Q2 2020 Earnings Call
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Good afternoon, and thank you for standing Bang.
Welcome to Western Digital's second quarter fiscal 2020 conference call presently all participants are in listen only mode.
Why don't we will conduct a question and answer session at that time, if he would like to ask the question. You May proceed star one on your phone.
As a reminder, this call is being recorded no we'll turn the call over to Mr., Peter Andrew You may begin.
Okay. Thank you and good afternoon, everyone. Joining me today or Steve Milligan, Chief Executive Officer, Mike Cordano, President and Chief Operating Officer, and Bob You Love Chief Financial Officer before we begin let me remind everyone that today's discussion contains forward looking statements, including product development expectations business plan.
James trends in financial outlook 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-Q filed with the FCC for more information on the risks and uncertainties that could cause actual results to differ materially.
We will also make references to non-GAAP financial measures today reconciliations between the non gap 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 Steve.
Thank you Peter and good afternoon.
Western digital delivered solid results and the second quarter as revenue came in at the midpoint of the guidance range and non-GAAP EPS was at the upper end of the range.
Our performance reflects strong execution and our product roadmap.
Success, and increasing or hard drive gross margin.
And an improving flash environment.
Notably these results reinforce our prior comments that the June quarter marked the bottom of this flash cycle.
We extended our capacity enterprise product leadership as we started sampling 18, and 16 terabyte CMR and 20 terabyte Esa more drives in December .
These drives feature our energy assisted magnetic recording technology, providing unrivaled aerial density and Tcl benefits.
We expect to commence revenue shipments of the CMR drives in the March quarter and ramp shipments through the rest of calendar 2020.
Our 14 terabyte platform is performing well.
And customer interest in our air based 10 Terabyte drive is quite high.
The capacity the strength of our capacity enterprise product portfolio will continue to allow us to maintain our leading market share position.
We achieved our goal of high single digit enterprise SSD market share and secured additional nvme E design wins, including at another major hyperscale customer positioning us for continued revenue growth and share gains.
We made an important announcement this afternoon of our next generation Threed NAND technology fix five with 112 layers of vertical storage.
Fixed five joins a full portfolio of Threed NAND technologies as our highest density and most advanced Threed NAND today.
Delivering exceptional performance and reliability.
Our team executed well in the quarter, increasing our hard drive non-GAAP gross margins to approximately 31% from 28.5% in the prior quarter.
We now expect an accelerated recovery and our flash gross margins in the first half of calendar 2020 with continued improvement through the end of the year.
I will now ask Mike to share our business highlights. Thank you and good afternoon.
Our December results reflect solid project execution and increase in hard drive gross margin.
Moving flash market environment.
Datacenter devices and solutions, we executed well in delivering new products positioning us for continued share gains and profitable growth in calendar year 2020.
And capacity Enterprise drive close collaboration between our head media and mechanical design team allowed us to simultaneously introduce energy assisted magnetic recording technology, and a triple stage actuator and our new 16, 18, and 20 terabyte drives.
These innovations provide us with continued aerial density leadership and a greater design margin, resulting in a best in class product quality and reliability.
Our focus on introducing the right technology at the right time, while delivering the best Tcl and highest product quality to hyperscale and OEM customers makes us their trusted partner.
In calendar year 2019, the success of our capacity enterprise product line led by our 14 Terabyte drive.
Of over 40% year over year exabyte growth.
We also started sampling our 18 and 16 terabyte CMR and 20 terabyte ask them, our drive and plan to commence revenue shipments of the CMR drives into current quarter.
As these drives ramp along with our 10 terabyte airbase drives we're well positioned for continued leadership.
In flash, we achieved our goal of high single digit enterprise SSD market share.
As our EMEA me based enterprise SSD revenue grew over 50% sequentially.
Supply constraints limited our upside as demand was better than expected.
I am encouraged to see the significant investments we've made in expanding our product portfolio over the past several years are enabling us to increased participation and higher margin higher growth and lower volatility parts of the flash market.
We have secured additional design wins, including another major hyperscale customer, which demonstrates our success and broadening our product portfolio and diversifying our customer base.
In calendar year 2020, we expect to double our enterprise SSD revenue as we move towards our goal of 20% market share.
Our competitive position within the data center is unrivaled built on the breadth of our product portfolio strong customer relationships technology leadership and superior product quality.
We look forward to another year of strong growth in the datacenter market.
Client devices strong growth in client SSD, and smart video along with growth and mobility and desktop hard drive drove the sequential revenue growth in the December quarter.
As we enter the March quarter Flash pricing continues to improve.
Furthermore, starting in the June quarter, we expect to begin shipments into a new gaming platform. The gaming console market is expected to be a multi exabyte opportunity this calendar year.
But then client solutions strong holiday demand for both our flash and hard drive solutions enabled revenue to grow on a sequential basis.
At CES 2020, we demonstrated a range of innovative products, including the world highest capacity pocket sized portable SSD and the world's first USPI threed out to SSD exclusively for gaming.
This afternoon, we announced our fifth generation Threed NAND technology fix five.
Utilizing a wide range of new technology and manufacturing innovation fix five has significantly increased accelerate density horizontally across the wafer.
These lateral scaling advancements in combination with 112 layers of vertical memory capability enables Dick's five to offer up to 40% more bits of storage capacity per wafer compared to western Digital's 96 layer fix for technology.
We have commenced shipping initial consumer products built ondecks five what mass production expected to begin later this calendar year.
