Western Digital Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2023

There are 14 speakers on the call.

Operator

Afternoon and thank you for standing by. Welcome to the Western Digital's Fiscal 4th Quarter and Fiscal 2023 Conference Call. Presently, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this call is being recorded.

Operator

Now I would like to turn the call over to Mr. Peter Andrew, Vice President, Financial Planning and Analyst and Investor Relations. You may begin.

Speaker 1

Thank you, and good afternoon, everyone. Joining me today are David Geckler, Chief Executive Officer and Wissam Jabre, Chief Financial Officer. Before we begin, let me remind everyone that today's Discussion contains forward looking statements, including expectations for our product portfolio, spending and cost reductions, business plans and performance, market trends and financial results based on management's current assumptions and expectations, and as such, does include risks and uncertainties. We assume no obligation to update these statements. Please refer to our most recent financial report on Form 10 ks and or other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially.

Speaker 1

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. With that, I'll now turn the call over to David for introductory remarks.

Speaker 2

Thank you, Peter. Good afternoon and thank you for joining the call to discuss our 4th quarter fiscal year 2023 results. Western Digital's fiscal 4th quarter revenue exceeded expectations As our access to broad go to market channels, enviable retail franchise and strong client SSD portfolio enabled us to capture demand upsides in both client and consumer end markets, reaffirming our strength in a challenging market environment. We reported 4th quarter revenue of $2,700,000,000 and non GAAP gross margin of 3.9%. Non GAAP loss per share was $1.98 Before diving into the specifics of the quarter and the full fiscal year, I would like to take a moment to reflect on our accomplishments in fiscal year 2023.

Speaker 2

Importantly, we continue to optimize our operations and successfully Throughout the fiscal year, we were focused on enhancing our product leadership and reinforcing our business agility. In HDD, We have successfully qualified our latest family of capacity enterprise hard drives at all major customers and are shipping our 26 terabyte In flash, we pioneered the use of wafer bonding in advanced 3 d NAND manufacturing and introduced the groundbreaking technology in BiCS8, which sets the foundation for future 3 d NAND scaling. On the expense front, we streamlined investments across our HDD and Flash portfolio, which enabled us to significantly reduce Quarterly operating expense, while continuing to deliver innovative products and technologies that address customers' growing storage needs. Further, we reduced our cash capital expenditure run rate by over 50% in the fiscal second half and consolidated our hard drive manufacturing footprint. These efforts enabled Western Digital to preserve capital while effectively executing on product strategies and aligning our supply with post pandemic demand environment.

Speaker 2

Notably, we reduced our inventory by nearly $300,000,000 sequentially and exited fiscal year 2023 at a much healthier level than a few quarters ago. And in June, we successfully completed amendments to our credit agreements, which provide Western Digital with significant additional financial flexibility as we navigate macro dynamics. In summary, we continue to proactively take action to bolster our agility, enhance our liquidity position, optimized our inventory levels across HDD and Flash and strengthened our position as an industry and market leader. We exited fiscal year 2023 well positioned to capitalize on improving market conditions and capture long term growth opportunities in data storage, spanning from client to edge to cloud. Finally, I want to acknowledge that the strategic review is ongoing.

Speaker 2

We continue to make progress on this process and will provide updates as appropriate. Turning to the fiscal 4th quarter, Revenue in both client and consumer end markets returned to sequential growth, led by normalized end market demand and higher average capacity per unit in flash. In consumer, retail flash exceeded our expectations across all major product categories. We saw similar results in client with upside in both HDD and flash and across almost all major product categories including client SSD, gaming console, embedded flash and client hard drives. In cloud, demand for both hard drive and flash products remain subdued.

Speaker 2

I'll now turn to business updates starting with HDD. In the fiscal Q4, ongoing cloud weakness drove the overall decline in HDD revenue. However, demand for both client and consumer hard drives has stabilized and exceeded our expectations. At the end of the fiscal Q4, We have successfully qualified all variants of our 22 terabyte CMR and 26 terabyte ultra SMR hard drive platforms at all major cloud Setting the stage to improve shipments and profitability. In addition, we are about to begin product sampling of our 28 terabyte Ultra SMR Drive.

Speaker 2

This cutting edge product is built upon the success of our EPMR and Ultra SMR technologies with features and reliability trusted by our customers worldwide. We are staging this product for quick qualification and ramp as demand improves. Turning to flash, revenue increased sequentially led by growth in both client and consumer flash bit shipments, which exceeded our expectations with total bit shipments returning to year over year growth. The stronger than expected bit growth is attributable to normalizing PC and consumer demand as well as content growth. Average capacity per consumer and client SSD increased over 40% 20% year over year respectively.

Speaker 2

Moving to technology developments, we continue to aggressively productize BiCS8 based on a chip bonded to array architecture. BiCS8 solidifies Western Digital and Keyoksha's leadership in cost, capital efficiency and IO performance into the future. Before I turn it over to Wissam, I wanted to share some perspective on our outlook. In HDD, as we look to the fiscal first Quarter, we expect overall demand to remain stable. Beyond the fiscal Q1, we anticipate both improving demand and new product ramps to drive growth in revenue and profitability.

