Q4 2020 Western Digital Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Western Digital's fourth quarter fiscal 2020 conference call. At this time all participants on the listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone if we require neat.
Further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker Mr., Peter Andrew Vice President of Investor Relations. Please go ahead Sir.
Thank you and good afternoon, everyone.
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Thank you and good afternoon, everyone. Joining me today or David Guettler, Chief Executive Officer, and Bob You Love Chief Financial Officer.
Well, we begun let me remind everyone that today's discussion contains forward looking statements, including product portfolio expectations business plans trends in financial outlook based on management's current assumptions and expectations and dancers 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 web site.
With that I will now turn the call over to David.
Thanks, Peter and thanks, everyone for joining us this afternoon to discuss our fourth quarter and fiscal year 2020 results.
Hope that you and your families are staying help healthy insights.
As I reflect on my first full quarter as CEO of Western digital I'm extremely proud of the way our team has navigated the complexities of uncertainties inherent in this unprecedented environment as a company. We continue to adapt to provide continuity in high quality products for customers deliver value to our shareholders and importantly, prioritize the hell.
Within the safety of our employees.
We have any view into many drivers and trends at play both domestically and internationally due to the breadth of our portfolio of innovative flash and hard drive solutions going into cloud OEM channel and retail end markets. We look at our business Holistically, but it is especially important no to understand the nuances.
Challenges and opportunities in each market we serve.
So before we dig into the results for the quarter and full year I want to talk about how the cobot 19 pandemic in other macro trends are impacting the business.
Ill then update you on how we're thinking about our straight to strategic priorities for the fiscal year 2021 before turning it over to Bob for a financial update which will be followed by Q in a.
[noise] Western digital is successfully managed through this unpredictable time with limited business impact from the pandemic.
We made important investments and changes to minimize manufacturing and logistical challenges that wrote that were primarily impacting our hard drive business, Bob will discuss the financial impact of these later in the call.
And we have maintained our focus on delivering for customers throughout.
From an end market standpoint demand was mixed in the quarter and if theres a common theme among our end markets. It's uncertainty in the second half of fiscal 2020 customers were focused focused on ensuring they had enough supply to meet heightened demand as expected demand in our cloud business was strong.
Due to the work from home trend at the same time healthy demand for our flash based notebook solutions drove record revenue in our OEM end market.
Finally in retail, while we have a robust distribution channel with over 350000 points of purchase around the world and well established brands, we were impacted by cobot related lockdowns at many of our brick and mortar customers.
We did see the business recover as the quarter progress due to easing of Lockdowns in a transition to online buying with curbside pickup.
As we look to the first half of fiscal 2021 uncertainty remains we remain vigilant given the resurgence of the virus and its potential to disrupt our supply chain, including our ability to keep full teams working in our manufacturing facilities.
Apart from Cobot 19 were managing through other macro trends the global economic contraction is generally is generating an uncertain demand environment and we're closely monitoring trade related geopolitical developments, which are pertinent to a global business like ours.
These near term headwinds will eventually subside and we're confident that the strengths of our portfolio and customer strong customer relationships are well aligned where the growth is in the cloud and on the edge. We've continued to make strategic technology and product investments in both flash and hard drives to drive long term revenue growth and grow.
Gross margin expansion.
Now turning to our financial results in the first in the fourth quarter results were generally in line with our guidance. We achieved this while partially offsetting higher than anticipated cobot 19 related costs, which Bob will discuss in more detail.
We reported revenue of 4.3 billion and non-GAAP earnings per share of $1.23 cents, mainly driven by growth in the cloud and record results for our client SSD portfolio for notebooks.
Looking back at the full fiscal year 2020, I am pleased with our performance our end market diversity and breadth broad customer base channel reach in innovative leadership, all position western digital to benefit from the multiyear growth and data creation in storage for fiscal 2020 revenue totaled 16.7 billion.
And we reported non-GAAP earnings per share of $3.04. We continued to align our portfolio with a sharp focus on growth and margin improvement.
