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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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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 afternoon, and thank you for standing by. Welcome to Western Digital's third quarter fiscal twenty twenty five conference call. Presently, all participants are in listen only mode. Later, we will conduct a question and answer session. At that time, if you would like to ask a question, you may press 1 on your phone.

recorded. Now I will turn the call over to mister Ambrish Srivastava, vice president and investor relations. You may begin.

Thank you, and good morning, everyone. Joining me today are Irving Tan, chief executive officer, and Don Bennett, interim 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 obligations to update these statements.

Please refer to our most recent financial report on Form 10 ks 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. We will also make references to non GAAP financial measures today. 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. With that, I will now turn the call over to Irving for introductory remarks.

Thanks, Abhish. Good morning, everyone, and thank you for joining us today. I'm honored to be speaking with you for the first time as the CEO of Western Digital. It is a privilege to lead this exceptional organization, and I want to start by recognizing the outstanding work of our employees across the company who managed a complex separation process over the last several months, while also continuing to drive the strong performance we are reporting today. Throughout that time, they remained deeply connected to our customers, Throughout continued pushing the boundaries of leading edge innovation, and sustained a strong

focus on operational excellence. This combination of customer focus, innovation, and execution positions us well for the opportunities ahead. In the past month, we've also welcomed our new Chief Product Officer, Ahmed Shehab. Having held leadership positions at two large hyperscalers, Ahmed is a seasoned expert in cloud storage needs and requirements, making him the right person to lead our product strategy and engineering teams as we continue to drive innovation and deliver solutions that meet the evolving demands of our data driven world. We're excited to have Akamet join Western Digital as its customer centric perspective and deep industry knowledge, particularly with data centers, will be invaluable to us going forward.

Let me now provide you with a few updates on our business. Since stepping into this role, I've been spending a great deal of time with our customers, employees, and the investment community. What's clear to me is that Western Digital has an incredibly strong foundation, a resilient business model, and incredible potential to benefit from the demand in the age of AI. Even in a world marked by geopolitical uncertainty and shifting trade dynamics, one thing remains constant, the exponential growth of data. From enterprise workloads to the explosion of AI generated content, such as the millions of images and viral videos generated through AI, data generation is accelerating at an unprecedented pace.

When it comes to storing data at scale, no technology rivals the cost efficiency and the reliability of HDDs. We continue to serve as the backbone of the world's data infrastructure, delivering unmatched value for mass storage needs. As we deliver our critical HDD technology to our customers, we are focused on continued innovation to provide the highest capacity drives with improved performance, energy efficiency and lowest total cost of ownership. Our industry leading 11 disk drives with capacities of up to 26 terabyte CMR and 32 terabyte UltraSMR are now ramping rapidly, with over 800,000 units shipped in the March. We are also on track to ship well over 1,000,000 units in the June.

The swift qualification and adoption cycle is a hallmark of our technology roadmap, demonstrating reliability, ease of implementation, and scalability with fastest time to value for our customers. On HAMR, we remain on track with respect to our milestones and road map that we communicated at our Investor Day in February. We are working closely on HAMR with two hyperscale customers and continue to receive encouraging ongoing feedback on our drives. Let me now turn to our quarterly results. For the third fiscal quarter, Western Digital delivered revenue of 2,300,000,000 non GAAP gross margin of 40.1% and non GAAP earnings per share of $1.36 Free cash flow for the quarter was $436,000,000 At our Investor Day, we outlined the three pillars of our shareholder friendly capital allocation approach.

They are to reinvest in the business, reduce debt and return cash to our shareholders. On April 14, we redeemed $1,800,000,000 of our twenty twenty six senior notes, thus further strengthening our balance sheet. I'm also pleased to announce that we are initiating a quarterly dividend of $0.10 per share in our fiscal Q4. These actions are underpinned by our strong belief in the strength and durability of our business. Don will cover this in greater detail in his remarks.