Speaker 2

In Flash, we are encouraged by several indicators Signaling improving market dynamics. Notably, our 2 largest end markets, client and consumer, are returning to growth, Inventories are normalizing, content per unit is increasing and price declines have been moderating. With that, I'll turn it over to Hessam.

Speaker 3

Thanks, David, and good afternoon, everyone. As David mentioned, fiscal 4th quarter revenue exceeded our expectations. Total revenue for the quarter was 2,700,000,000 down 5% sequentially and 41% year over year. Non GAAP loss per share was $1.98 Looking at end markets for the fiscal 4th quarter, cloud represented 37% of total revenue at 1,000,000,000 down 18% sequentially and 53% year over year. Sequentially, The decline was primarily due to a decrease in capacity enterprise drive shipments.

Speaker 3

Nearline bit shipments were 59 exabytes, down 26% sequentially, driven by ongoing weakness at cloud customers. The year over year decrease was primarily due to declines in both hard drive and flash product shipments. Clients represented 39% of total revenue at $1,000,000,000 up 6% sequentially and down 37% year over year. Sequentially, The increase was driven by growth in bit shipments for gaming consoles. The year over year decrease was due to declines in flash pricing and lower client SSD and hard drive unit shipments for PC applications.

Speaker 3

Consumer represented 24 percent of total revenue at $600,000,000 up 3% sequentially and down 19% year over year. Sequentially, the increase was primarily due to higher retail SSD shipments. The year over year decrease was driven by price declines in flash and lower retail hard drive shipments. For the fiscal year, Revenue was $12,300,000,000 down 34% from fiscal 2022. Non GAAP gross margin declined 17.2 percentage points to 15.7 percent and non GAAP operating margin decreased 21.8 percentage points to negative 4.8 percent.

Speaker 3

Non GAAP loss per share was $3.59 Looking at end markets for fiscal year 2023, cloud revenue decreased 34% year over year, primarily due to reduced shipments of capacity enterprise hard drives and enterprise SSDs. Client revenue decreased 39% year over year, primarily due to declines in flash pricing as well as lower client SSD and hard drive unit shipments for PC applications. Lastly, consumer revenue decreased 26% for the year as growth in retail SSD bit shipments was more than offset by broad based flash price decline and lower consumer hard drive shipments. Turning now to revenue by segment. In the fiscal Q4, HDD revenue was $1,300,000,000 down 13% sequentially and 39% year over year.

Speaker 3

Sequentially, total HDD exabyte shipments decreased 18% and average price per unit decreased 9% to $99 On a year over year basis, HDD exabyte shipments decreased 38% and average price per unit decreased 17%. Flash revenue was 1,400,000,000 up 5% sequentially and down 43% year over year. Sequentially, Flash ASPs decreased 6% on a blended basis and 9% on a like for like basis. Flash bit shipments increased 15% sequentially and 7% year over year. Moving to costs and expenses, please note that my comments will be related to non GAAP results unless stated otherwise.

Speaker 3

Gross margin for the fiscal 4th quarter was 3.9%, down 6.7 percentage points sequentially and 28.4 percentage points year over year. This includes $272,000,000 in costs or 10.2 percentage points for manufacturing underutilization, flash inventory write downs and other items. HDD gross margin was 20.7 percent, down 3.6 percentage points sequentially and 7.5 percentage points year over year. Sequentially, the decrease was primarily due to lower capacity enterprise volume as well as higher underutilization related charges. Underutilization charges were 76,000,000 or 5.9 percentage points.

Speaker 3

Flash gross margin was negative 11.9%, down 6.9 percentage points sequentially and 47.8 percentage points year over year. Underutilization charges due to the reduced Manufacturing volumes were $135,000,000 and inventory write downs were 27,000,000 resulting in an 11.8 percentage point reduction. We continue to tightly manage our operating expenses of $582,000,000 for the quarter, down $20,000,000 sequentially and $178,000,000 year over year. Operating loss in the quarter was $478,000,000 driven mainly by underutilization charges, Inventory write downs and other items totaling $272,000,000 Income tax expense was $57,000,000 for fiscal Q4 and $237,000,000 for fiscal year 2023. Despite a consolidated loss, We continue to have taxable income in certain geographies, resulting in taxes payable in those areas.

Speaker 3

Fiscal 4th quarter loss per share was $1.98 inclusive of $15,000,000 dividend associated with the convertible preferred equity. Operating cash flow for the 4th quarter was an outflow of $68,000,000 and free cash flow was an outflow of $219,000,000 Cash capital expenditures, which include the Purchase of property, plant and equipment and activity related to our flash joint ventures on the cash flow statement were 151,000,000 Gross debt outstanding was $7,100,000,000 at the end of fiscal 4th quarter. Trading 12 month adjusted EBITDA at the end of the 4th quarter as defined in our credit agreement was $1,600,000,000 resulting in a gross leverage ratio of 4.5 times compared to 2.8 times in the fiscal 3rd quarter. As a reminder, the credit agreement includes $700,000,000 in depreciation add back associated with the flash joint ventures. This is not reflected in the cash flow statement.