Importantly over the last year, we brought to market several exciting new innovations across both flash and hard drives that I'd like to touch upon.
Starting with flash as you know, we believe flashes the greatest long term growth opportunity for western digital and as an area, where we've already had a tremendous foundation with consumer cards, USBC drives and clients in enterprise Ssds.
As I mentioned on the Q3 call the migration to flash within game consoles as yet. Another example of flash penetrating deeper into the edge and endpoint the adoption of Fiveg in the build out of the edge to support new generation a real time services is another exciting development, we see an expanding Tam for flash that underpins a multiyear growth on.
For community.
To capitalize on this opportunity, we launched fixed five or 112 layer flash product in retail last quarter, which delivers exceptional capacity performance and reliability all at an attractive cost the ramp has gone very well with impressive yields than we are just at the beginning stage.
As of this product Ram.
While we focus on ramping VIX five fix for has continued to provide the right balance of performance and cost reduction.
Yes for represented over 60% of fixed fits shipped in the quarter.
Earlier this year, we celebrated the first production wafer shipment from our K, one fab, our new manufacturing facility for Threed fixed flash memory.
This is another important milestone, reflecting the successful 20 year partnership we've had with Coke ship.
Another major highlight has been bend the ramp of our enterprise SSD product line enterprise SSD revenue in the quarter grew nearly 70% sequentially and our revenue share increase to the low double digits. This will will remain an important area of focus within our flash portfolio.
Now turning to hard drives we continue to lead the industry an aerial density using innovations across the entire drive algorithms firmware mechanical heads and media.
We were the first in the industry to ship energy assisted drives for mass production and expect a strong ramp into the fiscal second quarter end beyond.
In short, we're going through important product transitions in both our flash and HDD businesses that we think set up western digital well for the future.
Recognizing that these are uncertain times, we believe that the most important thing we can do is keep our foot on the proverbial innovation pedal and execute on the roadmap across the business. We have an extremely talented team working on new products that will continue to drive leadership and flash in hard drives.
Looking ahead, our stretched our strategic priorities are centered around driving innovation for customers and value for shareholders.
First and foremost we will focus on driving long term shareholder value as we bolster our flash and HDD portfolios, including ramping two important product lines to high volume.
Our SSD products in our energy assisted capacity enterprise drives. The secondly, we will accelerate our transition to fixed five delivering additional performance for our customers and notable cost advantages for western digital.
Third we will continue to sharpen our execution from a product roadmap and strategic business objectives, and finally, we are evolving our portfolio to drive growth margin improvement in cash generation, while also paying down debt and investing in the future.
In the near term, we expect remain challenged by the pandemic in the global economic contraction internally. We're also navigating multiple substantial product transitions, which will require sharp execution focus, but we're very confident they will set us up well for the long term.
With that I'll turn the call over to Bob to share our financial highlights and outlook.
Thanks, Dave and good afternoon, everyone.
Dave mentioned it covered 19 pandemic has created a challenging global economy that has continued to impact western digital performance in large part due to the high level of uncertainty to both we and our customers are facing.
While this uncertainty isn't going away in the near term, we will continue to adapt and we believe western digital is well positioned for the future.
With that I'll walk you through our fourth quarter fiscal year 2020 results.
For the fourth quarter revenue was $4.3 billion up 3% sequentially and up 18% from a year ago.
Non-GAAP earnings per share was $1.23 cents.
For the full fiscal year revenue was $16.7 billion up 1% from fiscal 2019, and non-GAAP EPS was three dollarstwo 0.4 cents.
Looking at end markets client devices revenue was $1.9 billion up 5% on a sequential basis and up 19% year over year.
Within this end market, our robust family, our client Ssds, which are ideally suited for remain learning and work from home applications achieved another record quarter of revenue.
Notebook and desktop related hard drive revenue declined slightly sequentially as the market continued to transition to SSD based products.
It's not a video was weaker than our expectation due to continued headwinds associated with that pandemic.
In gaming, we began shipping our flash solutions for the upcoming new game console launches.