Now turning to our outlook. First, I want to acknowledge the current environment, which remains highly uncertain and volatile, driven in a large part by tariffs and global trade tensions. At Western Digital, we are addressing these challenges on two fronts. In the near term, we've established cross functional teams to minimize disruption and mitigate the impact of tariffs on our customers and operations. At the same time, we're taking a strategic view, evaluating the longer term implications of supply chain shifts to ensure we stay agile, resilient, and are well positioned for the future.

Though the broader environment has some uncertainty, demand from our hyperscale customers remains robust in a tight supply environment. We're thankful to our customers who increasingly recognize the complexity of the HDD supply chain and are partnering with us to provide visibility into their future needs. This collaboration enables us to plan more effectively, and we now have long term agreements that extend through the first half of calendar year twenty twenty six with two of our largest customers. However, there are areas such as in the enterprise and in certain parts of our distribution and retail business, where there could be more uncertainty with respect to demand, driven largely by the current tariff environment. Taking these factors into account and looking ahead into the fiscal fourth quarter, we expect sequential revenue growth driven by sustained strength in data center demand.

We continue to work closely with our customers to align with their long term requirements, while delivering the best possible total cost of ownership. Let me now turn the call over to Don, who will discuss our fiscal third quarter results and fiscal fourth quarter guidance in more detail.

Thank you, Irving, and good morning, everyone. In the fiscal third quarter, Western Digital delivered strong financial results and successfully completed the planned separation of the company's flash business on February 21. As such, the historical results for the flash business segment are reported as discontinued operations and excluded from these results, unless otherwise noted in my comments. Total revenue for the quarter was $2,300,000,000 down 5% sequentially and up 31% year over year. Non GAAP earnings per share was $1.36 driven by gross margin of 40.1%, disciplined cost management, and tax benefits.

Total X Y shipments were down 6% sequentially, driven by lower nearline shipments related to deployment plans of our customers. Average price per unit increased 4% sequentially to $179 Looking at end markets, cloud represented 87% of total revenue at $2,000,000,000 down 4% sequentially and up 38% year over year. On a sequential basis, the decline was due to a 6% reduction in nearline bit shipments to 145 exabytes, while pricing per unit in cloud was up 5%. On a year over year basis, both revenue and bit shipments grew at 3832%, respectively, driven by the strength of our product portfolio. Client represented 6% of total revenue at $137,000,000 down 2% on both a sequential and year over year basis.

Compared to last quarter and last year, revenue was down due to lower unit shipments. Consumer represented 7% of revenue at $150,000,000 down 13% sequentially and 4% year over year. The sequential decline in consumer was primarily due to lower unit shipments, while year over year the decrease was largely due to pricing. Moving to the rest of the income statement, please note my comments will be related to non GAAP results on a continuing operations basis unless stated otherwise. Gross margin for the fiscal third quarter was 40.1%.

Sequentially, gross margin improved 1.7 percentage points, ahead of our guidance of 50 basis points improvement. Operating expenses were down sequentially to $324,000,000 Our results demonstrate continued focus on cost discipline as we concluded our business separation process. Operating income was $596,000,000 up 85 basis points sequentially, driven by higher gross margin and lower operating expenses, partially offset by lower revenue. Operating margin was 26%, up 1.5 percentage points sequentially, and up 17.3 percentage points on a year over year basis. Income tax expense was $12,000,000 and the effective tax rate for the fiscal third quarter was 2%.

The decline in the company's effective tax rate from guidance is a result of the recognition of one time deferred tax benefits in conjunction with the separation of the flash business. Turning to the balance sheet. At the end of our fiscal third quarter, cash and cash equivalents were $3,500,000,000 and total liquidity was $4,700,000,000 including undrawn revolver capacity. Gross debt outstanding was $7,400,000,000 at the end of the fiscal third quarter. Inventory was $1,300,000,000 representing eighty six days of inventory, up $63,000,000 sequentially, and down $174,000,000 on a year over year basis.