We believe inventory in the flash supply chain has returned to normal levels and with strong demand for our products, we are experiencing pockets of tightness.
These dynamics combined with continued product execution in both flash and hard drives position us well for continued profitable growth.
I will now turn the call over to Bob for details on our financial performance.
Thanks, Mike and good afternoon, everyone.
Revenue for the December quarter was $4.2 billion.
5% sequentially and flat from a year ago.
Please recall that the September quarter was a 14 week quarter.
By end market data center devices in solutions revenue of $1.5 billion was down 3% sequentially and up nearly 40% year over year.
On a sequential basis growth in enterprise SSD is offset by a decline in capacity enterprise drive and the impact of our exit from the storage system business.
Quite devices revenue of $1.8 billion was up 11% on a sequential basis and decreased nearly 20% year over year.
As Mike noted earlier, the sequential growth was driven by client SSD Smart video mobility and desktop HDD.
The year over year decline was primarily due to pricing in flash our decision to limit our participation mobility and a decrease Tam for notebook and desktop hard drive.
Point solutions revenue was $948 million.
6% sequentially flat year over year.
Sequential growth was driven by strength in hard drives.
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By product category Flash revenue was $1.8 billion up 13% sequentially and down 15% year over year.
Lastly, as fees were down 8% sequentially, primarily related to our increased participation mobility.
Fit shipments were up 24% sequentially.
Our drive revenue was $2.4 billion, roughly flat sequentially and up 16% year over year.
Average price per hard drive was flat sequentially at $81 and exabyte shipments were down 1% sequentially.
As we move on the costs and expenses. Please note all of my comments will be related to non-GAAP results unless stated otherwise.
Gross margin for the December quarter was up 1.1 percentage point sequentially to 25.9%.
Our flash gross margin was 19.5% of slightly from last quarter as a better pricing environment was offset by our increased participation in mobile.
The hard drive growth margin grew more than expected to almost 31% from 28.5% the prior quarter.
This improvement was due to the full realization of the cost benefits of the kao closure and a stable pricing environment as overall ASP per drive sequentially flat at $81.
Operating expenses were $765 million.
Operating expenses with normal incentive compensation expense would have been closer to $720 million.
Operating cash flow for the December quarter was $257 million and free cash flow was $377 million.
Capital expenditures, which include the purchase of property plant and equipment and activity related to flash ventures on our cash flow statement, where an inflow of $120 million.
As previously noted we are benefiting from the timing of the funds going back and forth between us and the joint venture.
For the full fiscal year, we expect cash capital expenditures to be close to zero.
Gross capital expenditures, which includes our portion of joint venture leasing and self operating funding is expected to be between two and two and a half billion dollars.
In an effort to provide greater transparency and clarity into our capital expenditures. We've added a few new slides to our earnings presentation.
Available on our Investor Relations website.
In the December quarter, we distributed $149 million in dividends to our shareholders reduce debt by $388 million, which include included an optional 325 million dollar debt pay down.
From a capital allocation perspective, our first priority is to reinvest in the business to maximize long term shareholder value after that paying our dividend and reducing our debt are the next priority.
At the end of the quarter, we have $3.1 billion in cash and cash equivalents.
Our $2.25 billion revolver remains unused and our gross debt outstanding was just under $10 billion.
Total inventory dollars were down $165 million on a sequential basis as both hard drive and flash inventory decrease.
Moving on our non-GAAP guidance for the third fiscal quarter is as follows.
We expect revenue to be in the range of $4.1 billion to $4.3 billion.
We expect gross margin to be approximately 2020, 8.5% to 29.5%.
Please note that this range includes approximately $70 million in costs associated with the K one fab.
Operating expenses are expected to be between 740 and $760 million.
The midpoint of the guidance range assumes a return to normal variable compensation expense and selective new R&D investments.
We expect interest and other expense of 80 $85 million and we expect the tax rate to be around to be between 25 in 2007%.
As a result of this detailed guidance, we expect earnings per share between 85 cents and a dollar and five cents.
Assuming approximately 305 million in fully diluted shares.
With that I will now turn the call over to the operator to begin the acuity session. Operator, we'll now take our first question.
Ladies and gentlemen, we will now begin the question answer portion of today's call. If you have a question. Please press star one on your phone if you would like to withdraw your question. Please press the pound.
One moment please for the first question.
Our first question comes from one female hand with bank of America.
Yes, Thank you and congrats on the strong guidance when you speak often accelerated recovery here in flash gross margins can you lay out the key drivers of that through 2020, and how you're thinking about the velocity of that recovery in any thoughts on where you might exit the calendar year.
Yes, Wamsi. This is Steve I'll take that question. So theres really a couple of different things that I would say are going on in terms of the flash market.
One the first thing is as we indicated in our prepared remarks, we believe that inventory levels in from an industry perspective to the best of our estimation have returned.
In the balance or call at normal levels.
So thats one thing that I heard the other thing is is obviously, we have been working very hard on improving our product lineup, which is allowing us to sell into markets that carry a higher gross margin profiles as well as they are stickier business and we believe that that will help us overtime.
To manage the volatility that is associated with the flash business.
The the other thing is is that it was part of all that is is that there's an increasing awareness on behalf of our customer base that.
That inventory supply and demand is tightening up in other words demand is going to exceed supply this year.
And so we're seeing customers recognizing that.
Prices are improving of right now that tightness is.
It's kind of in pockets, it's not necessarily across the board.
So we're seeing pockets of tightness in the market and as we move through the balance of the year, we expected that tightness will increase and so what that means from a gross margin perspective.