And finally mobile flash revenue was down sequentially, but up year over year off a low base.
Moving on to data center devices in solutions.
Fourth quarter revenue was a record $1.7 billion up 11% sequentially and up 32% year over year.
For the full fiscal year revenue of $6.2 billion was up 24% from fiscal year 2019.
Capacity enterprise hard drive revenue was down slightly on a sequential basis, while enterprise SSD revenue grew nearly 70% sequentially and more than doubled from a year ago.
Next client solutions revenue was $687 million down, 16% sequentially and down 9% year over year due to covert 19 related lockdowns.
Despite this we were encouraged to see demand pickup in June as countries began to ease markdown restrictions and as brick and mortar locations shifted more of their operations online. This strength continued into July.
Given the unprecedented circumstances, we executed very well in this business in a difficult environment.
With over 350000 points or purchase around the world. We continue to have incredibly strong distribution BRAF and brand recognition.
Turning to revenue by product category.
Flash revenue was $2.2 billion up 9% sequentially and up 49% year over year.
Flashing asps were up 1% sequentially on a blended basis and up 3% on a like for like basis.
Good shipments were up 8% sequentially.
Hard drive revenue was $2.1 billion down, 3% sequentially and down 4% year over year.
Total exabyte shipments were down 2%.
On a sequential basis, the average price per hard drive increased 2% to $87 of mix continue to shift to the cloud.
As we move on to cost and expenses. Please note all my comments will be related to non-GAAP results unless stated otherwise.
Gross margin for the fourth quarter was up one percentage point sequentially to 28.9% slightly below our guidance range.
The major item that impacted our gross margin was covered 19 related costs of $96 million.
This almost exclusively impacted hard hard drive.
The hard drive business and was primarily related to reduce factory utilization and higher logistics costs.
For clarity. This item was included in our non-GAAP gross margin.
Our flash gross margin was 30.5% up four percentage points from last quarter due to cost reductions and slightly favorable pricing.
Our hard drive gross margin was 27.2% down 2.1 percentage points from the prior quarter.
The biggest driver of lower gross margin was $96 million in cobot 19 related costs, representing a 4.7 percentage point impact on our hard drive gross margin.
Operating expenses were $713 million well below our guidance range, primarily due to our decision to cap variable compensation expense given the current economic environment.
Non-GAAP earnings per share was $1.23 cents.
Operating cash flow for the fourth quarter was $172 million and free cash flow was $261 million in fiscal 2020, we generated $1.1 billion and free cash flow.
Capital expenditures, which include the purchase of property plant and equipment and activity related to flash ventures on our cash flow statement, we're an inflow of $89 million due to the timing of funds flowing to and from the joint ventures.
In the fourth quarter, we distributed $150 million in dividends to our shareholders, which was our final distribution prior to suspending the dividend.
We also made a standard $63 million debt repayment in the fourth quarter.
I would note that we've already made an optional debt repayment of $150 million in July.
Our liquidity position continues to be strong.
At the end of the quarter, we have $3 billion in cash and cash equivalents and our gross debt outstanding was $9.7 billion.
Our debt to EBITDA ratio was 4.2 times in the fourth quarter and our adjusted EBITDA leverage ratio as defined in our credit agreement was 2.8 times.
As a reminder, our credit agreement includes an approximate $1 billion in depreciation add back associated with the joint ventures, which is not reflected in our cash flow statement.
Please refer to our earnings presentation on the Investor Relations website for further details.
Moving on to guidance for the fiscal first quarter.
We are somewhat challenged in the near term as result of the uncertainty of a pandemic and being in the midst of a global economic contraction.
Despite this uncertainty we continue to execute and focus on our great products deep customer relationships and large and growing markets.
We're working on a number of substantial product transitions will set us up well for the long term.
We expect revenue in the first fiscal quarter to be in the range of $3.7 billion to $3.9 billion.
Growth in client solutions is expected to be more than offset by a decline in both data center devices and solutions and client devices.
We expect non-GAAP gross margin to be between 25 and 27%.