Our net leverage ratio at the end of the fiscal third quarter was 1.7x. Please note, after the close of the March, we successfully redeemed $1,800,000,000 of our twenty twenty six senior notes using cash on hand. The redemption reflects our commitment to strengthening the balance sheet and achieving our target net leverage ratio of one point zero to 1.5 x, as outlined at our Investor Day. Operating cash flow for the fiscal third quarter was $5.00 $8,000,000 and cash capital expenditures represented a cash outflow of $72,000,000 resulting in free cash flow generation of $436,000,000 for the quarter. Please note that this is on a consolidated basis for the quarter.

As Irving highlighted in his opening remarks, we are pleased to announce that we're initiating a quarterly dividend of $0.10 per share, reflecting the strength of our balance sheet and confidence in the long term cash generating ability of our business. This decision underscores our commitment to delivering value to our shareholders. I'll now turn to the fiscal fourth quarter non GAAP guidance. This guidance includes our current estimate of all anticipated or known tariff related impacts on our business in this period. We anticipate revenue to be 2,450,000,000 plus or minus $150,000,000 Gross margin is expected to be between 4041%.

We expect operating expenses to increase slightly on a sequential basis to a range of $330,000,000 to $340,000,000 The increase is due to variable compensation reflecting improvement in the underlying business, hiring to fill critical open positions resulting from the business separation, and increased investments in research and development. Interest and other expenses are anticipated to be approximately $70,000,000 The decrease on a subsequent basis reflects our lower debt levels following the notes redemption previously discussed. The tax rate is expected to be between 810%. We expect EPS to be $1.45 plus or minus $0.20 based on approximately $360,000,000 shares outstanding. Additionally, for modeling purposes, we would like to highlight that fiscal year '20 '20 '6 will be a fifty three week year for us.

As a result, our first fiscal quarter in FY twenty six will have fourteen weeks. In addition, we expect the tax rate for FY twenty six to be between sixteen percent and eighteen percent. In closing, Western Digital is well positioned to navigate the current dynamic environment. We remain focused on creating value for our stakeholders and investing in our future to capture the significant growth and data ahead, while maintaining a healthy supply and demand environment. With that, I'll now turn the call back to Irving.

Thanks, Don. Western Digital's results this quarter and guidance reflect the ongoing structural transformation of our business with continued progress towards a business that delivers sustained profitability. We continue to maintain strong conviction in the business and are confident that we will weather the sensitivity and come out even stronger. With that, let's now begin the Q and A.

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. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one on your phone. Our first question comes from Eric Woodring with Morgan Stanley. Please go ahead.

Thanks for taking my questions and congrats on the nice quarter out the gate. Instead of asking a demand question, I wanted to actually ask about capital allocation. And so Irving, you have a dividend yield of about 1%, soon to be lower than that given how your stock is trading in the pre market. That's about $100,000,000 of annual cash outflow. Can you maybe just help us understand how we should be thinking about both dividend growth going forward, given it seems like you have some capacity there, but then also maybe how you're thinking about potential share buybacks?

I know your intent is to delever with the Sandisk stake, but just help us understand on the cash return side to equity holders, how we could be thinking about the cadence of both dividend growth and buybacks? Thanks so much.

Yes, Eric. Thanks for the question and I appreciate it. Well, as we laid out in our Investor Day, our goal is to get our net leverage down to the 1.1.5x range. And once we are there, we intend to return 100% of our excess cash to our shareholders and that will be in the form of both dividend and share buybacks. As we also indicated at Investor Day, which we have honored and committed to today, we're starting off with a relatively small dividend to begin with.

And then as we progress, we'll look to increase that and complement that with buybacks as well. So stay tuned for that.

have a Yes. Just the quick follow-up was, Irving, what I hear from you is kind of more visibility because of some of these LTAs. And I'm just and I'm curious, with customers now giving you some indications into the first half of calendar twenty twenty six, does that mean you have enough visibility to expect revenue margins and EPS sequential growth through calendar twenty twenty five? Or is it too early to make that call? Thanks so much guys.