Last quarter, we said that we thought we would see monetarist modest improvement in our gross margins in the flash area now, we're saying that those that are margin profile will it will accelerate in terms of then improvement and I would expect as we move into the back half of the year, we'll see I'm, an increasing mark of more of that as the market tightens.
Even more I'm in the back half a calendar 2020, what that means from a numeric perspective is that we would say that.
We have the opportunity for our flash more gross margins to get into the 35% to 40% range as we get into the back half of the calendar year.
Okay, Great. That's that's great. Steve. Thanks appreciate the color and can you maybe just you guys, obviously executed pretty well in the quarter on HDD side as you head.
Added two to sort of have those margin step up as well can you talk about the pop ups HDD gross margins from here as well. Thank you, yes, I think the way to think about those is we're in a range, where we're comfortable going forward. So we will continue to operate.
Around that range that we reported.
We have great biased with Wamsi I would add to that with a bias for those margins improving over time as an increasing amount of our hard drive volume shift shifts to capacity enterprise.
So what we've talked about is something in the mid 30% range, we're not necessarily saying that that will happen in this calendar year, but that should be the bias over a period of time.
Okay, great. Thank you.
Thank you. Our next question comes from Aaron Rakers with Wells Fargo.
Yes, thanks for taking the questions.
First kind of keeping on the hard disk drive business.
No you talked about in the press release or the slide deck, a 100% plus growth.
Year over year, an airline HDD capacity shipments but.
Given the competitive landscape in the questions I'm curious.
What did that how did that perform on a sequential basis and how are you. How are you currently seeing the competitive environment.
Yes, so I think in general we maintain our leading market share position call it and that kind of low to mid Fiftys, we'll see where this all settles out once everybody reports.
We expect that to continue right through the first half of this calendar year and then in the back half. We obviously think we have some opportunity continue to grow slightly so from a product positioning standpoint, we feel very good.
Not only our 14, which continues to be the highest volumes shipper, but the expected ramp of our 16, 18, and 20, which will occur throughout the year and as we noted in prepared remarks, we will begin initial revenue shipments in the current quarter.
Okay, and then on the gross margin on the flash side.
Mix can be a meaningful driver to gross margin, but I'm curious does that.
As you continue to execute on Eric.
For now we start to talk about five can you just update us on how we think about the cost curve relative to that mix you have to factor for kind of take you back to that we are you said, 35% to 40% gross margin.
Where are we are currently in the mix of fixed for in terms of did ship right now.
Fix for as is the overwhelming majority of this we're just starting the initial fixed five ramp the way to think about Aaron though is really in this kind of 15% plus or minus annualized cost take down and certainly we would expect that to continue as we move through this next product transition relative to.
Mix I would say both product and market segment exposure and then of course, the broader ASP pricing environment are going to be the drivers of that margin enhancement through the calendar year 2020.
Thank you.
Thank you. Our next question comes from Mehdi Hosseini with Jake.
Yes, thanks for taking my question.
Two two follow ups for my color, Steve first and then side and on the game console I'd, rather new game consoles.
This.
Is incremental as I imagine the prior generations are hard disk drive basin now is migrating to ssds and do some figures out there.
I'm just wanted to see what is your assumption for the kind of.
NAND supply that the new game console is going to consume given the fact that this is incremental and have a follow up.
Yes, I think you're right. It is all incremental and and from an industry standpoint, and certainly far from our standpoint, because we were not participating in the gaming market in 2019 calendar year on the hard drive side I don't think we'll want to go any farther than what we said in her prepared remarks. This is going to be a large multi exabyte market.
We wouldn't want to comment any more specifically.
Okay Fair.
Moving on to hard disk drive, obviously youre introducing a new.
18 turbine can you help me understand how your cost competitive I understand your product has a fewer number of plates and as we migrate from 16 to 18 hub.
Cost competitiveness is going to be used to increase market share.
Yes, so I think from our standpoint, we think we have a significant time to market lead on 18 and 20.
And so that flatter count to our understanding is.
Justin.
Our next generation so our benefit relative to market share is always about bringing the right products the market and a leading way hitting smoothly through customer qualification and ramping quickly we've been doing that generation over generation for several years, we will do that again on the 18 16 at 20 terabyte product that will be ramping.
This year and we and many we do have a cost advantage and we would think that I mean, that's represented in our underlying hard drive gross profit.
Performance.
And one other things that you're alluding to is that our capacity enterprise driving this continues for.
16, 18, 20, or 20 terabyte drives that we are using.
Aluminum media versus last media.
And that is that.
A lower cost.
Got it thank you.
Thank you. Our next question comes from Karl Ackerman with Cowen.
Hi, Good afternoon, gentlemen, I have two if I may.
First question.
He is regarding your NAND supply outlook.
Yeah, we're calling for 30% growth for the industry in calendar 2020.
As most of that coming from process conversions and what's sitting in inventory or is it going be dictated by adding substantial greenfield capacity at the K one facility.
And in addition to that Youre, South Korean pure last night spoke about NAND demand industry NAND demand growing kind of high Twentys for 2020, Yeah, how does that play in your capital planning process.
Okay car, one thing I want to comment as when they were talking about high 20% I believe that was supply growth not demand growth.
So, but anyway I'll, let Mike comment on the specifics, yes. So so all the growth both ours in the industry is technology transition. So our K. One expansion is all about technology room for technology transition. There is no wafer capacity in our plans going in and that's really and I think that.
Across the industry.
