipate the mix to really change that much. It's pretty much consistent based on the customer profile that we have.

We have the next question from the line of Karl Ackerman from BNP Paribas. Please go ahead.

Yes, thank you. I was hoping you could discuss the breadth and stickiness of the announced price increase you disseminated in September. In particular, since much of your volume is on long-term agreements, are ASP improvements only to volume that is not on LTAs? If you talk about that, that'd be helpful.

Yeah, the letter that we sent out, Karl, was predominantly to our channel customers. It really affects predominantly our client and consumer portfolio and probably the lower end of our nearline capacity drives. That's really roughly only about 10%-15% of our business. For all our hyperscale customers that are on firm POs or LTAs, those are discrete commercial agreements that we have with them that were not affected by that letter.

Yes, if I may. It seems you have several months remaining to divest the remaining stake of SanDisk without incurring a tax penalty. Having said that, that investment in SanDisk is proving quite prescient. Could you perhaps update your thoughts on whether you intend to divest remaining stake and/or if you do, what your cash issues plans would be, whether it's pay down debt, invest in heads of media, buybacks, etc.? Thank you.

Yeah, during Q1 of fiscal 2026, we did not monetize the remaining stake in SanDisk, and we still have 7.5 million shares. It is our intention to monetize that stake prior to the expiration of the one-year anniversary of the separation, which is February 21st. Last time when we did the monetization, we did a debt for equity exchange. We haven't made up our mind how we are going to do it, but it could potentially be a similar transaction like we did the first time.

Thank you. We have the next question from the line of Tom O'Malley from Barclays. Please go ahead.

Hey, guys. Thanks for taking my question and really nice results. I wanted to go into the long-term agreements, Irving. During the pandemic, we've been conditioned with kind of the DRAM and NAND suppliers to think about long-term agreements as something that is really good while things are moving up and to the right and kind of get torn up when things correct. Can you talk about the hooks that are in these agreements? Are these take or pay? How are they structured so that you feel confident around your ability to get value for the length of agreements that you're signing?

As I highlighted, for five of our hyperscale customers, we actually have firm POs. These are not LTAs. These are firm POs that have been placed on us. For one of our largest hyperscale customers, we have an agreement for all of calendar 2027 with a quite significant amount of commercial teeth in them. It is quite a different environment where I would say we are moving to a world where we have firm purchase orders. Even with longer-term agreements, there are appropriate commercial terms in there to protect ourselves in the case of any adjustments in their forecast.

Yeah. I've been asking this question throughout earnings here. We heard from Lam about their impact to AI spend. I asked Seagate just on what they think on $100 billion of AI spend you would see from a benefit to their business. They kind of talked about a high single-digit percentage of CapEx traditionally has gone there. Do you guys have any different view, or would you be more nuanced in the way you looked at that?

Yeah, I would say it's a bit more nuanced. We do track it. There's not a direct correlation to it. Obviously, the big spend in AI goes to GPUs and HBMs and power. We've seen the percentage of CapEx on HDDs go from probably low single digits to trending more towards the 4%-5% range.

Thank you. We have the next question from the line of Harlan Sur from JPMorgan. Please go ahead.

Good afternoon. Thanks for taking my question, and congratulations on the strong execution. This year, it looks like nearline exabytes growth is trending more towards that sort of 35% range for the full year. You drove 36% year-over-year growth in June, 30% growth here in the September quarter. You've got an order book that extends out over the next, call it, 12 months, which is reflective, like you said, of your customers' exabytes demand profiles. Does the forward exabytes demand profile really suggest a normalization back to a 23% demand figure, as you talked about, Irving, or is that more of a supply-constrained-driven profile and demand is really trending above that range? My point is that given all this AI infrastructure investment in compute, networking, memory, and storage, a 23% bit demand figure may now be too conservative. Wanted to get your views.

Yeah, it's a good question. I would say it's still an evolving environment where the figures continue to increase. As I mentioned, if you go back just less than 12 months ago, we thought mid-teens was the right number. We're now seeing trending to the 23% range, with potential as we fast forward to the 2027, 2028 timeframe to increase even more. That's something we're working through with our customers to ensure that we continue to drive aerial density improvements to be able to support the cable growth that they're expecting going forward. It's something we're working very closely with them.

I think the big difference is that in the environment that we're facing, we're getting much deeper insight into our customers' forward-looking exabytes requirements, a much closer partnership in terms of how they want to more rapidly adopt a higher capacity drive to be able to support their data storage requirements going forward.