Yes, Eric. Thanks. Well, I think the shift to LTAs has given us a greater visibility. And as I highlighted in my opening comments, we now have two hyperscale customers that have given us LTAs up to the first half of calendar year twenty twenty six. And that's really helped us plan our supply chain appropriately along with the CapEx investments that we need to make and give us a lot more confidence in the business.

And so, as I've highlighted in the past, think especially when it comes to the hyperscale business, we see demand continuing to be strong and robust throughout the calendar year 2025 and now as I've mentioned into the middle of calendar year 2026 as well.

Thank you. The next question comes from Aaron Rakers with Wells Fargo. Please go ahead.

Yes. Thanks for taking the question. Also congrats on first quarter out of the gate. The comments around the guidance, you guys alluded to into the fiscal fourth quarter, you did point out that it reflected all known or anticipated tariff impacts. I'm curious if you could unpack that a little bit.

I believe the majority, if not all, of your manufacturing footprints in Thailand. Just curious of how you're thinking about how your best assessment of what these tariff impacts might be or any indications that you've seen

Hey, Aaron. Thanks for the question and good to hear from you again. Well, in Q4, we don't anticipate any direct tariff impacts in relation to its translation into pricing or cost to customers. But where as we've highlighted in our prepared statements, we do see some potential demand uncertainty in the enterprise distribution and retail segments of the business just due to the unpredictability and volatility. And you would have heard a lot of comments in the marketplace around enterprises and consumers sort of pausing or holding back on making purchases as well.

So factoring all that in, that's the guide that we gave. But again, the growth that we've guided to is really driven primarily by the strength that we continue to see in the data centers specifically in our hyperscale business.

And Aaron, I'll just add that in Irving's prepared remarks, we talked about establishing cross functional teams to minimize disruption and mitigation to both our customers as well as our internal operations. Additionally, we're taking a strategic view on looking at multiple alternatives depending on what the tariff situation looks like tomorrow or in mid May or June whenever the next round of tariff guidance comes out on our products. As you know, we're part of the semiconductor group and we currently have 0% tariff on our products.

Yes, I do. Thanks, Ambrish. So when I think about the gross margin, right, 40.1%, I think at the Analyst Day, you talked about 38% plus is kind of being the longer term model. When I look at the guidance into this next quarter, if my math is right, it looks like the incremental margin that you're alluding to is like north of 45%. So I guess my question is, is there anything structurally in the business or kind of the path forward that keeps us from thinking that gross margin could trend into that mid-forty, if not higher range over time?

Yes, I think, Erinn, on at Investor Day, we provided a guide or a model on gross margin that was a floor of 38% and that's over a five year period. As you know, there are market vagaries and ups and downs along the way. So 38% was the floor. We obviously were able to deliver very strong gross margins this quarter. We crossed the 40% threshold and that's really driven by the value that customers see in the technology that we are providing them as well as very strong operational discipline and also pricing discipline that we've experienced within the market.

So, as we continue to kind deliver total cost of ownership value to our customers, innovation capability whilst maintaining their operational discipline within the customers within our operations, sorry, we see gross margins continuing to remain strong.

Thank you. The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Yes. Thank you, gentlemen. My for my first question, I I know you have focused on technology transitions to drive exabyte demand from here. However, what are the hurdles for you to add manufacturing capacity? Is it driven by certain visibility you have on LTAs or other things we should consider?

Thanks for the question, Kyle. A lot of our exabyte growth has really been driven by area density improvement and technology improvement. As we've highlighted, our Ultra SMR technology, which is unique to us, gives us a 20% capacity uplift over the standard recording media. So our ability to deliver incremental exabytes without having to put in CapEx in terms of more production units has been one of the big differentiators that we've been able to create. And so that's an area that we continue to invest in, in our R and D function to continue to drive greater aero density performance.

We've recently just launched our 26 terabytes and 32 terabytes industry leading platforms, and we'll bring out in the next few months our 28 terabytes and 36 terabytes platforms as well. So, those increases through aero density will continue to enable us to deliver exabyte growth without having to invest in CapEx for additional unit growth.

