Q3 2020 Earnings Call
[music].
Good afternoon. Thank you for standing by welcome to Western Digital's fiscal third quarter 2020 conference call.
We all participants are in listen only mode.
Later, we will conduct a question and answer session.
Time, if you would like to ask the question you May Press Star one on your phone as reminder, this call is being recorded.
Now I'll turn the call over to Mr., Peter Andrew you may begin.
Okay. Thank you and good afternoon, everyone. Joining me today or David Keckler, Chief Executive Officer, and Bob you low Chief Financial Officer.
Before we begin.
Mind, everyone that todays discussion does contain forward looking statements, including product development expectations business plans trends and 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 Inc. 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.
Thanks Peter.
I would like to thank everyone for joining us this afternoon and I hope that you and your families are well given the covert 19 pet pandemic, where all facing.
I joined Western digital a little over a month ago, because I have strong conviction in the digital transformation that is reshaping every industry every company and how all of US live our daily lives.
This transition will continue to rapidly increase the amount of data generated stored and consumed in the world.
Western digital is uniquely positioned to accelerate and benefit from this transformation.
As the only company, providing a broad array of NAND flash SSD and HDD solutions.
We have a strong portfolio establish footprint operational scale brand and great customer relationships from the cloud to the edge to the endpoint.
On today's call will discuss what we're doing to position. The company for continued success tend to be best prepared to capture the significant opportunities in front of us.
Well I couldn't have anticipated the unprecedented series of events that have transpired since I joined the company on March nine.
I do believe that the underpinnings of the technology architecture. We are all now leveraging on a daily basis has been well established over the past several years.
The public cloud rapidly accelerating innovation.
Across a wide array of increasingly intelligent devices, all brought together by high speed networks.
All elements of this architecture are continually upgraded.
[music] cloudy skies, new and more powerful edge and endpoint capabilities and emerging Fiveg networks.
The increase capabilities across any point of this architecture drive incremental opportunity for all that participate in the ecosystem.
Data is the critical component that unlocks value across as ecosystem that our portfolio is well positioned from the cloud to the edge to the endpoints.
I'm confident our teams innovation and land that HDD technologies will drive significant new opportunity for our customers and value for our shareholders.
As you can probably tell I'm excited to be here and see great opportunities for western digital.
Before we review our results for the third quarter I.
I would like to address how we were operating amid the covance 19 pandemic.
First and foremost our priority is to ensure the health safety and well being of our employees customers and suppliers.
We are carefully following precautionary measures and best practices across our global sites than all production facilities remain operational.
We encountered some supply disruptions in the quarter. However, due to the efforts of our operations team, we saw supply trends improve as the quarter progress.
We also incurred additional costs associated with logistics and other manufacturing activity.
Demand remains strong in the third quarter as expected revenue was 4.2 billion right at the midpoint of our of the guidance provided in January.
We experienced healthy demand from our major cloud customers throughout the quarter than maintained our leading position in the capacity enterprise drive category.
The current environment has accelerated the movement to the cloud transforming the way businesses operate students learn than away friends and families connect.
These trends will continue to drive innovation and data storage growth for a number of years and we are well positions.
Hi capacity hard drives are the foundation to enabling the world's essential zetta bite scale data infrastructure, providing unmatched capacity and tcl efficiency.
Our 14 terabyte products continued to perform well than industry analysts expect this capacity point to remain the industry's highest volume drive at least through the third quarter of calendar 2020.
We are leading the industry and bringing next generation energy assisted drives to market as we recognized revenue for our 16 at 18 terabyte drives during the quarter.
Customer interest in these products specifically, our 18 terabyte drive is very high in the ramp is on schedule.
Customer acceptance of our enterprise Ssds continue to grow.
Our latest 96 layer Nvme me based ssds have completed more than 20 qualifications with well over 100 qualifications in progress at multiple cloud and OEM customers worldwide.
Demand for our notebook solutions was greater than expected due to the shift to working from home and E learning.
We experienced record client SSD revenue during the quarter and expect continued growth in the fiscal fourth quarter.
Desktop hard drive revenue was down due to normal seasonality.
And the shift towards mobile notebook solution.
In addition, smart smart video hard drive demand was softer than expected as a result of coated 19.
Mobile flash bit shipments remained modest in the quarter as we strategically managed our exposure to this part of the market.
Retail was particularly affected by cobot, 19, and a typically seasonally weaker quarter.
As we have approached the ended the quarter, we experienced a decline in demand from traditional brick and mortar retailers.
As they started to temporarily closed their stores.
While many retailers shifted to curbside pickup than began pushing sales through their online channels. We expect physical store closures will create a headwind in our fiscal fourth quarter.
Finally.
New game councils are expected to come to market. Shortly that are re imagining the next generation of gaming.
These new platforms not only utilized nearly one terabit.
Hurting our outlook through the for for the fourth quarter demand remain strong and we expect growth in revenue and profitability.
Of course, the covert 19 pandemic continues to create a very dynamic environment for us to manage but our teams are performing well.
Bible go through the details of our queue for guide.
I am convinced that western digital will play an increasingly vital role in the digital transformation underway.
Combination of right products customer engagement and markets focus provides tremendous opportunities for us.
Flash holds the greatest long term growth opportunity for western digital.
As I mentioned previously that migration to flash within gaming councils is yet. Another example, the flash penetrating deeper into the edge and endpoint.
The adoption of five G. and the build out of the edge to support a new generation of real time services is another exciting development.