Speaker 3

Please refer to the earnings presentation on the Investor Relations website for further details. During the fiscal Q4, we executed amendment to our credit agreements. These amendments include modifications to the leverage ratio requirements applicable through the Q4 of fiscal year 2025, which provide additional financial flexibility in the near term. We also extended the commitment under the delayed draw term loan agreement to August 14, 2023. Please refer to our earnings presentation for details.

Speaker 3

At the end of the quarter, total liquidity was $4,900,000,000 including cash and cash equivalents of 2,000,000,000 Undrawn revolver capacity of $2,250,000,000 and an unused delayed draw term loan facility of 600,000,000 Before I cover guidance for the fiscal Q1, I'll discuss our business outlook. For fiscal Q1, sequentially, we expect both HDD and Flash revenue to be relatively stable. In fiscal Q1, we are continuing to adjust production to better match demand and anticipate underutilization charges to impact both HDD and Flash gross margins along with product mix pressures on Flash ASP. Beyond the fiscal Q1, we anticipate both HDD and Flash revenue to improve through the remainder of fiscal year 2024, driven by normalizing demand in storage as well as higher average content per unit in flash. Gross margin is expected to gradually improve, driven by higher HDD volume and lower underutilization charges in both flash and HDD.

Speaker 3

We will continue to tightly manage our cost structure and expenses as we navigate the challenging environment. For fiscal year 2024, we expect capital expenditures to decline significantly. I'll now turn to guidance. For the fiscal Q1, our non GAAP guidance is as follows. We expect revenue to be in the range of $2,550,000,000 to 2,750,000,000 We expect gross margin to be between 2.5% and 4.5%, which includes underutilization charges across flash NHDD totaling $200,000,000 to $220,000,000 We expect operating expenses to be between 570 to $590,000,000 Interest and other expenses are expected to be approximately 90,000,000 We expect income tax expense to be between $30,000,000 $40,000,000 for the fiscal Q1 and $130,000,000 to $170,000,000 for fiscal year 2024.

Speaker 3

We expect a loss per share of $1.80 to $2.10 assuming approximately 323,000,000 shares outstanding. I'll now turn the call back over to David.

Speaker 2

Thanks, Wissam. Let me just wrap up. Fiscal year 2023 marked a period of exceptional progress and strategic planning for Western Digital. We diligently optimized our operations and executed our innovative product roadmap, priming ourselves for greater Before opening up for Q and A, I would like to take a moment to recognize Siva Sivaram, our esteemed President of Technology and Strategy. CEVA will be leaving Western Digital to pursue a great leadership opportunity in a different technology domain.

Speaker 2

CEVA has made significant contributions to Western Digital and SanDisk over the past 10 years and he is a wonderful friend. We wish him all the best going forward. Peter, let's start the Q and A.

Operator

Thank Our first question is going to come from the line of Joseph Moore with Morgan Stanley. Your line is open. Please go ahead.

Speaker 4

Great. Thank you. I wonder if you could talk to NAND in the current quarter. Looks like the underutilization charges are similar. Does that mean your utilization is unchanged?

Speaker 4

And I guess it seems like you're able to make some inventory progress. Does that mean that you can at some point Yes. I have line of sight to bring that back up.

Speaker 2

Yes. Hey, Joe. Thanks for the question. NAND, in the current quarter, as we said, We saw good, I guess, good market reaction in consumer and in the client business, both returned to growth on an So by basis, they both were sequential growers. So we saw incremental upside there.

Speaker 2

So we were happy about that. We are Underutilizing the fab, I'll let Wissam talk about that in a little bit more detail. We do plan to underutilize for another couple of quarters, but We feel good about the overall the signs in the overall market, price declines are moderating, our inventory is down, Bit shipments are up. We expect bit shipments to be up again double digits next quarter. So Not quite where we want to be yet, but the market is stabilizing and we see a lot of good things, A lot of metrics going in the right direction.

Speaker 3

Yes, Joe. And with respect to underutilization, We saw similar type of underutilization charges in fiscal Q4 versus Q3 For the flash side and when you look at HDD, we had a bit of more unutilization. But sticking with the Flash. Also in our guidance, we've noted similar levels into fiscal Q1, Albeit if you look at sort of the range of $200,000,000 to $220,000,000 I would say it is split 70% flash, 30% HDD. And also we're if I think of, let's say, the fiscal Q2, I anticipate more or less similar levels of underutilization from where we stand today.

Speaker 4

Great. Thank you. And if I could just follow-up, in terms of the uses of cash in the next few quarters, I know you've got the convert That comes due early next year. I think there's still some issues about a potential tax payment. Can you just update us there and sort of Do you

Speaker 3

need to raise money to pay those out? So with respect to uses of cash, as you noted, we do have the convert That matures in February 24, and we plan to address that this quarter or the next one. We also have the IRS settlement that is coming up and we expect also this payment to be Very likely this quarter. But with respect to liquidity exiting fiscal Q4, We had approximately $4,900,000,000 of liquidity. And so if you recall, the delayed drought term loan was put in place in the event we need to address the IRS settlement.