I do, Ambrish, please. Thanks for that, Erwin. I wanted to follow-up on the comments you made with regard to LTAs. It sounds like demand for hyperscale is quite good and has strong visibility into the first half of twenty twenty six. However, I was hoping you could provide a bit more color on the growth curve of private cloud and SMB customers.

I'm curious whether you have seen perhaps any pull forward in counter Q2 ahead of tariffs? And secondarily, how you think about the demand dynamic for those customers in the second half? Thank you.

Yes. Thank you. We definitely do see opportunities, especially in sovereign clouds and private clouds going forward. Even in the age of AI, where the primary beneficiaries have been the large hyperscalers, we also see growth sort of at the edge happening. So that's an opportunity that we look to pursue going forward as well as a growth driver.

We haven't seen any pull forwards. The linearity that we saw within Q3 was very consistent with the linearity that we've seen in the past. And then also as we look at sequential quarter on quarter growth, very consistent with what we've seen in the past. So, no real change in terms of pull ins both last quarter and what we see happening this quarter as well.

Thank you. The next question comes from C. J. Muse with Cantor Fitzgerald. Please go ahead.

Yes, good morning. Thank you for taking the question. I guess to follow-up on the prior question, I was hoping you could speak a bit about supply and what kind of exabyte growth you can get just from delivering higher capacity drives? And I guess, what is the timeframe where you would potentially consider adding more capacity?

Thanks for the question, C. J. Look, we feel confident right now with the forecast that we have and outlook that we see in terms of exabyte growth. We are able to deliver that through, again, the technology and innovation we're delivering that provides us that capacity uplift without putting in any capacity. If there was any need to put in any capacity, it would probably be more on the hidden media side of the house, but we don't anticipate any capacity investments in those areas for the near term.

And C. J, I'll just add that in this uncertain environment, we're very tightly managing our capital expenditures and we continue to manage the business to the low end of our guidance range of 4% to 6%.

I do have a brief. Thank you. I guess could you speak to gross margins? Obviously, great results and guide. Curious in terms of the drivers from here, is there still kind of a fixed cost benefit that would arise?

Or is it really all capacity drives delivering higher ASPs? Is that the main driver or are there other factors that we should consider? Thanks so much.

Yes, CJ, you hit it right. It's really about the product technology that delivering to our customers. We continue to add TCO benefit to them and we're participating in that value that we're bringing to the customers. We're tightly matching supply and demand. So we're not going to see great impact from increased production over time, because we're very tight in our supply allocation.

So, it's really about delivering value to our customers through technology and continue to drive leading edge products at scale.

Thank you. The next question comes from Vamsi Mohan with Bank of America. Please go ahead.

Yes, thank you so much. Nice results here. Irving, if I heard right in, you noted the potential for some enterprise slowdown driven by tariffs. I was curious, have you seen anything in your order patterns to suggest that? Or is this sort of more, anticipatory in terms of, what could happen if a tariff regime became more onerous?

Yeah. Thanks for the question, Wamsi. It's more the latter. Right? We haven't seen any, slowdown just yet, but obviously, there is demand uncertainty, because of the tariffs.

And obviously, we've heard a lot of news coming out of enterprises and earnings over the last few days around customers being a bit more cautious in terms of spending and capital investments as well. So given that, we've just factored that into the guide. But nothing untowards for the time being. That's why we've just widened the range in terms of our guide for Q4.

Yes. Thanks, Ambrish. Maybe for Don, as you look into the September where you're calling out the fourteen weeks, any parameters you can help us think through in terms of revenue and OpEx into that quarter, please? Thank you.

Yes. So we guide one quarter at a time. But the reason I mentioned a fourteen week is because obviously we'll have fourteen weeks of expenses. Typically our customers order on a quarterly basis. So the revenue will be it'll follow typical seasonal patterns, But at this point, we're not guiding revenue for that quarter.

Thank you. The next question comes from Assia Mershun with Citigroup. Please go ahead.

Great. Thank you for the question and great quarter by the way. Just there seems to be some concern like just around hyperscalers. I know your competitor talked about demand being very strong there as well and good visibility. Just anything on why you don't think this could be double ordering?