We see and expanding Tam for flash that will enable a multi year growth opportunity.
And hard drives we have already aligned our portfolio to capitalize on long term growth areas are technology and products are indispensable to the growth of the public cloud the seminal technology trend of our era.
We are the first to market with next generation energy Assistant drives then we will continue to deliver new innovations to build upon our aerial density leadership.
I joined Western digital to be at the center of this incredible opportunity innovating in one of the critical building blocks of the digital world storage.
Given the breath and strength of our portfolio and the attractive markets. We operate in we need to best positioned the company for ongoing success.
As a result, we have made the decision to suspend our dividend in order to reinvest in the business and support our D. leveraging efforts Bible go into more details on our d. leveraging objectives.
Before I turn the call over to Bob I'd like to take a moment to thank the entire wedged western digital team who have come together. During this challenging time, it's been incredible to see the support teamwork and leadership displayed across all levels.
Together I am confident we will get through this and emerge stronger than before.
Well now as Bob to share our financial highlight.
Thanks, Dave and welcome to Western digital.
Oh, Dave mentioned the World has changed in the last few months I'm impressed by how well the western digital team is coming together and navigating through this challenging.
Results in the fiscal third quarter were generally in line with the guidance provided in January as the men held up well in most of our and markets.
We had coated 19 related impacts, which I will be two and a few minutes.
Revenue was $4.2 billion down one per cent sequentially and up 14% from a year ago.
By N. market.
Devices revenue of $1.8 billion was up 2% on a sequential basis and increase 13% you're over here.
Record client SST revenue drove most of the sequential and year over year growth.
As we look into the fiscal fourth quarter, we anticipate client access d. will experience another strong quarter of revenue growth.
Notebook and P.C. related hard drive revenue declined and now represents under 20% of our total H.D.D. revenue.
Smart video was a bit weaker than expected primarily due to Kobe 19.
And finally.
Oh was up sequentially and year over year, we remain under index to this part of the market.
Data center devices and solutions revenue $1.5 billion was up two per cent sequentially and up nearly 22% year over year.
Capacity enterprise hard drive revenue was flat on a sequential basis.
Enterprise S.S.D. revenue group.
Pointing solutions revenue was $821 million down, 13% sequentially, and 2% you're up a year or.
Retail business was impacted as we approach to the end of the quarter due to cope with 19 related locked down.
These bogged down we'll have an impact on our fiscal fourth quarter.
Demand remain strong in our end markets as we look into the fiscal fourth quarter.
<unk> in client devices in data center devices inclusions should more than off after declining client solutions.
My product category wash revenue was $2.1 billion up 12% sequentially and up 28% year over year.
Flash S.P.'s were up 5% sequentially.
And bit shipments were up seven per cent sequentially.
As we look into the fiscal fourth quarter demand for our flash based solution remain strong and we anticipate that flash prices will rise on a sequential basis.
Hard drive revenue was $2.1 billion down, 12% sequentially and up 2% year over year on a sequential basis. The average price per hard drive increase 5% $85 and exabyte shipments were down 6%.
As we move on to it costs and expenses. Please note all my comments will be related to non gap result, unless stated otherwise.
With covert 19 impacts deal detailed where appropriate.
Gross margin for the third quarter with two percentage points sequentially to 27.9%.
The startup costs of our Fabbing kit, a comma k., one word $62 million and the Kobe 19 related costs, and a quarter where $13 million.
For clarity.
Both items are included in the reported non gap gross margin.
The Kobe 19 costs were primarily related to reduce factory utilization and higher logistics and other costs.
Are flash gross margin was 26.5% of seven percentage points from last quarter due to a stronger pricing environment and cost reductions.
In the quarter, we began to ship production unit out of K. one.
The hard drive gross margin declined to 29.3% from 30.8% and the prior quarter, mostly due to the Kobe 19 impact and mix shifts.
Operating expenses were $738 million slightly lower than expected.
Other income an expense was $91 million higher than expected due to unfavorable foreign exchange rate movements.
The tax rate came in at 23.5% in the quarter, which was lower than our prior range of 25% to 27% for the full year.
We now estimate our fiscal year 2020 tax rate to be between 24 25 cents.
Earnings per share was 85 cents.
Operating cash flow for the third quarter was $142 million and free cash flow was $176 million.
Or free cash flow was better than expected in a quarter that is usually seasonally low.
So far in fiscal 2020.
Generated $847 million in free cash flow and expect to generate very good cash flow in the fourth quarter.
Capital expenditures, which include the purchase of property plant and equipment and activity related to flash ventures on our cash flow statement weren't in flow $34 million due to the timing of funds.
Back and forth to the joint venture.
For the full fiscal year, we expect the cash capital expenditures to be an inflow of a couple of hundred million dollars.
Roasts capital expenditures, which includes our portion of joint venture leasing and self operating funding is expected to be approximately $1.7 billion. This fiscal year.
We're assessing our fiscal 2021 capital expenditures based on the current economic environment.
Oh liquidity position continues to be strong at the end of the quarter, we had $2.9 billion in cash in cash equivalent and our gross debt outstanding was $9.8 billion.
In the fiscal third quarter, we distributed $149 million in dividends to our shareholders and made an optional hundred and 50 million dollar debt pay down.
Fiscal year to date, we've lowered our debt by about $920 million.
Our first priority for cash utilization is to reinvest in the business.
Since we're suspending our dividend our second priority is repayment up debt.