Speaker 3

So that will be drawn down to take care of the IRS settlement when it happens. And with respect to the convert I mentioned, we'll address it in the coming two quarters. Okay.

Speaker 4

Thank you very much.

Speaker 2

Thanks, Joe.

Speaker 5

You're welcome.

Operator

Thank you. And one moment please for our next question. Our next question is going to come from the line of C. J. Muse with Evercore ISI.

Operator

Your line is open. Please go ahead.

Speaker 6

From a supply perspective, we haven't seen the shutdown of utilization in the rest of the way we're seeing. So

Speaker 2

Okay. Hey, that was CJ. CJ, that was very it was Little tough to hear you there, but I think we got the gist of the question, which was supply demand normalization. Is that right in flash?

Speaker 6

Yes. Sorry about that, yes.

Speaker 2

No, that's all right. Okay. So Look, I think as I said, a number of things we saw in the market this quarter, we saw sequential bit growth overall, we saw Client and consumer returning to exabyte growth on a year over year basis, consumer SSD Content up 40%, client SSD up 20%. We saw our inventory down. We think in the client in the Consumer and client markets, PC markets basically shipping to demand at this point.

Speaker 2

We expect our for the fiscal year, we saw our bids about flat year over year. For the calendar year, we see them down Low single digits, we'd probably see the industry down a little lower than that. So, we're taking the actions to bring Supply and demand better into balance and I think we're seeing that across our markets. Cloud is still There's still a couple of quarters to go there and that's a larger story. But in our 2 biggest markets for flash, We're seeing that supply demand balance start to move closer together, put it that way.

Speaker 6

Thank you. And my second question, from a strategic review, you announced earnings Actually, we'll be thinking about training and hearing about NFP there.

Speaker 2

Okay. I think that was a strategic review and timing, CJ. So like the process is active. We look forward to talking more about it when we reach a conclusion.

Speaker 6

Thank you.

Speaker 2

Thank you.

Operator

Thank you. And one moment for our next question, please. Our next question is going to come from the line of Aaron Rakers with Wells Fargo. Your line is open. Please go ahead.

Speaker 7

Thank you, guys. This is Michael on behalf of Aaron.

Speaker 2

I wanted to ask how are

Speaker 4

you guys thinking with the recent uptick in AI investment in the data center?

Speaker 7

How do you think that impacts The mix of flash relative to HDD capacity being deployed or maybe how that would impact you going forward? And then Kind of related to that, how or guys can you guys just give us an update on where you stand with your enterprise SSD qualifications? Thank you.

Speaker 2

Yes. I've been thinking a lot about generative AI. It's clearly a big topic these days and Obviously, a lot of spend going on to build out the infrastructure in the cloud, which I think quite frankly is a great thing. The cloud distribution model of new technology is something that is pretty amazing that's been built out over the last decade. So we all get access to this technology very rapidly.

Speaker 2

And when I think about this in the storage domain, clearly the compute infrastructure is being built out Now, but what we're all going to be enabled with are like incredible tools to automate data creation at many different levels, whether it's Text data, video data, whatever it happens to be, I think that we're essentially going to really accelerate our ability, all of us, to create information that needs to be stored. So I see this as kind of a catalyst for just a profound increase in the amount of data creation. I think that once those tools get distributed and we all start using them, I think that drives Incremental growth across SSDs and hard drives. I mean, hard drives are the foundational storage in the cloud. Compute infrastructure gets built out, very optimistic that this is a, as I said, I think it's a profound It's a catalyst for profound increase in the rate of data creation.

Speaker 2

So quite excited about that. We don't know exactly How you model that just yet, except that there's new innovation drives New data creation, which drives the need for storage. So we look forward as these as this infrastructure gets built out and rapidly adopted, the impact it's going to have on our business. Now on enterprise SSD, we still have the qualifications. We've recently qualified 5 in some of these places, that market along with nearline HDD or capacity enterprise HDD is depressed right now or subdued.

Speaker 2

So we're not seeing a lot of growth in that, but we fully expect that when that market comes back and that part of cloud Our spending comes back that we'll be in a good position. We're still investing in the products and feel good about The position we have with the major cloud vendors.

Speaker 7

I appreciate that. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And one moment for our next question. Our next question is going to come from the line of Tom O'Malley with Barclays. Your line is open. Please go ahead.

Speaker 8

Hey, good afternoon guys and thanks for taking my question. I just I wanted to narrow in on the HDD side. There's been a variance of timing of recovery across the industry. Could you just give us your latest on when you think the cloud portion of your HDD business is going to recover? I know you previously have said The Q4, has there been any push out in that expectation?

Speaker 8

And could you also just comment on the health? I know it's down this quarter, but just the health of that HDD business as you're seeing it today. So just the timing of the recovery and how it's trending today.

Speaker 2

Yes. I think as we move to so first of all, We think we're going to see sequential exabyte growth in capacity enterprise HDD throughout the fiscal year, but it's going to be towards the end of the year into the Q1 where We start to get line of sight to all of the customers coming back. I think we're having discussions across all of our customers about what they're we always have conversations, but some of the big ones have been in inventory digestion for quite a while. So we're getting better line to the end of that, but I think we still have a couple of quarters to go, but improving. I think next quarter things will be stable.