Anything as it relates to pricing negotiations that would limit or limit the impact if indeed there was any double ordering? Thank you.

Yes. Thanks for the question, Aisha. We definitely don't see any double ordering at this time. I think one of the key things is we are in a very tight supply demand environment. So, even if there were double orders, I think we would be challenged to fulfill them, right now.

And I think more importantly, the demand profile that we're seeing given the LTA visibility that we have all the way to middle of twenty twenty six, is we are seeing order patterns very much follow the LTA demand. So there's nothing really abnormal. It, as Don mentioned, it follows very much both seasonality quarter to quarter and linearity within quarter as well. So, we don't see any double ordering. If anything on pricing, obviously, as we transition to new platforms, that always gives us an ability to deliver better TCO value to our customers and an opportunity for us to deliver greater pricing upside as well.

Yes. Sure. Thank you very much. On gross margins, it was better than expected in the current quarter that you reported. Why can't gross margins do similar incremental step up?

You are seeing better revenues in the June. And then as you think about the remainder of the calendar or the fiscal twenty six, should we continue to expect margin expansion from these levels? Thank you.

Yes. Thanks for the question. I think the strong gross margins that we have delivered and also guided to is a reflection of the value that we bring to our customers, particularly through the technology enhancements that really gives them both better TCO, but also very fast time to value. And that's what we continue to focus on. And if we are able to continue to deliver that innovation, continue to deliver that total cost of ownership benefit and giving them fast time to value, we don't see any reason why gross margin could not expand going forward as well.

So that's our focus. We don't worry too much about the gross margin, but continue to focus on delivering value to our customers and I think the gross margin will flow from that. Thank you, Asiya.

The next question comes from Amit Daryanani with Evercore. Please go ahead.

Thanks a lot. I guess maybe just to stop it on the tariff dynamic. I realize you don't have much of an impact on tariff right now. But as you're signing these LTAs into calendar '20 '6, can you talk about if you sort of have tariff escalators embedded in them to ensure you can pass through the cost of these to your customers? Would that be a different set of discussions to be had once you know what the tariff scenario looks like?

Thanks for the question. We are obviously working very closely with our customers. As we all know, I think the situation is evolving on a daily basis and extremely fluid. So it's hard for us to really speculate what the outcome would be. Right now, as I mentioned in my prepared remarks and Don emphasized as well, we have teams that are working across the company closely with our customers to really understand how we can mitigate the impacts of tariffs and also any supply disruptions in the near term.

And then in the long term, we're also evaluating with them what their supply chain shifts may be, so that we can also align to that. So we are also prepared both from an agility, resiliency and long term readiness perspective to be able to work for our customers as they shift their supply chains to be able to best support them as well.

I do. Thanks, Ambrish. And then maybe just on the HAMR side, I think you folks mentioned you're working with two cloud customers at this point on HAMR. Just any sense on when you expect these qualifications to happen? And as you work towards them, should we think of some sort of upside bias to your R and D or OpEx investments through that process?

Yes. Thanks for the question. I think we've laid it out very clearly at Investor Day. We are looking to start qualification in the second half of calendar year twenty twenty six and then ramping up production at scale in the first half of calendar year twenty twenty seven. We have engineering samples with two large hyperscalers already today.

We're in close contact with them on the performance of those drives. We're getting regular feedback from them. I would say so far the performance has been meeting the milestones that we both laid out. And on a quarterly basis based on the feedback that we receive from them, we are delivering the next generation of enhancements on those drives. So I would say we are comfortable with where we are.

We are on track with that roadmap that we laid out. At the same time, we're also preparing to introduce our new 28 terabyte and 36 terabyte ePMR platforms as well. So our whole focus is on ensuring that we really derisk transitions for our customers, continue to deliver very scalable, predictable, reliable capacity points that gives them the fastest time to value.

The next question comes from Tom O'Malley with Barclays. Please go ahead.

Western Digital (WDC) Q3 2025 Earnings Call Transcript

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