Our current plan is to reevaluate the dividend and other shareholder return policies and our total dad is under $6 billion and our net debt is under $3 billion.
<unk> recycle is to have at growth leverage in the range of one to 3.5 times the the dog.
Our current debt you bid all leverage was 5.0 times in the third quarter.
I want to make it clear suspending the dividend is not related to our debt covenants, we have substantial room under our covenants.
Moving on to non gap guidance for the fiscal fourth quarter.
We extract revenue to be in the range of 4.25 to 4.4 or $5 billion.
Gross margin is expected to be between 29 and 31%.
This range includes approximately $65 million in cost associated with the K. one fab.
We're also anticipating the impacts of Kobe at 19.
Operating expenses are expected to be between 740 $760 million.
Good point of the guidance range assumes normal variable compensation expense.
Interest and other expense is expected to be between 75, an $80 million.
The tax rates should be between 24, 25%.
As a result of this detailed guidance, we expect earnings per share between a dollar and $1.40, assuming approximately 302 million in fully diluted shares.
We're using a wider range this quarter, primarily due to the uncertainty and the environment.
What's that we will now begin acuity session operator ready for our first question.
Thank you, ladies and gentlemen, it'd be one now begin the question answering a question of today's call. If you have a question. Please pastime why don't you sound.
Like too much I have question. Please press the pound.
One moment please for the first question.
I think the question will come from mine raincoats like well find out. Please go ahead.
Yeah. Thanks for taking the question.
Well, it's yeah, I'll I'll, maybe I'll start with just talking about I I think was like eight <unk> presentation. You guys gave some commentary Romney outlook.
Oh that you have the flash spoke with as for as far as industry supply <unk> as well as your expectation previously, noting that you'd expect admit 30% grow on enterprise high capacity near aligned dried shipments little four year and on the second point you just it looks like you definitely underperform familiar appear on.
Airline just if you can help us understand what you're seeing.
Market relative to the performance replaced seat.
So.
The first question.
Part of it but it sounds like that was on.
Lighting, a supply and demand growth.
So look I mean, let let me start out with with what we're seeing right now I mean, we saw good demand we saw as Bob talked about margins up this quarter. We're we're next quarter was as we expected asked me.
Up again, obviously as we get into the second half a year things get a little more difficult to to really project I think we're looking at various different recovery scenarios.
And those and we'll be proven about how we do that.
On an airline side I mean.
Happy with where the.
Performed.
You know the 14 Terrabyte is still performing well 18 terrified chips for revenue this quarter as we talked about you know that we made that commitment we delivered on that the raptors on schedule, we see great interest from that there's no doubt we're in a little bit of a product transition in the industry and that'll.
Out over the next couple of quarters, but.
We're happy with where the portfolio is.
Have anything to add on I think that's a good summary, and we're we're ramping announced plans.
Okay.
Follow up on <unk> I know you <unk>, you know room as far as your <unk> five fine you don't dare to adjust to be <unk> can you just remind gets again what those segments are what the threshold look like I I I think it was a little bit lower than that so you know just refresh it to get on <unk>.
Maybe covenants change going forward.
So the covenants are related to adjust to you, but Don number that we use for compliance purposes, and so that the ratio is well below the five that we show as a non gap yeah, you bid on number and we we as you saw it made progress and a quarter, our our growth leverage.
Went from 5.7 to 5.0 this quarter. So we're we're definitely a trendy to in the right direction.
And as I said, you know that we have plenty of room under the covenant.
Just haven't given a lot of specifics on the actual compliance covenants.
Okay, I'll get back to see <unk>.
That's right.
Thank you know our next question what comes on channel nine with Morgan Stanley. Please go ahead.
Great. Thank you [noise] because you could talk about the decision I run the dividend and we highlighted this is something you should consider but I just curious how much of it is the current environment any uncertainties around.
Versus just coming in as a new C.L. and wanting to get to these leverage targets, but before you start paying cash huh.
You know like anything I think it's a combination of a lot of things, but certainly the current situation.
Yeah bring some focus to to that the desire to do you leverage a little faster.
But the real issue and and and of course.
Real issue is I come into the business in the company is really well positioned you know when I think I talked about it in my remarks.
I think about the technology trends that are going on right now it's I mean, it's happening in the cloud obviously, everybody knows that the public cloud is a huge transition we continue to see.
Credible gross that we will talk about that for a long time, where we're very well positioned in that market.
You know it.
Perform in the fourth quarter, we'll see that hard drive market up the portfolio has been three positions for that capacity.
Hard drive capacity enterprise marketable she actually see that market returned to gross after several years of.
Decline and maybe going sideways a little bit so.
We're very well index of what I think is one of the biggest technology trends we've seen in a very very long time and is that continues that's going to be good for our portfolio.
Then we have the flash portfolio, which you know if you look at the edge, we have just new markets coming online all the time, we we've talked about gaming.
See see our headsets all kinds of things are going to drive demanding that side of the market as well. So we're playing the portfolio is very well position and we have lots of opportunities to invest in the growth of the business and when I think you. When you put that altogether. It was the right time to move onto a different different model.
Great thing so much.
<unk>.
Follow up you can assess the current environment, we see a fair amount of tightness, particularly on enterprise Great man how much of that you think is just tight supply demand of of run man versus you know tighter supply of P.C.D. controllers things like that it seems like it's it's a combination of both.
You know you still think to take the underlying and market is pretty healthy.