Yeah, just a quick follow-up. On the UltraSMR mix shift, good to see the team at a 50/50 mix. I don't think you guys answered this question, but given the order book, POs, LTAs, where does the mix trend on UltraSMR into 2026? Is this mix shift towards UltraSMR a rather important part of the driver of the stronger incremental gross margin fall through?

Yeah, we said we will see the mix of UltraSMR continue to increase over time, both as existing customers who have qualified UltraSMR increase their UltraSMR footprint. We have another two customers that are going through UltraSMR qualification as we speak right now. We anticipate the take-up of UltraSMR to be an increasing part of our portfolio and continue to grow going forward.

Yeah, Harlan, just in general, the transition to higher capacity drives typically translate into a better gross margin profile.

If I may add, Harlan, I'm Ambrish, remember UltraSMR is also translatable to HAMR. That's something to keep in mind as well. Thank you.

Thank you. We have the next question from the line of Asiya Merchant from Citigroup. Please go ahead.

Great. Thank you for taking my question and great results here. If I can, just trying to unpack pretty strong beat relative to the guide. Given that you guys are in these long-term agreements and there are capacity constraints, just if you could help me unpack what drove the upside. Was it some pricing that came through? Was there some extra drive that you were able to push through? I don't know if it was a mix shift. If you could just help me unpack that, that would be great. Thanks.

Yeah, so as it relates to the upside in revenue, it was mostly driven by great execution by our manufacturing operations organization, pushing really hard on the supply side and improving yields, improving throughput. That created some upside on the supply side for us from a revenue point of view. Also, on the gross margin side, we had some upside there, mostly driven by a strong price environment where we have seen some modest low single digits ASP per terabyte increases on a sequential and a year-over-year basis. In addition to that, as I just indicated, the shift to higher capacity drives is definitely benefiting the gross margin profile. Our customers, they want more exabytes, and they know they can get more exabytes as they move faster to higher capacity drives. That was definitely beneficial.

In addition to that, again, the operations team is executing strong on driving down cost internally as well throughout the supply chain. A combination of all of that provided some upside in the Q1 financial results.

Sure. Thank you very much. How should I think about then, given you guys have been running very well on your productivity initiatives, how should we think about that cost decline, especially given you have some calls that are ramping up faster than expected? How should we think about the cost declines here in the outer quarters? Thank you.

Yeah, again, the team continues to execute really well. A combination of moving to higher capacity drives, which results in a lower cost per terabyte, but then also really working on productivity, yield improvements, test time reductions, and driving operational efficiencies throughout the whole supply chain. A combination of all of that is delivering the mid to high single digits cost per terabyte reductions that we've indicated at the analyst day and that you have seen being executed in the last couple of quarters.

Thank you. We have the next question from the line of Steven Fox from Fox Advisors. Please go ahead.

Hi, good afternoon. If I adjust your free cash flow for the tax payment, it's $930 million against a non-GAAP net income of $655 million. I'm assuming there's something unusually positive in that number. I'm trying just to right-size to how we should think about free cash flows relative to net income going forward because that's just a tremendous performance in one quarter. Thanks.

Yeah, so very pleased with the very strong free cash flow of $599 million. This is the second quarter in a row where the free cash flow margin is well above 20%. Great execution there. As it relates to Q1 of fiscal 2026, we had a major reduction in our working capital, in part driven by a reduction in our DSOs as the billing linearity during the quarter is very strong. Days of inventory was slightly up, but also the days payable went up. Great execution there by the team. Unfortunately, as you know, once you've obtained some major reductions in working capital, it's hard to repeat that each and every quarter. It's our goal to maintain it at this level, but you will not see the incremental benefit that we saw in Q1 of fiscal 2026.

Anyhow, I think going forward, I feel comfortable with a free cash flow margin in the +20% range.

Yeah, just real quick on the prior question. Maybe it's a chicken-and-egg question, but you said the customers are recognizing the need to mix up to get the exabytes they need. Is it the fact that they're pushing harder on you that you're then pushing harder on your development team to get these higher mixed products out? Is that sort of the dynamic that's going on? Thanks.

I think it's a win-win scenario, Steve, that sort of both organizations are working very closely. Customers obviously want higher capacity drives to fulfill the exabytes demand. It's also beneficial for them from a TCO standpoint. Don't forget, when you have high capacity drive, rack densities are much higher, and therefore TCO is much better as well. From our standpoint, that's a great way for us to better support the demand that our customers have on us and for us to be able to support the strong growth trajectory that we are seeing both in cloud and in AI going forward.

Western Digital (WDC) Q1 2026 Earnings Call Transcript

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