And just to comment further on where we think we talked about low thirtys in terms of supply growth steam commented on what samsung's.
Comments, where we believe demand growth will be in the 35% plus range. This year.
Hence the shortage.
Very helpful.
Last one if I if I may.
Your enterprise SSD market share opportunity is quite significant and I think impressive but.
When we think about that yes, how much of that is driven by a new server architecture launched this year versus retrofitting existing servers.
I ask because a tier one youre space Hyperscaler just announced after the close.
That does that depreciation will be lower for them in March due to an increasing useful life of their server. So maybe just kind of talk about that little bit that'd be great. Thank you. Yeah. So no we're not dependent on any specific server transition. So what were able to do with our EMEA me products is when both new server and exists.
Shifting socket design wins in the EMEA E space and then of course similarly in staff.
There will be a series of new new products announced where we will we will be design, Dan. So we're not dependent on any particular.
Server transition and it's really the power of and strength of the product portfolio as well as to the customers view of us as a preferred supplier that's driving that share growth.
Thank you.
Thank you.
Thank you. Our next question comes from Tim long with Barclays.
Thank you.
Going back to two for me as well on the on the HDD side.
Talk a little bit about as 16, 18, and 20 ramp through the year just for your for your new airline business. What do you think the the gross margin as Pete.
Impacts will will be there and then on the NAND side. There was a really comment you talked a little bit about mix.
Can you just give us a sense as to the other dilution from from mobile and should we expect more or less participation in that market as we move through calendar 2000. Thank you.
So Tim this off so the first one on the hard drives and where we have not been giving specifics on capacity enterprise margins, but they are better than average and as we've said before as our mix trends towards more and more about enterprise. We do expect our hard drive gross margins can get up into the mid 30% range. So that'll be a benefit.
And from.
The mix question I mean, we're not.
Oh, so not able to get specific in terms of exactly what the numerical implication was at mobile, but it obviously was dilutive to EPS this quarter and overtime will always participates on in the mobile market, but we'll continue to manage.
Yeah, and add the flash supply demand situation tightens up we will see the mobile market become more attractive for us.
From a gross margin perspective.
Okay. Good point thank you.
Thank you. Our next question comes from Joe Moore with Morgan Stanley .
Great. Thank you I Wonder if you could talk about the planning process behind it the capex at the JV level on NAND.
The extent that you guys are feeling better about the business and where profitability is going do you feel the need to to change capex. It at the JV and.
And then I guess, so second half that question.
You said earlier that are there any here that you can sort of get the industry big growth without a lot of capex because you won't have the fab shutdown you won't have the power outage can you just update us on your thinking on how that impacts your supply growth for the for the calendar year, Yeah I'll comment overall on the Capex in terms of that growth in that sort of thing I mean, you know from an overall told.
Just awful perspective, I mean, you know.
We we want to be adding a bit supplied to the market that is consistent largely with the overall growth from a demand perspective. So we're not you know as a result.
The improving environment, we're not looking at accelerating or decelerating or plans, but overall longer period of time, we would want to try to manage our growth from a supply perspective too to growth in demand.
And so that hasn't changed.
Great. Thank you.
Thank you like our next question comes from Mitch Steves with RBC capital markets.
Hey, guys just two questions for me just wanted to try to clarify at least get some numbers around this or any way to think about it. So when you look at the SSD opportunities just trying to double your share there are the envy me.
Stephen you guys made the slide deck and you combine that with the gaming platforms coming in how much of that is adding to kind of the to the overall demand given a 35% number I'm just trying to understand how much of this you guys have clean visibility on so we can get understanding how much that demand is gaming plus your share gains on enterprise side.
Well the broader.
The industry demand number we gave you as independent of our own share growth right. So at any one of these particular segment so our view of 35%.
Demand side growth on the year is an aggregate across the industry per bit.
Well, we talk about segment share gains in enterprise SSD and in gaming that's obviously.
Product segment related gains so we're not going to talk specifically about that I think you can kind of calculate where we think we're going on the enterprise SSD side, given given my comment yen add kind of further context of them and what we're trying to do is we're trying to place our bids.
In those markets that characterize I call. It one or two elements one opportunities for us the hot add more value from a product perspective, thereby driving higher gross margin.
Referred to that as let's call it enterprise market.
And then also those areas of the market that are.
Our either stickier.
Less volatile.
So that we can manage the ups and downs that tend to occur in this kind of market gaming, yes, it's incremental from a flash perspective.
And also tends to be stickier business more predictable.
And so it has has some of those characteristics that are attractive to us as we look to place our best them more attractive parts of the market as opposed to let's call it more transactional or price driven areas of the market.
Got it understand then just last when you guys have mentioned like 40% kind of NAND gross margins kind of the goal you guys want to get too I'm, just trying to get a better understanding for the Ram. So that's something you guys think you can exit at in calendar year or they're going to take a lot longer not just looking for any sort of sort of help but when you guys. Thank you can get to the kind of 40% number you've talked about.
Well, what I commented on is that given the trajectory of our business and where we see it playing out in calendar year, we expect that our flash gross margin rate will move into the 35% to 40% range as we get into the back half of the year now that's not being specific as that calendar Q3 year calendar Q4 wants to see exactly how the market.
Evolves, but we clearly continue to believe that 40% range is the right level for us and we believe that will begin to approach that I'm in the back half of the calendar.
Perfect. Thank you.
Thank you. Our next question comes from C.J. Muse with Evercore.