Yeah, we're we're still very bullish on the enterprise us as the market and you know we Joe We've got goes to get up to 20 per cent market share their.
In the short term you know you're right, it's a matter of balancing and making sure. We got there right controllers to to go with the Nam for that market and and so that's probably the controller size more of a challenge than than than side, but we're very very optimistic on that business.
Okay. Thank you thanks to.
Thank you know our next question will come from call Act come in with Carolyn. Please go ahead.
Hi, good afternoon.
Welcome to the team did.
Two questions high may.
<unk>.
I was hoping you could provide a little bit more clarity on when we should expect volumes.
Oh, your 16, and 18 term I drive to cross over your 14 term I drive I can appreciate your conservatism given limited using the second half but.
We actually see the 18 termite timeline accelerate given robust data center demand.
Yeah, Carly thing, where things are going to see for me as I had a really focus on forecasting one quarter to time.
So it's not going to happen next quarter.
You knew that you know I think we're looking several quarters out I guess is what I'll say at this point I I think.
You know willing to accelerate given the increase cloud demand we're seeing.
Yeah, we're seeing a lotta demand for that product already I don't think it's going to accelerate one way or another based on.
I mean work, we're basically going to we have the demand we need to wrap the problem.
So we're looking forward to it being a great launched now and the team is very focused on continuing to make supply available, but yeah. We're we're excited about the product.
That can as in the fault if I may.
Are you capacity constraint on your line today and demand launch probably difficult to ascertain what your customers inventory levels are has man inventory on your own balance sheet declined on a daily basis in March and any thoughts on how that could trend in that you in core.
Thank you.
Yeah.
Yeah, I I can start with the inventory question. So you are inventories were up just slightly this quarter I actually think in the next quarter, you'll see inventories coming down quite a bit because of some of the supply chain challenges, but I'd save everything seems to be an equilibrium in general.
Yeah.
I would say the same thing about the supply.
We supply constraint I think it balances is is what we expected at this point.
We continue to see strong demand.
[noise] thanking our next question will come from Sydney, How we're going to bank. Please go ahead.
Uh-huh great. Thanks for taking my question type two questions, which one is on the coast smoking guide being 29% to 31% on on gap thesis I knew there was a number.
Moving parts.
You talk on the price to clamp he's just help us the on the bridge between what you weren't Cisco Q.T., where it does a bunch of expenses are included hand held that gets petsko queue for.
Yeah. So I'm sitting here says Bob I'll I'll take that so the actually we'd probably have more absorption variants and costs Edwin and the fourth fiscal quarter than we had to the third.
And we are trying to move prices up where we can in the market as a result for those incremental costs. So it's yeah. It's absorption at logistics costs, it's other costs and making sure the environments are safe around the world. So you know, it's actually a bigger challenge in the fourth quarter.
Okay <unk> be like Oh question is you know your clothes cash Catholics to $1.7 billion from I think last according to the two and half just trying to figure out what has changed there in terms of the cap explains I I understand for makes you guys are not ready to get the guidance, but just.
<unk> qualitatively at the rationally, how you're thinking about tech migration waiting for <unk> does get those kinds of things will be great. Thank you.
Yeah, so without talking too much about this specific number as you know this was always anticipated to be.
Low growth cutbacks here for us because you go back a year ago, we were we were reducing.
The amount it could be.
After D., we had we actually took them off line about a year ago as you'll recall.
In a along with our partner we'd pushed out some of the cap action segmentation. So we'd always expected this could be a light year and I still expect contracts will be up next year.
Already at this point to say how much that'll be.
[noise]. Thank you.
Next question will come from many house anyway. Thank.
[noise] get said thanks for taking my question.
I would I go back to your hard disk drive is.
As a few years it seems like.
Yeah.
Cause it to skipping no.
<unk> may have some market share in 60, Turnabout and now you are I guess shibley <unk> <unk>.
<unk>.
[noise] [noise] produce looking for.
Mhm.
<unk> an update on your <unk> do you and he's.
Context, my fun <unk>.
Put David is this the first time that you have the Mike if you could please.
Tell us how do you see the company moving forward and <unk>.
How did you say you employing I understand that you've been on board from D., maybe a a one or two month, but both men and hard disk drive a very dynamic these changes on Monday.
<unk>.
Extend that you showed me this year long term vision and your strategy would be very helpful. Thank you.
Okay. So.
<unk> on the on the first question you're right. We are in a product transition and we are yeah. We are excited about <unk> like drive.
Not yet a expert on hard drive aerial density, but I've come up to speed on it you know relatively quickly I mean, you're right, it's getting harder and harder to drive more density, but we you know we have an enormous amount of r. and d. in this area and I and we're going to invest.
Aggressively to make sure we may.
Contain our lead and aerial density and I think you'll hear more from US you know coming up about that there's lots of things going on as are always is.
In in our in D. organizations, and that's been one of the things that it has not been surprising to me, but when I came in but as it is great to see is just adapt.
Of talent, that's in the organization to drive the road map in that critical technology.
Like I said I mean, this is what I look at the strategy of the company I mean, we will have more.
What to say about this in the future, but when I looked at this coming in.
The company is very well positions in the factor that made the pivot to flash.
And if you know the way I look at the World is how it how it evolves as you've got this we're in like almost.
It's kind of almost cliche to say at about this on precedented amount of technological change it always seems to be going faster, but.
I mean really an over the last number of years the the change that the cloud in the public cloud is driven and the amount of technological changes, it's pushing on every industry and every.