Speaker 2

There will be a bit of mix impact there. We expect client to be a little bit more challenged than this quarter. But I think as we move throughout the year, things will get better. And I think your timing of a couple more quarters So getting through this phase and as we get into early next year, we expect things to look better.

Speaker 8

Helpful. And then also in the HCD visit, Your competitor kind of talked about being more aggressive in certain areas on pricing. Have you guys also Look to be more aggressive on pricing and any comments that you have on just your strategy with clients on the pricing side? Thank you.

Speaker 2

Yes, pricing really starts with innovation. I mean, I think that's where we're staging our 28T Ultra SMR product. We're really, really happy With where Ultra SMR is at, EPMR, Opti NAND and we're already staging our next product for growth there. That's the underpinnings of where We're able to bring a better TCO proposition to our customers. And as we do that, we're able to share in the benefits of that as those drives gets deployed.

Speaker 2

The rest of the market is more market driven pricing. We have a lot of different channels, a lot of different markets we sell into. And that type of pricing is just is more what you would typically think in any big market around supply and demand. Thank you. Thanks, Tom.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of Krish Vankar with Cowen. Your line is open. Please go ahead.

Speaker 5

Yes. Hi. Thanks for taking my question. I told them personally, David, in class, I

Speaker 3

In June,

Speaker 5

it was out for some sequential and then for your peers. You just spoke that pricing should improve after or revenue should improve after December. Is that a function of overall NAND getting better or your specific exposure to retail and PCs developing you? And then I have a follow-up.

Speaker 2

I missed the first part of the question. It was horrible. Yes, sorry.

Speaker 3

Sorry, Chris, could you please repeat?

Speaker 2

Yes, you didn't have a great There was a little bit of static on the line.

Speaker 5

I apologize. I was just trying to figure out that pricing was not added in June. We spoke about revenues improving after this. Is it a function of NAND pricing improving or just because your

Speaker 9

I'll get it. I agree

Speaker 5

to him, C. C. Is going to get better.

Speaker 2

Okay. I think I got it that time. So NAND pricing, So first of all, in the last quarter, NAND price you saw Like for like pricing down 9, blended down 6, so moderating from the quarter before. Next quarter, we expect Volume to pick up, which will drive volume pickup, margin to be impacted a little bit more from where it is today. So continue to moderate, but volume picking up.

Speaker 2

Does that help answer your question? I don't know if I didn't get all of your question, Chris. So I'm sorry if I'm not answering it.

Speaker 5

No, no, I think it does. I was just trying to think about the Euro specific end vertical, which is PCs and Retail.

Speaker 2

Yes, well, wait. I got you. So as we said, we saw the client and consumer markets return to growth, Exabyte growth and sequential revenue growth. So we see those markets have kind of through their inventory And more shipping to end demand. So, that we expect that to continue as we go forward.

Speaker 5

Got it. Thanks, David. And then a quick follow-up on hard drive. You said that you're sampling the 28 terabyte EPMR. Is the 32 terabyte EPMR still on a road map?

Speaker 5

And are you like doing that by increasing the number of disks per drive? And how do you think about the gross margin

Speaker 2

Okay. So let me again, I think I got most of the questions. So we're not adding more discs. I mean, Ultra SMR is It's a combination of our EPMR, OptiNAND and Ultra SMR technology. It's the next step on the roadmap.

Speaker 2

I think we've talked a lot over the last year plus about this driving from 20 to 30 plus with A set of technologies around EPMR, OptiNAND, Ultra SMR and this is the next step in In that roadmap, we still have a couple more steps to go. So we'll announce the products one at a time, but we're happy with where we are and continue to drive innovation. And as demand comes back, we'll be ramping into a great set of products. And these are products that can be staged quickly and ramp In volumes very quickly, very established technology. In the 26T drive, Ultra SMR Drive, we really that sold at scale this quarter and we expect a significant growth in that in the next quarter as well.

Speaker 5

Awesome. Very helpful. Thank you.

Speaker 2

Thank you.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is open. Please go ahead.

Speaker 7

Yes. Thank you so much. So we've had a few head fakes on recovery on the cloud side, particularly in HDDs. And Wondering as you think through sort of this improvement starting in fiscal 2Q, What's underpinning some of the confidence you noted demand recovery? Are you seeing particular signs from customers that are pointing to that?

Speaker 7

And your primary competitor also noted taking some changes including a build to order philosophy. Curious if you guys are Contemplating any such changes?

Speaker 5

And I have a follow-up.

Speaker 2

Hey, Wamsi. So first of all, yes, I mean, you hit it. I mean, We have ongoing and very significant conversations with our customers on a many quarters out. So that's what gives us That's what underpins the view we have. To your point, things can change, but that's a current view and the conversations are Our projections are productive and positive.