Yeah. Good afternoon. Thank you for taking the question I guess first question you talked about industry bit supply growth in the low Thirtys and you would be in line with that can you share with US would you expect to revenue on on a bit basis and as part of your thinking there how are you contemplating a bits for mobility versus elsewhere.
Well the one thing I'll say relative we don't comment specifically, but we would expect to have our own inventory positions.
And quite balanced state, we are entering the year and we expect to be exiting the calendar year to the extent you want to calculate that that will give you feel for it.
Okay and your thinking on the mobility side is that something that you're you're you're thinking maybe on the will stick more to enterprise and.
Councils no we were like the mobility side is not all created equal and part of our effort over the last several years is getting more product diversification as Steve talked about some of the newer areas, but we will continue to maintain exposure to mobility, we will just manage that exposure and make sure we're making.
We're able to make good choices as the market continues to evolve. So we see it has a long term area of investment.
See there's some very attractive parts within the mobile mobile marketplace. So we'll continue to be investing there will just be able to manage our bid allocation more broadly three this calendar year and into the future.
Excellent and as my follow up another question on the NAND gross margins.
Shocking I'm curious if you could I guess speak to the K one charges when when you think they might roll off and and how accretive that might be and also given kind of state of the industry. Today are you running 100% utilization it what type of.
Tailwind or do you see there thank you.
Yes, so in terms of K, one I mean, we're now having real production runs and we'll continue to have more production as we progress through the year that.
Last quarter, we didnt have quite as large a charges without going too I think it came in around.
35 million and I think we'd said on this call last quarter to be around 75 in the current quarter in the March quarter, we're expecting around 70 million in terms of a period expense charge and that should start to go down after this quarter and it's really a function of how we ramped production and are obviously ability to absorb.
Those costs, but it'll start to start to get better I think from here, Yeah, and one thing just to comment on when I talked about 35% to 40% slashed gross margins in the back half of the calendar year that is.
Inclusive of any potential startup costs, though still room remain in the back half the year.
Thank you. Our next question comes from one gel Shaw with <unk>.
Hi, Thanks for taking my question two questions. One could you just update us on the CEO search and then secondly on.
Each did you exabyte they were down 1% sequentially, but then you talk about.
<unk> percent growth on an ex somebody business yet on units if you could tie.
Those two as to why on a sequential basis.
It could be down and related to.
Near line, what's the visibility into 2020.
Yes, I'll take the CEO search comment or question and then my can comment on a capacity enterprise regarding the search the search process is ongoing.
And one of the things that I will add to that as the board is very pleased with the progress that they're making today.
And so that's all the update we have for now.
And relative to the capacity enterprise marketplace, our fiscal quarter, one was a record shipment for us our X by share was around 57%.
We were operating to optimize both profit and maintain our kind of leading share position.
In this space. So some of that would be a little bit of share drop I talked about that 53% to 55%, depending on where things settle out but as we look into the first half of this calendar year, we see demand across the breadth of the market remaining fairly strong.
And we think we're in a good position to maintain this leading market share position that that I just talked about so.
Visibility is good obviously different customers have different plans, but when we aggregated.
We feel pretty comfortable with continued strength the demand through the first half the calendar year.
Yeah, Thanks, a lot.
Thank you. Our next question comes from Steven Fox with Cross research.
Hi, Good afternoon, just a couple of quick questions from me I'm first of all you mentioned that you became a supply constraints on the Nvidia need ssds during the quarter.
You can you just wanted to talk about how you work that through and what it implies for future growth. Maybe this quarter next quarter and then secondly, I was wondering if you could expand on you commented that the pockets of tightness, you're currently seeing what exactly would you call out I guess, besides enterprise, but anything you can elaborate on there.
And where maybe it does pockets expansion coming quarter. Thank you yeah. So I'll take I'll take the question on the M.B. I mean, a supply constrained it was not a flash supply constraint issue basically what happened as demand was better than we had expected and it was some of the components that we use in RMB on me.
As the product we've worked to resolve those women should not be an issue as we move forward through calendar 2020.
And then the other question, yes, so I think what we're seeing is in general demand has been very strong across.
Right SSD.
The performance categories.
So in some parts of the world there's constraints there and that's.
Being reflected in the movement on pricing and a positive direction.
Great. Thank you.
Thank you. Our next question comes from Harlan sur with JP Morgan.
Hi, good afternoon. Thanks for taking my question I'm good to see the sub growth in the enterprise Nvme Pcie SSD platforms I'm given the strong momentum on these products in the strong cloud spending environment do you think that you guys actually exited the calendar year tracking up low double digits percentages market share or we still.
We'll still more constrained on the supply exiting the year.
Yes to Steves comment, we actually saw demand in excess of our availability of the actual other components. So had we been able to fully realize that frankly, we had a bit in the low low double digits on share that remedies itself. As we're now inside lead time, we continue to see strong demand for those products.
And as I talked about we expect double revenue in that category year over year.
Great. Thanks, Yeah, I'm used to decide on the outlook for capacity enterprise exabyte shipments up kind of 35% year over year. This year.
[laughter] Conservative I mean, we're hearing that it's more like the at the mid 40% range with 60% type year over year growth in the first half of this here just given the continued strong cloud spending trends. So wondering if you can kind of lay out your assumptions maybe here in the first half the year for X. The Blake consumption, just given that cloud and hype.
Go spending still seems to be quite Chicago, Yeah, we haven't been too specific on now I will say I will give you a comment that we do see at the at this time a bias up in demand. So I think that's reflected in your comments. So you know relative to a 35% of so annual expectation I think our current view as a bias up from there.