Company is just astounding, there's lots of reasons for that.
And many wages.
Democratizing the access to the most sophisticated technology everybody can have it now through an A.P.I. call and that's just causing just a huge wave of investment and technological change and advancement for every company every industry.
For all of US our portfolio is very well positions to support you know we provide one of the key building blocks.
Fundamental elements of that digital world storage I think in the cloud in our our leadership an aerial density we are very very highly correlated to that gross factor in the industry, but not just that it's also.
On the plus side, you've got yeah, yeah, you've got.
The edge and end points, and what's happening there and they're becoming more sophisticated.
You know networks, which is something I'm pretty familiar with giving my history networks are getting faster that's enabling a lot.
For higher.
Much more capable end points.
To be interconnected that's driving the flash side of the business we've talked about this prepared remarks.
I just look at the gaming market all the sudden becomes opens up to this.
New market, just opens up to us and there will be more and more of those happening and then these two things reinforce each other the more innovation or is at the edge. It on the endpoints attracts more data for data that needs to be stored or more data that needs to be processed insights need to be derived from it and that becomes.
Kind of his virtuous cycle that happens and I think the company is very well positioned on both sides to that so we'll have more to say on Halloween.
Zero in on that and you're right. It is a very dynamic market you know, it's very sensitive to supply and demand changes, but the general trajectory is a good one we're in a good market. It's always great to be in great. Tambs that are growing as I said, even the hard drive business, which is you know we pal.
I say, we the team here, that's repositioned the portfolio around capacity enterprise and you're seeing the gross now come back to that technology base, which is great.
So.
Up there will have I'll have more to stay in the future, but as I said I'm I'm Super happy to be here I think it's I think with this company provides is incredibly.
Fundamental and critical for the World that we're all going to and and we use every day so.
And we'll we'll style that even more dial that in more as we go forward.
For the question.
Thank you.
Thank you know our next question will come from C. Jamie's whatever Oh. Please go ahead.
Yeah, but that's a neat thank you for taking the question I guess first.
Pushing on gross margins can you repeat what would the k. one charges are in in new June quarter, and how you see that progressing through the rest of the calendar year and then can you also share with us would covert expenses you're assuming.
<unk> I'm, assuming again, that's all well, mostly H.D.D. related and is that something that we should be I'm thinking about as we bought all out into the back out for the year.
Yeah. So so far of a of take a cut it to C.J. I I believe I said, the I.K. one costs word $62 million in the in the current quarter and guided tour around 65 million next quarter, I think that'll be roughly the level through the rough but calendar year and then you should start to see a drop off pretty quickly next.
Here is volume starts.
More.
So I I think thing.
The way, we're seeing it right now.
In terms of Kobe 19.
Aren't going to get specific in terms of the costs as I mentioned, we'll have more absorption variances. This quarter will also have a more logistics cross this quarter and at a number of other.
We're going to be able to partially offset that would pricing.
And our customers will share in some of that but we're still nah nah.
<unk>.
At night.
But I don't want to get too detailed on that because it's just too hard to tell out or.
Right now and yeah, we'll just have to take a one quarter time as we move forward. So far you know demand has held up.
Pretty well for us and and we'll just have to see how that continues through the through the year.
But don't see major changes right now.
Yeah.
Thanks feature.
Thank you for next question comes from until she a high involvement. Please go ahead.
Good afternoon, and thank you for taking the questions first one again on gross margins isn't and business very nice expansion into March quarter. A 90 days ago, you guys talked about gross margins potentially being in the 35% to 40% range in the back half of the year.
Appreciate you guys aren't gardening for the full year, but is that still the right appropriate range or how things evolve given hope in 19 and it's ramifications.
So you got to write that we're going to stick to one quarter of time, but I mean, they're going in the right direction I mean it the the fact I mean, we've forecast for next quarter's a forecast for next quarter, we feel good.
The band is.
But you know.
We'll see how it goes here week by week as we go through the corridor.
Yeah.
<unk>.
So does it follow up.
Kind of the fall question too Somebody's question earlier, there's that I. Appreciate your bone we've been around for <unk> for a month plus here, but.
<unk>.
Oh neat share me, one or two things that you'd like to change or improve upon out the company. In response to know your question I think you talked about being comfortable with a portfolio and having the confidence and sort of go gross profile the company, but how about from an operational standpoint, any any one or two things that you hope to change or improve upon.
I guess as as a as a out on to that if you had to pick one or two kind of financial metrics that you tend to to focus on prioritized actually kinda speak to those that would be helpful. Whether it be revenue or margin G.P.S. cash flow.
Thank you.
<unk> I mean, I think it's a I appreciate the question I.
I guess I'll say in general, it's a difficult quarter to draw lots of long term conclusions about much of anything right now.
The.
You know I will say.
The operations team is just incredible job I mean, I've watched as play out now all over the last seven weeks or so that then here and.
Yeah, we we have a global footprint with with factories and Fabs all over the World, China, Japan, The Philippines, Malaysia, Thailand here in the U.S. and.
To see how all the best practices and shared and all of those within kept open it and and functioning at some level and then increasing capabilities working with our suppliers.
I think that's a tremendous straight to the company.
I have more to say about that later, but again I think this past seven weeks is not a time, where you want to look at anything and draw a really long term conclusion, given the dynamics situation. We're in.