Speaker 2

On the build to order comment, look, I think the industry is going to come out of the well, let me speak about us. So Western Digital will come out of this downturn. It's pretty severe downturn in a cyclical industry. But We've done a lot of things that I think the business is going to be different on the other side of this. First of all, we've taken significant amount of Capacity out of the system, we've talked about the shift from client to capacity enterprise at least as long as I've been here and Been going on for many, many years before that.

Speaker 2

I think that transition is going to be essentially done. There's a long tail on any technology. But if you look On the unit basis, we'll come out of this with significantly less spending on our infrastructure. We'll have the lowest fixed Costs we've had in a decade plus in our HDD infrastructure, and we'll really be focused exclusively on that Client enterprise business going forward. That's not a we'll still have a client business, don't get me wrong.

Speaker 2

It's still going to be there. Like I said, there's a long tail of technology. But I think as part of that, the industry will come out we will come out of this as more of a Build the order, if you will, as opposed to a build to forecast. So that's why we're having these conversations with our customers because It is a long build time on an HDD and we want to make sure that we've got the infrastructure in place, We've got the components in place and we're running the right process to deliver what our customers need at the right time. So I think that maybe the short answer to your question is yes, Western Digital will be is going to more of that kind of process.

Speaker 7

Okay. Thanks, Dave. And just a clarification on the underutilization charges, which look roughly flattish quarter on quarter. Are those charges roughly similar in flash and HDDS this past quarter? Or are there different moving pieces underlying that for September?

Speaker 7

Thank you.

Speaker 3

Sure, Wamsi. So when you look at the September quarter, the guide at $200,000,000 to 220,000,000 of underutilization charges and they're split roughly 70%, flash 30% HDD. And I would just to clarify also to add with respect probably to the following quarter, I expect Sorry, underutilization related charges to be, let's say, 5% to 10% down and most of the, if not all of the The decrease would be coming from HDD.

Speaker 7

Thank you, Wamsi.

Speaker 3

You're welcome.

Speaker 2

Thanks, Wamsi.

Operator

One moment for our next question, please. Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open. Please go ahead.

Speaker 10

Thank you. I want to ask about the Cloud weakness again. I understand the cloud things are could be lumpy, but curious about your conversations with the large hyperscale guys. How have that changed around the quarter ago? Are they giving you signals about when inventory will start stabilizing?

Speaker 10

Are they worried about supply in the second half, given production cuts by all the suppliers? And are they more receptive to purchase commitments?

Speaker 2

Yes. What I would say is the it's always a very robust conversation given the amount of business we do With the hyperscalers, it's clear that some of them have been in a very severe Inventory digestion phase, and kind of took a pause on buying anything, but we're back to having conversations with those I mean, they're still growing and storage is still being created and growing. So we expect those Conversations in those businesses to the buying will reemerge and we're having the conversations on When that will happen and in what magnitude just to make sure that we've got all of our capacity aligned to deliver that. I think We're getting very good reception on the product roadmap as we talked about our 2022 terabyte, 20 4 terabyte, 20 6 terabyte Platform and products have now been qualified by all of the major cloud vendors. We're just we expect to ramp Those significantly, especially the 26T next quarter, that's really You know, becoming a major capacity point for some of the biggest cloud builders.

Speaker 2

And right on the back of that, we're launching a 20 8 So the conversations are strong and it's about making sure we have clear alignment on what their requirements are going to be and that we get the Proper manufacturing in place to deliver on that.

Speaker 10

Okay, thanks. Maybe a Quick follow-up on the hot drive side. Clearly, you guys are doing better than the competitor last quarter. But just want to hone in on the SML drives, which you Can you give us an idea what SMR adoption is today and where you think it will be in the few quarters from now? Thanks.

Speaker 2

SMR, it's very idiosyncratic, right? I mean, the intersection of Adoption and inventory digestion makes it very lumpy and if you look at the current quarter or last Quarter, but I can say going forward that several of the major cloud providers are standardizing on an SMR Deployment, Ultra SMR for us and we expect to have a significant ramp of that technology over the next several quarters.

Speaker 10

Okay. Thank you.

Speaker 2

Thank you, Sydney.

Operator

Thank you. And one moment for our next question, please. And our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open. Please go ahead.

Speaker 11

Hi, guys. Good afternoon. Thank you so much for taking the question. I had one clarification and then a question. David, on NAND ASPs for the current quarter, I guess you talked about bids being up double digits sequentially and you're kind of guiding revenue to flat sequentially.

Speaker 11

So I guess the implied ASPs are down perhaps a little bit more than what they were down in the June quarter, but you talked about moderation. So is The sharper price decline in September that's implied in guidance or embedded in guidance primarily a function of mix or am I missing something there?

Speaker 2

Yes. It's maybe a little bit sequentially maybe a little bit lower than what you're modeling. So I think that's where it is, Toshiya. We can follow-up with you on kind of little more details, but I think that's probably the clarification.

Speaker 11

Okay, got it. Thank you. And then as my follow-up, Maybe one for Wissam. You mentioned that for fiscal 2024, you plan to cut CapEx significantly. Curious if it's purely impacting your capacity decisions in NAND or are there any changes or shifts So how you think about the roadmap?