Great. Thank you.
Ladies and gentlemen, due to time restraints, we ask that you. Please limit yourself to one question I next question comes from a non debartolo with loop capital.
Hi, Thanks, guys, you're taking the question congratulations on solid well I mean, that's good yeah, you the guide really really amplify yet.
I'll just stick with that with near line. He could you just given what what constitutes about how you see the a static and then Mike as well.
Of the cloud cycle TV I'd like it sounds like you're saying you expect to rule.
Balance of calendar year 20 now.
Yes.
The Stephen like do you see it potentially continuing.
Hi, Joe I'm, not asking for a guy, but the patches of continue exabyte demand going up sort of into the back half. The year is this sort of one word gets up to a upkeep sooner, but then maybe a it's sort of in extending credit cycle any thoughts there would be great. Appreciate well, let me try that.
Clarify little bit we certainly see the first half the calendar year remaining strong I'll reference back the comments I just made on annualized basis, we've been talking about 35% annualized growth, we do see on an annualized basis, a bias up from there I would want to comment any further on.
The way the full year or the shape of each individual quarters.
Okay. That's that's helpful. I appreciate that clarification. Thank you guys.
Thank you. Our next question comes from Srini, Pajjuri with SMBC Nikko Securities.
Thank you just a follow up on the previous question, Steve I guess, you know we've had pretty strong two quarters from the cloud and market here and you know there's some concerns that the maybe a digestion period as we head into the first half and I think Intel did say that they know they expect a somewhat of a digestion Peter.
I'm just wondering you tend to have pretty long visibility in especially on the drive side I'm just wondering if you're seeing any signs of slowdown out there.
That causes you to kind of believed that theres going to be digestion period.
Yeah. So again all customers not created equal there ours are some that are doing that but when we aggregate demand remains quite strong through the first half the calendar.
Thank you. Our next question comes from the Jive, a catch with Mizuho.
Yeah, Hi, guys I'm, just wondering I saw your Capex is down a flip is good ready.
Hoping that discipline I, just wondering I said look at the rest of the ecosystem are you seeing a any I guess, if capex Oh, how do you how do you that and also in the China side with why Mtc assay can you expand what are your thoughts in terms of supply coming in with increased <unk> Capex, you wouldn't Hao Nan price.
He has been trending thanks.
You know a comment in terms of overall industry, the extent that theres public information, but you know Samsung indicated and others have indicated we're all circling at a.
Its supply growth rate, that's kind of in a similar neighborhood.
With Samsung talking about high 20%, 20% growth rate and we're talking low or mid and low thirtys.
And so we're kind of all aggregating and we're not seeing anybody or adding capacity.
From a NAND supply perspective that with concern us certainly not on the short term because it would take up to 18 months for that to become productive capacity and so we're not seeing anybody behave in a way that we think that with upset the balance from a supply demand perspective. So.
We feel pretty good about that way Mtc no real change in terms of our expectations. There, we do not thing that see them, having any material impact in terms of the market for the next several years.
And we'll continue to we'll evaluate that depending upon their ability to ramp not only from a pure production standpoint, but from a technology perspective, but certainly no concerns I would say over the next two three years in that regard and that's kinda with in the planning cycle that we would we would have visibility too.
Thank you. Our next question comes from Sidney Ho with Deutsche Bank.
Great. Thank you. My question is if you can look at your calendar Q1 guide being roughly flat quarter over quarter, which seems to be better than seasonal, especially on the name side can you talk about your expectation is made by by product side trying to focus on this policy John So by segment I'm, just curious how much of that above seasonal guys. That's all.
The as being pretty miserable for yes, let me I'll come in at a really high level and then you know micro Bob can add a little bit more specifics, but I mean, if you look at first thing I want to answered and kind of a backdoor sort of way. If you look at our gross margin improvement quarter on quarter, which as you know which is pretty significant in terms of 25.9 to 28.5 that.
29.5 in terms of the range.
Almost all of that is driven by improving flash environment, so, namely pricing.
All right and so and yes, there's mix improvements in that sort of thing and so that directly impacts revenue. So when you look at an improving pricing.
Environment, that's helping us to keep our revenues, let's call it flattish on a quarter on quarter basis, and then beyond that we continue to see the overall demand environment to be solid I.
I mean, just kind of solid not great not necessarily but not that and so it's just kind of there and that's both a flash in a hard drive statement and so that's allowing us to kind of work against what would be normal seasonality.
Drop in revenue in calendar Q1, so those are really kind of the two big factors.
Thank you. Our next question comes from me, how chunk ski with Maxim Group.
Yes, Thank you and great to see the that's already NAND flash recovery in the gross margins.
I did want to.
Make sure I understand the dynamic that is going on there.
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Our do you expect your own NAND flash inventory to decline QQ for the March quarter, which I think.
As micron hasn't come into that they were expecting there next question inventory to accumulate but for natural gas prices to increase so just wondering if you had some color there as far as your expectations on that.
Yes, as Bob I can make a couple comments that I don't want to start giving guidance for inventory by quarter, but we're still not satisfied with where we are on inventory in spite of the reduction that we saw this quarter and our goal over the next few quarters is to get to at least five turns and that's what we're focused on internally as a company.
So it wont be strictly linear getting there, but we think we could achieve that fairly soon.
Thank you. Our next question will come from Patrick Ho Stifel.
Thank you very much maybe as they follow some of the question is about a year or 18 20 gig gigabit drive terabyte drives to have been released I can you discuss how the gross margin.