As far as as far as financial metrics. There's there's lots of good ones clearly gross margin, it's something we're going to be very focused on making sure. We're investing our resources in the places that can draw the highest return.
That that is obviously, a very big focus in a in cash generation quite honestly and make sure where.
Managing for that so those are two that are at the top of.
Oh, Oh long list.
Really helpful. Thank you.
Thank you. My next question comes from Jim Sounds like City Graham. Please go ahead.
Hi, good afternoon. This.
Right now we're in good shape.
You know, obviously answered incredibly dynamics situation I'll say that right from this.
Sorry, I mean every day it changes in every day of course, you get new information to make the best decision about how you're going to move forward, but the team has done a great job of that.
Things opened the whole time.
Literally over the past.
Asked two or three weeks things have gotten significantly.
Stronger.
And it puts us in a position right now where I think we're we're I don't want to use the term normal because I don't think anything's normal in the world right now, but we're operating at a level that I mean, obviously, we're operating a level of support that we just put forward. So I feel really good about what the team is done and the position they put us.
And around the world, what we're saying Super vigilance to make sure one that we implement best practices across all all of our facilities. You know we are working from home at a significant level everywhere, we can and that's making the situation better but the people that have to come in to keep the businesses running and as you know.
We are essential business and everywhere, we operate that hasn't been an issue about getting any kind of authorization to operate.
But making sure that the people that are in the facilities are safe.
We've had we've had good success, there as well or supply chain, we've been working with our supply chain, we've been helping out our supply chain to make sure they get the appropriate.
You know government release to continue to operate.
We've been doing some diversification of that to fill some gaps and some non regrets moves on that but right now the supply chain again, it's the same thing as our own facilities. It's week by week, it's gotten better to a point where right. Now we are you feel like we're in.
Relatively strong position.
Yeah, I mean, we're able to hear producing at this point and you know I could change, but everybody's produce.
Thank you know our next question comes from mid Steve with I.V.C. cap. It on my Kids. Please go ahead.
[noise] took my question.
A small one big yeah. So the first ones would go into the dividend and cancellation there. So what what type of leverage maturity I was trying to get too or is there any sort of way to think about when it it'll be reinstated in terms of upon each semester mature and then secondly, just given the the supply.
Disruptions overseen economic wise Ah disruption.
The new view in terms of what you guys police smartphone units will look like I'll call. It close to 24 months one other time for you on the news [noise].
Right So Mrs. Bob I'll I'll start.
Are one of the things we've done as we've studied the capital structure quite a bit and and.
Concluded his obviously, it's a sickly.
Local business, we want to have a a growth whoever's. It works for us through this cycle Oh, we're expecting as we bring our our debt levels down to well managed to anywhere from.
123.5 times, the the dog, depending on where we are in the cycle.
And as I mentioned the goal is to get our our growth dead down to about $60 million.
Yeah, two or $3 billion.
And yeah, I don't know fuel.
Hey match How're, you doing things for the.
Question.
Back to the mobile phone market. So we're we're not trying to forecast it and we're not as exposed to it as some of our customers I'm sorry.
Editors.
[laughter].
That's.
Thank you know our next question come to Stephen Fox Fox Advisors. Please go ahead.
Thanks, Good afternoon I just kinda question on the retail channel you mentioned, there's obviously, there's a pretty big destruction and the channel right. Now can you talk about one how it impacted the guidance for the current quarter and then secondly, when we think.
That sort of you know those brands, which are pretty strong in retail league western digital any old San disk products.
But you're you're sort of focus on those longer term given that you could probably we deploy those debts and heads in media into more profitable area.
Thank you.
So I think it's we talked about for the fourth quarter. We you know we expect some headwinds in that business. I think it's typically is easily we'd corridor anyway, and obviously with store's not being open.
It makes it a lot tougher.
You know last quarter as we talked about towards the end of the quarter. We we obviously saw deterioration as close stores for clothes and we also so.
Saw the mic shift to lower margin products as well, we've got that all factored into the guy.
Again, we're very we're very comfortable with the guy the guys. Okay.
So we've got all the dynamics that we expect to happen in the retail channel baked into those numbers.
No longer term again, we'll have more to say about longer term strategy, but I think it's a great strength of the company though.
I think it's an area, where we can drive differentiation that we can drive margin in those channels as well they're not just.
So.
I feel good about that capability.
It's one of the things that attracted me a company so.
Yeah, well I get we'll have more to say about what the long term strategy is there, but I think it's a it's definitely an asset.
Great. Thank you very much good luck going forward.
Thank you Steve.
Thank you I'm next question will come from Sri name perjury with S.N.B.C. Nico Katie.
Thank you a good afternoon, guys, Dave I guess [noise].
And you know the the current demand is sustainable I guess into the second half I guess, we all we are all are trying to do that [laughter] disappointing, but what I'm trying to get it is that they know you you guys tend to have pretty good visibility on the Hyperscale cloud side, given your design cycles I just want to hear your thoughts as to what.
Customers are saying about the second half and what sort of design activity on the drawing. So you were saying you know any thoughts would be helpful.
Yeah, again, I'll I always catch everything with we're gonna Guy one quarter time, but it's a fair question I mean.
We I I guess, the only thing we can say as we continue to see strong demand from the from though.
Clouds suppliers.
You know there's always a question are they building inventory or they buying at the old consumption digestion kind of thing everything. We see is you know they're strong demand for what their products or anything they're saying the same thing not saying anything new there.
How long it last I mean.