Speaker 11

And related to that, I think on a bit shipments, David, you mentioned for calendar 2024, You guys are going to be, I think, down low single digits, but how should we think about bit production in calendar 2024 given the CapEx and production cuts that you're going through right Thank you.

Speaker 3

Well, maybe let me start with the first part of the question on CapEx, Toshiya. The comment on CapEx is well, when you look at calendar sorry, fiscal 2023, we've taken quite a bit of CapEx out from our plans as we continue to preserve cash. I mean, you can see that we've spent, I think year on year, we're down roughly 30% to 35%. It's almost $1,000,000,000 lower than the gross CapEx level, almost $1,000,000,000 lower than What our plan was at the beginning of the year for fiscal 2023. For fiscal 2024, we're projecting to be significantly lower.

Speaker 3

It's mostly in line it doesn't impact necessarily our product roadmap. It is more or less what we See today relative to what our NAND or basically other types of investments, meaning nodal transitions or other types of investments planned. And so I wouldn't say there's any major change relative to what we've already been planning. But given the dynamic macro environment we're operating in, we will continue to monitor

Operator

Thank you. And we'll move on

Speaker 2

to our next question.

Operator

Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is open. Please go ahead.

Speaker 12

Thank you for taking my question. I'm wondering, you have any unique perspective having both HDDs and SSDs. There's commentary coming out of Pure and I'm hearing more from some of the other storage vendors of growing use of storage within cloud within data or sorry, growing use of SSDs within cloud and data centers and almost like a potential secular shift. Again, Pure takes it kind of to the extreme. But I'm just wondering how you think about How the mix will trend over time, maybe layer in AI if you want.

Speaker 12

And just think about What are you hearing from your customers? And then I have a follow-up. Thank you.

Speaker 2

Hey, Shannon. Thanks for the question. We've talked about this a lot over the years. I think that Both technologies are growing in the data center. HDD is the predominant storage mechanism in the data center.

Speaker 2

We don't expect that to change. Our customers don't expect that to change as long as we continue to drive the HDD roadmap forward. We just We're ramping 26 terabyte. We're already launching 28 terabytes. So we're moving forward with capacity points on HDD.

Speaker 2

And we expect robust growth of HDD storage in the data center going forward. We also expect growth of enterprise SSD storage in the data center going forward. It's probably growing a little bit faster They're highly complementary technologies and we expect that to be the case for Any useful planning horizon in the future, we look a decade out. The cost differences are still significant And that's certainly the way we talk to our customers about how they're building mass scale data centers.

Speaker 12

Okay. Great. And And then Wissam, can you talk a little bit about OpEx? How you're thinking about it relative to maybe a normalized level? And how much leverage will you get for the model as revenues come back before you have to start spending more from an OpEx perspective.

Speaker 12

Thank you.

Speaker 3

Yes, sure. So on OpEx, you saw we continue to manage it very, very tightly in Fiscal Q4, we ended at $582,000,000 which is around $180,000,000 lower than the same quarter last year. As to your question, over the near term, I think we're within sort of the range where We expect to be, but as the business starts coming back, there could be some Small increase as we start layering up some of the variable expenses on that. However, we should never we shouldn't expect the increase in OpEx to be faster than the And so we wouldn't be monitoring that and it will be gradual. And similarly, if there's a need for us to take additional On OpEx to continue to manage very tightly, we also have some room to do that.

Speaker 3

Michelle, can we have the next question please?

Operator

We sure can. Just one moment. Our next question comes from the line of Timothy Arcuri with UBS. Your line is open. Please go ahead.

Speaker 9

Thanks a lot. I had 2, Wissam. The first one is on underutilization charges and it's kind of like a 2 part question. The first is what's the current utilization in NAND? And then on the HDD side, is there kind of a milepost as to where these could start to go away because You're guiding $70,000,000 for September for under utilization in HDD.

Speaker 9

It sounds like it goes to maybe $60,000,000 to $65,000,000 in December quarter, But when does it go away? Because you started to take underutilization charges, I think, when HDD revenue went sub $2,000,000,000 per quarter. So Do we have to get all the way back to $2,000,000,000 a quarter to have those HDD under utilization charges go away?

Speaker 3

Okay. So Tim, with respect to the flash side, we continue to make these Decisions on an ongoing basis. And from the numbers, you can tell the underutilization related charges were are projected to be roughly flat from Q4 to Q1. As for HDD, I think the math is your math on Q1 is close to Where the guide is, but I think in December quarter, if you think of the underutilization charges going, Let's say from Q1 to Q2 going down 5% or 10% and all of that decrease coming from HDD, you start seeing Some declines basically in the HDD underutilization in the December quarter. And Based on what we see today, it's a bit too early to talk about the second half of the fiscal year 2024.

Speaker 3

But to the point you're making around the $2,000,000,000 revenue mark, We don't need to get to the $2,000,000,000 revenue mark to really fully utilize our Capacity, if you recall, we've restructured quite a bit of our manufacturing capacity in the hard drive business And we continue to take and optimize that fixed cost aspect of the cost structure. And so we can be fully utilized at a lower level than $2,000,000,000 given the current cost structure.