Acceleration or the the path to all your target gross margin is impacted by your ability to get those out sooner in terms of the development of those drives you talked about I think last quarter. The non flatter was pulled in somewhat in terms of development how does that help in the acceleration of the gross margin progression.
Yeah. This is Bob I guess, the first thing I would say as our gross margins are already very good in terms of capacity enterprise and high as as I said earlier as our mix tends more and more toward about the enterprise that a pull up our overall hard drive mix.
It was not as good as prior quarters. This past quarter, but you still saw the margin improvement you saw that if piece stayed flat in spite of a tougher mix. So overall I think margins are very thought on capacity enterprise and I think as we introduced the new product that trend will continue.
Thank you and our final question will come from Mark Miller with benchmark before we end with a choice statement by our CEO .
Thank you, but I believe the.
Questions I'm wondering to address about the second half strength and data center. It also near line.
I've been post why don't need to post was again.
Hey, Mark good to hear was.
Alright, Thank you I'm all for joining us today, and we look forward to seeing you at the upcoming Goldman Sachs Technology Conference in San Francisco have a good rest of the day.
This concludes today's conference call. Thank you for joining you may now disconnect.
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Good afternoon, and thank you for standing by welcome to Western Digital's second quarter fiscal 2020 conference call.
We all participants are in listen only.
Later, we will conduct a question and answer session.
Time, if he would like asked the question you May press Star one on your phone.
As a reminder, this call is being recorded no we'll turn the call over to Mr., Peter Andrew You may begin.
Okay. Thank you and good afternoon, everyone. Joining me today or Steve Milligan, Chief Executive Officer, Mike Cordano, President and Chief operating Officer, and Bobby you allow Chief Financial Officer before we begin let me remind everyone that today's discussion contains forward looking statements, including product development expectations business plan.
Trends in financial outlook 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-Q filed with the FCC for more information on the risks and uncertainties that could cause actual results to differ materially.
We will also make references to non-GAAP financial measures today reconciliations between the non gap in 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 Steve.
Thank you Peter and good afternoon.
Western digital delivered solid results and the second quarter as revenue came in at the midpoint of the guidance range.
non-GAAP EPS was at the upper end of the range.
Our performance reflects strong execution in our product road map.
Except some increasing or hard drive gross margin.
And an improving flash environment.
Notably these results reinforce our prior comments that the June quarter marked the bottom up this flash cycle.
We extended our capacity enterprise product leadership as we started sampling 18, and 16 terabyte CMR and 20 terabyte Somar drives in December .
These drives feature our energy assisted magnetic recording technology, providing unrivaled aerial density and PCL benefits.
We expect to commence revenue shipments of the Samar drives in the March quarter.
Ramp shipments through the rest of calendar 2020.
Our 14 terabyte platform is performing well.
And customer interest in our air based 10 Terabyte drive is quite high.
The capacity the strength of our capacity enterprise product portfolio will continue to allow us to maintain our leading market share position.
We achieved our goal of high single digit enterprise SSD market share and secured additional nvme E design wins.
Including at another major Hyperscale customer positioning us for continued revenue growth and share gains.
We made an important announcement this afternoon of our next generation Threed NAND technology fix five with 112 layers of vertical storage.
Fixed five joins a full portfolio of Threed NAND technologies as our highest density and most advanced Threed NAND today.
Delivering exceptional performance and reliability.
Our team executed well in the quarter, increasing our hard drive non-GAAP gross margins to approximately 31% from 28.5% in the prior quarter.
We now expect an accelerated recovery and our flash gross margins in the first half of calendar 2020 with continued improvement through the end of the year.
I will now ask Mike to share our business highlights. Thank you and good afternoon.
Our December results reflect solid project execution, an increase in hard drive gross margin.
Moving flash market environment.
Datacenter devices and solution, we executed well in delivering new products.
Hitting us for continued share gains and profitable growth in calendar year 2020.
In capacity Enterprise drive close collaboration between our heads media and mechanical design team allowed us to simultaneously introduce energy assistant magnetic recording technology, and a triple stage actuator and our new 16, 18, and 20 terabyte drives.
These innovations provide us with continued aerial density leadership and a greater design margin, resulting in a best in class product quality and reliability.
Our focus on introducing that right technology at the right time, while delivering the best Tcl and highest product quality to hyperscale and OEM customers access their trusted partner.
In calendar year 2019.
Success of our capacity enterprise product line led by our 14 terabyte drive drove over 40% year over year exabyte growth.
We also started sampling our 18 and 16 terabyte, CMR and 20 terabyte Assetmark drive and plan to commence revenue shipments of the CMR drives in the current quarter.
As these rights ramp along with our 10 terabyte airbase drive we're well positioned for continued leadership.
In flash, we achieved our goal of high single digit enterprise SSD market share.
As our EMEA based enterprise SSD revenue.
Over 50% sequentially.
Supply constraints limited our upside as demand was better than expected.
I am encouraged to see the significant investments we've made in expanding our product portfolio over the past several years are enabling us to increase participation at higher margins higher growth and lower volatility parts of the flash market.
We have secured additional design wins, including another major hyperscale customer.
Mr rates, our success in broadening our product portfolio and diversifying our customer base.
In calendar year 2020, we expect to double our enterprise SSD revenue as we move towards our goal at 20% market share.
Our competitive position within the data center is unrivaled built on the breadth of our product portfolio strong customer relationship technology leadership and superior product quality.