What I talked about in the intro of in my prepared remarks, I mean, I think this world that we're all living in because of cold at 19.
Just a lot more work at home learn at all there's just a lot more dependence on clouded endpoint technologies.
I think that.
Architecture has been set for some time now and yeah.
Impacting every business.
We've seen a massive acceleration to that.
Fortunately because of a global pandemic.
The question is how much it.
Continue to stay as it starts to subside.
I don't you know, obviously there'll be some variability in that given that there's so many people at home now, but I like I said I think the model is set and I think it's how fast we're going to get there I don't think there's there's a question on funny is that the rank destination. So yeah, we'll see as we move into the second half our conversations with all those customers.
Then you to be fantastic you're right.
One other thing that's been greatness I'd come into this company is just to understand.
So far relationship.
The strength of our footprint and those customers is extremely impressive.
So we're going to stay very close to them continue to work with them and.
Infrastructure.
But right now I don't think yeah, we we don't have any sign that.
Well, we I.
I think what we're seeing as you increase demand and nothing tells us that it's.
But but real demand and how far it how far it extends into the second half we'll see is.
Helpful. Thank you and then.
But I guess as you try to improve the free cash flow going forward. A couple of line items I want to hear your thoughts on first on the all back [laughter] and then the other thing I notice is that you know you've been paying a fairly high tax rate relatively speaking at least on a non got bases compared to you or a semi peers I'm just curious as to why that he's under windows.
To come down thank you.
Yeah, so too good questions Outback, but I think the best assumption is that it will be around the levels. We got into this quarter for the for that.
Q quarters anyway.
The on the tax rate. The dilemma is we have a fantastic structure, when we're making more money than we are right now and so right now in our profitability levels are relatively low we have certain minimum taxes, we have to pay around the world in it and make our tax rate.
Alright, so it'll come down is the overall profitability starts to come up.
Thank you.
Right.
Thank you know as a reminder, ladies and gentlemen, please limit yourself to one question. Then one follow up question. My next question comes from Highland sounds like G.P.M.Y. again. Please go ahead.
Good afternoon. My question, let's put the team sub continued strong growth in the rental your new enterprise S.C.C. platforms. I know you goes it's hard being 20% market share but.
And your shipments into March quota or an assumption on industry shipments you guys actually achieve double digits percentage market share.
In the market quarter.
Yeah, I'd say this year was fairly flat fair market is growing quite a bit. So you know where as I mentioned earlier were a bit constrained now controllers right now, but the demand is definitely there.
Okay, great thinks that and then on the phone with 19 operational issues team and we just give us a bit more color on where these are coming from I know that you guys. You know dogs shelter in place and movement control in the Bay area, Philippines, Thailand, Malaysia old areas, where you guys have.
Operations, any geography is which are creating more of a push appointment operational alone or logistics perspective. Thank you.
I don't really want to call out any one area over another because.
Yeah.
And it changes quite a bit based on a local situations, but you know obviously, if there's a couple different categories things fall into first is logistics.
It's gotten more expensive to get them move stuff around.
A lot of stuff went on domestic flights.
Passenger flights, there's a lot fewer of those those costs are going out.
The general number of places that are open and how difficult it is to move things around his.
Category of costs.
In in places, where we maybe do have a little bit of on it or we can't run at full capacity, although that's getting to be less and less and less of an issue over the last couple of weeks or something and cost.
Talked about and then there's some just general costs of just a increase cleaning and those kinds of things, but those are relatively minor.
Oh.
No I I think that's right I mean, I I think certainly made it'll be better than April and I think it'll be even a little better than me yeah.
Okay. Thanks to the insights it really has been a week over a week it's gone.
Much better.
Thank you.
Thank you know an X. question will come from just didn't get on with their please go ahead.
Hi, good afternoon, we couldn't reading recently about the H.D., placing going out to match.
Gosh, what what's your sense [laughter], placing an H.T.D. going for it then and what it does.
Swaption, creating the country and and not having to wear pointing to the.
Next step you quarters.
Oh I don't know about for the next few cars, but we have then you know we have been.
Somewhat successful and moving pricing to cover somebody increase costs I think that's what that's what our focus is on anything around crises.
In the industry, but we're not looking at it.
Looking at it in the sense of what it takes to to cover the increased cost that we have at the business and you know we have a good idea what those are gonna be for next quarter and when we get there will figure out what's what's gonna happen in.
No I agree.
[noise] articulate and then just a quick just to make fun of <unk> you stuck to know about.
<unk>.
And how does that seem completely sheet that is there any clarification that you keep putting too.
Yeah, maybe percentage without but that's currently so discount quarter going to be impacted by those disruptions I know that he's talked about two expectation 20th century and wants to come down just trying to put things together in terms of.
Whether they can eat meaningfully impact committing any impact on on this guy coming up to see Swaptions this quarter.
Yeah, I don't want to put a specific number on it because of potential that it's a very as I said it several times, a very dynamic environment I would say that.
Yeah, we have confidence in the supply the supply that's gonna be produced to support the guys for the next quarter.
We have a lot of confidence in that but it could check you know things change every day.
But I said the trend has been going it's been getting better and better to where it's given us the confidence to put the guide in place that we have.
Great. Thank you.
Thank you Yeah. The last question comes from Weston Twain with Keybank happened.
Before we end with a short statement by I.C.L. Please go ahead.
Yeah I. Thank you for taking my question I had a couple quick ones first it was just wanting to each had a chance to look at the we should commerce real change regarding.