Speaker 9

Thanks a lot for that, Wassam. And then just on the debt service cost. So you have the convert due in February. I think that's at a pretty good rate. I think it's at 1.5%.

Speaker 9

So the debt you're going to replace that with, I imagine, is going to be pretty expensive. So it seems sort of I guess my question is sort of where does that leave you in the cap structure? Obviously, it seems like debt service costs are going to go up maybe $20,000,000 a quarter once you have to So can you just talk about sort of how you solve for all that? Thanks.

Speaker 3

So, yes, the current rate on the convert is 1 point 5% and given where the interest rate environment is today, I would expect that to be if replaced by debt to be When replaced by that would to be roughly more expensive than that. So look, it's a little bit too early to talk about it in a lot of details, But this is something that is definitely a focus for us as we think through The various options that are available to us with respect to refinancing, for instance, we look at the potential Cost of capital and our goal is to make sure that we maintain lower cost of capital to the extent possible. But I expect it to be slightly up from here, all set.

Speaker 5

Thanks a lot, Wasson.

Operator

Thank you. And one moment for our next question. Our next question comes from the line of Ananda Baruah with Loop Capital. Your line is open. Please go ahead.

Speaker 10

Yes. Thanks, guys. Appreciate you taking the question. Thanks so much.

Speaker 3

Good morning.

Speaker 10

Just Two quick ones, if I could. When would you expect 26 terabyte and maybe I'll even throw 28 in there since you mentioned it, David, to reach crossover. And then I just have a quick follow-up to that. Thanks.

Speaker 2

Crossover as Look, let me say that there's a lot of there's multiple different capacity points. So I think we need to maybe talk This is a little bit different. It doesn't just move from 2014, 2016, 2018, maybe like it did 2, 3 years ago. Now there's a bit of Distribution of different customers and what kind of technologies they're using, whether it's 20s or 22s or 26s or going to 28s or even So, as I look at where things are going to be in the next Couple of quarters, you're going to see a pretty even distribution across 3 or 4 different capacity points, all of them shipping 500,000 or more drives. We expect very substantial ramp of 20 6 and I don't want away from the ramp that's going to happen there.

Speaker 2

It's going to be very quick and very rapid now that it's qualified, and getting close to being a leading capacity

Speaker 10

Thanks for making those distinctions. That's actually really helpful. And the follow-up is, You guys have any view yet, any opinion on when things normalize out in hard drives, if the hyperscalers return to what their Classic utilization levels have been historically, how they've run the capacity or do you think they settle in somewhere Yes, right. On the Eagle operation.

Speaker 2

Look, I think anytime you go through a period like this, there's some Work done on optimization of infrastructure and consolidation, I think that's happening. But I would expect things you go through that and you just incrementally get better. Like anything in technology, you're constantly improving, constantly getting more I think that, that is something that's always going to go on. And we're still going to see The growth in exabytes on top of that. So I think we're still looking at 20%, 25% exabyte growth in the HDD business.

Speaker 2

And I We clearly haven't seen that in the last year, but we know it's a cyclical business and we expect to get back to those levels.

Speaker 10

All right. That's awesome. Thanks a lot.

Speaker 2

Thank you.

Operator

Thank you. And our last question is going to come from the line of Karl Ackerman before we have a short statement by our CEO.

Speaker 13

Could you discuss how we should think about a recovery in nearline units and unit pricing as you and your peer implement a build to order process? And As you address that question, could you discuss how this build to order process may differ from long term agreements signed in 2021 that were a bit challenging to implement over time? Thank you.

Speaker 2

So units, I expect to recover, right? I mean, we're going to get exabyte growth. We're at a low point on units. We expect units to recover and get back to where they were and eclipse That actually is as we continue to get exabyte growth, I'll put in say once again, I am very excited about generative AI. I know everybody is, but I think it's going to come to our world on storage once all this gets deployed.

Speaker 2

And so I expect to see units recover. I think the build to order process is going to be a fairly straightforward process because we have deep relationships With the set of customers here, it's a big market, it's a big relationship. And I think it's just Getting the business model to a place, where there's better alignment between the infrastructure we have in place. Again, we've been talking about this for Many years now that in a lot of ways cloud has significantly benefited from the reduction in client and there's been a consistent Availability of infrastructure to build hard drives. And we're at the end of that transition now, so we have to just Have more planning around that.

Speaker 2

I think the long term agreements were a step into that. I think this is maybe the next step into How do we run our franchise to make sure we've got the best alignment between delivering a great product and value proposition to our customers, which is extremely important. The Storage is incredibly important part of the data center and making sure that we have the right infrastructure in place to fuel that growth. So I expect it to be a pretty natural change or evolution of the business model, And I expect it to be very positive on all sides. Thank you, Carl.

Speaker 2

All right, everyone. Thanks for joining the call. We look forward To talking to you all throughout the quarter. Take care.

Operator

This concludes today's conference call. Thank you for joining. You may now disconnect.

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Earnings Conference Call
Western Digital Q4 2023
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