We look forward to another year of strong growth and the datacenter market.
Client devices strong growth in client SSD at Smart video along with growth in mobility and desktop hard drive wrote a sequential revenue growth in the December quarter.
As we enter the March quarter flat pricing continues to improve.
Furthermore, starting in the June quarter, we expect to begin shipments into a new gaming platform. The gaming console market is expected to be a multi exabyte opportunity this calendar year.
But then client solutions strong holiday demand for both our flash in hard drive solutions enabled revenue to grow on a sequential basis.
At CES 2020, we demonstrated a range of innovative products, including the world's highest capacity pocket sized portable SSD and the world's first you SB three not too.
Exclusively for gaming.
This afternoon, we announced our fifth generation Threed NAND technology fixed by.
Utilizing a wide range of new technology and manufacturing innovation.
Five has significantly increased decelerate thats the horizontally across the wave.
These laterals scaling advancements in combination with 112 layers of vertical memory capability enables X five to offer up to 40% more bits of storage capacity per wafer compared to western Digital's 96 layer fix for technology.
We have commenced shipping initial consumer products built ondecks five.
Mass production expected to begin later this calendar year.
We believe inventory in the flash supply chain has returned to normal levels and with strong demand for our products, we are experiencing pockets of tightness.
These dynamics combined with continued product execution in both flash and hard drives position us well for continued profitable growth.
I will now turn the call over to Bob for details on our financial performance.
Thanks, Mike and good afternoon, everyone.
Revenue for the December quarter was $4.2 billion.
5% sequentially flat from a year ago.
Please recall that this September quarter was a 14 week quarter.
By end market.
Got it centered devices and solutions revenue of $1.5 billion was down 3% sequentially and up nearly 40% year over year.
On a sequential basis growth in enterprise SSD is offset by a decline in capacity enterprise drive and the impact of our exit from the storage system business.
Quite devices revenue of $1.8 billion was up 11% on a sequential basis and decreased nearly 20% year over year.
As Mike noted earlier, the sequential growth was driven by client SSD smart video mobility and depth.
The year over year decline was primarily due to pricing in flash our decision to limit our participation mobility and an increase Pam for notebook and desktop hard drive.
Point solutions revenue was $948 million up 6% sequentially flat year over year.
Sequential growth was driven by strength in hard drives.
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By product category Flash revenue was $1.8 billion.
13% sequentially and down 15% year over year.
Lastly, as fees were down 8% sequentially, primarily related to our increased participation mobility.
Fit shipments were up 24% sequentially.
Our drive revenue was $2.4 billion, roughly flat sequentially and up 16% year over year.
Average price per hard drive was flat sequentially at $81 and exabyte shipments were down 1% sequentially.
As we move on costs and expenses. Please note all of my comments will be related to non-GAAP results unless stated otherwise.
Gross margin for the December quarter was up 1.1 percentage point sequentially to 25.9%.
Our flash gross margin was 19.5% up slightly from last quarter as a better pricing environment was offset by our increased participation mobile.
The hard drive growth margin grew more than expected to almost 31% from 28.5% the prior.
This improvement was due to the full realization of the cost benefits of the kao closure at a stable pricing environment as overall ASP per drive sequentially flat at $81.
Operating expenses were $765 million.
Operating expenses with normal incentive compensation expense would have been closer to $720 million.
Operating cash flow for the December quarter was $257 million and free cash flow was $377 million.
Capital expenditures, which include the purchase of property plant and equipment and activity related to flash ventures on our cash flow statement, where an inflow of $120 million.
As previously noted we are benefiting from the timing of the funds going back and forth between us and the joint venture.
For the full fiscal year, we expect cash capital expenditures being close to zero.
Gross capital expenditures, which includes our portion of joint venture leasing and self operating funding is expected to be between two and two and a half billion dollars.
In an effort to provide greater transparency and clarity into our capital expenditures. We've added a few new slides for earnings presentation.
Available on our Investor Relations website.
In the December quarter, we distributed $149 million in dividends to our shareholders reduce by $388 million, which and included an optional 325 million dollar debt paydown.
From a capital allocation perspective, our first priority is to reinvest in the business to maximize long term shareholder value.
After that paying our dividend and reducing our debt are the next priority.
At the end of the quarter, we have $3.1 billion in cash and cash equivalents.
Our $2.25 billion revolver remains unused and our gross debt outstanding was just under $10 billion.
Total inventory dollars were down $165 million on a sequential basis as both hard drive and flash inventory decrease.
Moving on our non-GAAP guidance for the third fiscal quarter is as follows.
We expect revenue to be in the range of 4.1 $4.3 billion.
We expect gross margin to be approximately 228.5% to 29.5%.
Please note that this range includes approximately $70 million and costs associated with the K one fab.
Operating expenses are expected to be between 740 $760 million.
The midpoint of the guidance range assumes a return to normal variable compensation expense and selective new R&D investments.
We expect interest and other expense of 80 $85 million and we expect the tax rate to be around to be between 25 in 2007%.
As a result of this detailed guidance, we expect earnings per share between 85 cents at a dollar and five cents.
Assuming approximately 305 million in fully diluted shares.
With that I will now turn the call over to the operator to begin the acuity session.
Operator, we'll now take our first question.
Ladies and gentlemen, we will now begin the question and answer portion of today's call.
You have a question. Please press star one on your phone.
If you would like to withdraw your question. Please press the panel.
One moment please for the first question.
Our first question comes from Wamsi Mohan with Bank of America.
Yes. Thank you.