Company Northern exposure in China, Russia in Venezuela.
Specifically in China, you'd previously said you have 20% to 25% expose and I'm wondering if you had it seems to think about how much of that might fall under a new definitions I'm in school.
We've had we've had a chance to take a quick look at it and we don't believe it will have a material impact on occurs.
[noise], but okay monitor it very very closely.
That makes sense. That's helpful. And then the other question I had was just on notebooks, it's been a big driver near term revenue.
Can you talk about the density trends in notebooks and the backlash from your own interest that might be another table are going up and I put it that might be outstanding. If you guys are down.
Yeah.
Yeah I.
Again, we're gonna stick to talking about things for next quarter I I don't have anything and particularly insightful to say about density trends books at this point.
No I I don't I mean, obviously, it's come up over the last year, but I I think as we go forward.
We can follow up with.
Tales.
Oh that sounds good. Thank you thank U.S.
Alright.
I think all of you for joining us here today, we look forward to seeing your virtually at the upcoming J.P. Morgan in Bank of America conferences.
And the rest of your day. Thank you thank third one.
Today's conference call. Thank you for joining you may now just kinda.
[music].
[music].
[music].
Good afternoon. Thank you for standing by welcome to Western Digital's fiscal third quarter 2020 conference.
We all participants are in listen only mode.
Later, we will conduct a question and answer session.
That time, if he would like to ask the question you May Press Star one on your phone as reminder, this call is being recorded.
Now I'll turn the call over to Mr., Peter Andrew you may begin.
Okay. Thank you and good afternoon, everyone. Joining me today, our David Gagliano, Chief Executive Officer, and Bob You out Chief Financial Officer.
Before we begin let me remind everyone that todays discussion does contain forward looking statements, including product development expectations business plans trends and financial outlook based on management's current assumptions and expectations and outside does include risks and uncertainties, we assume no obligation to update the state.
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 it 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.
I'll now turn the call over to David.
Thanks Peter.
I would like to thank everyone for joining us this afternoon and I hope to you and your families are well given the cobot 19, pets pandemic, where all facing.
I joined Western digital a little over a month ago, because I have strong conviction in the digital transformation that is reshaping every industry every company now all of US live our daily lives.
This transition will continue to rapidly increase the amount of data generated stored and consumed in the world.
Western digital is uniquely positioned to accelerate and benefit from this transformation.
The only company, providing a broad array of NAND flash.
Let's see an H.D.D. solution.
We have a strong portfolio establish footprint operational scale brand and great customer relationships from the cloud to the edge to the endpoint.
On today's call will discuss what we're doing to position. The company for continued success tend to be best prepared to capture the significant opportunities in front of us.
Well I couldn't have anticipated the unprecedented series of events that have transpired since I joined the company on March nine.
I do believe that the underpinnings of the technology architecture. We are all know leveraging on a daily basis has been well established over the past several here.
The public cloud rapidly accelerating innovation.
Across a wide array of increasingly intelligent devices, all brought together by high speed networks.
All elements of this architecture are continually upgraded.
Cloudy skies, new and more powerful edge, an endpoint capabilities and emerging Fiveg networks.
The increase capabilities across any point of this architecture drive incremental opportunity for all that participate in the ecosystem.
Data is the critical component that unlocks value across this ecosystem that our portfolio is well positioned from the cloud to the edge to the endpoints.
I'm confident our teams innovation and land at HGTV technologies will drive significant new opportunity for our customers and value for our shareholders.
As you can probably tell I'm excited to be here and see great opportunities for western digital.
Before we review our results for the third quarter I.
I would like to address how we were operating amid the covert 19 pandemic.
First and foremost our priority is to ensure the health safety and well being of our employees customers and suppliers.
We're carefully following precautionary measures and best practices across our global sites and all production facilities remain operational.
We encountered some supply disruptions in the quarter. However, due to the efforts of our operations team, we saw supply trends improve as the quarter progress.
We also incurred additional costs associated with logistics and other manufacturing activity.
Demand remains strong in the third quarter as expected revenue was 4.2 billion right at the midpoint of art of the guidance provided in January.
We experienced healthy demand from our major cloud customers throughout the quarter and maintained our leading position in the capacity enterprise drive category.
The current environment has accelerated the movement to the cloud transforming the way businesses operate students learn than the way friends and families connect.
These trends will continue to drive innovation and data storage growth for a number of years and we are well positions.
Hi capacity hard drives are the foundation to enabling the world's essential zetta bite scale data infrastructure, providing unmatched capacity and tcl efficiency.
Terabyte products continued to perform well.
An industry analysts expect this capacity point to remain the industry's highest volume drive at least through the third quarter of calendar 2020.
We are leading the industry and bringing next generation energy assisted drives to market as we recognize revenue for our 16 and 18 terabyte drives during the quarter.
Customer interest in these products specifically, our 18 terabyte drive is very high and the ramp is on schedule.
Customer acceptance of our enterprise Ssds continue to grow.
Our latest 96 layer and the base Ssds have completed more than 20 qualification with well over 100 qualifications in progress at multiple cloud and OEM customers worldwide.
Demand for our notebooks solutions was greater than expected due to the shift to working from home and E learning.
We experienced record client SSD revenue during the quarter and expect continued growth in the system.
Fourth.
Desktop hard drive revenue was down due to normal seasonality.
And a shift towards mobile notebook solution.
In addition, smart.
[music].
Bart.
Yes.