This range includes approximately $80 million in costs associated with the K one fab.
This should be the peak quarter in fiscal 2021 for K one period expenses.
We expect operating expenses to be between 700 and $720 million.
Interest and other expense is expected to be between 70 and $80 million.
The tax rate is expected to be between 22, and 26% in Q1 and for the full fiscal year 2021.
We expect non-GAAP earnings per share to be between 45, and 65 cents in Q1, assuming approximately 304 million fully diluted shares.
Gross capital expenditures, which includes our portion of the joint venture leasing and some of operating funding is expected to be approximately $3.1 billion in fiscal year 2021.
This includes approximately $1.3 billion in cash capital expenditures.
We will continue to monitor and capital expenditures very closely given the current business environment.
In summary, we are executing well in a challenging environment and results are generally inline with expectations, we're taking decisive steps to successfully navigate through the current macroeconomic environment, while ensuring we focus our resources to address the significant long term growth opportunities that are ahead.
I'll now turn it back over to Dave.
Thanks, Bob while we continue to give navigate through a complex and dynamic environment Im confident that western digital can lead the market for years to come as I've said I came here because I have a very strong conviction that western digital can play an increasingly vital role in the digital transformation and that conviction has only strengthened in.
The past five months, we have deep flash and HDD product portfolio operational scale than a great customer relationships combined with the ever growing demand for data creation in storage.
All in all its a great place to be extremely thankful for the hard work that our talented global team puts in on a day in day out basis.
We are operating in uncertain times, the western Digital's strong consistent performance reflects our ability to maintain our market leadership by delivering technological innovation with the quality performance and cost effectiveness the customers rely upon.
With that I'll turn the call over to the operator to begin our culinary.
Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then return to the Q2 withdraw your question press the pound Keith Please standby, while we compile the Q and a roster.
My first question will come from Wamsi Mohan with Bank of America. Please go ahead.
Yes. Thank you I was hoping you could give us some sense on your 18 terabyte ramp it appeared that youre expecting background before and the September quarter.
It looks like it might have been pushed out further can you talk about what's going on there and Hello Hello.
Yes, I know it has been pushed out.
The ramp is on plan as we've talked about we plan on producing.
In excess of a million units this quarter to very important quarter for us on that around one.
Because if the quarter, where we get we get the yields off which gets us the margin profile, we need to go into the second quarter of the fiscal year at full production capacity. So that's on track.
Where we wanted to be we feel good about it and and this is going to be important quarter for us, but it's something we know how to do in ramping a drive platform.
Okay. Thanks for that I was wondering if you can maybe bridge this quarter on quarter gross margin outlook, while domain puts and takes there are.
How much are you thinking that the HDD side is going to.
Contribute.
Given that some of the.
Capacity enterprise weakness was.
Capacity enterprise seems like a little weaker than what people are thinking thank you.
Yes, I'll make a few comments I'll turn it over to Bob to make a few comments I think if you look at gross margin going forward there is.
There's a number of headwinds we still have the co bid costs, we don't expect them to be as high next quarter as they were this quarter, but theres still there.
Logistics costs, especially.
It's just a very dynamic environment there that.
Changes week by week.
We've got the ramp of the 18.
Terabyte drive that we just talked about so in the beginning phases that ramp you're going to.
It's it's a headwind on gross margin until we get off the ramp. That's why this is such an important quarter for us that we work through that and as I said that.
Thats on track and then on on Flash, we've got we've got an easing pricing environment. So that that's going to impact gross margin there Bob any I missed anything I think those are the key is going in on the hard drives obviously volumes will mean, lower who will be amortized in our fixed costs over a smaller volume as we go up the yield ramp on.
On the 18 terabyte drives down the flash side as Dave said, I mean, we've got some price and mix headwind and we also as I mentioned in my comments, we have our costs up a bit on K, one which amounts to about one percentage point on the flash side. So it's just we have multiple challenges this quarter, but I think.
Long term, we're going to be really well positioned once we get up to phone product ramps.
Okay. Thank you.
Thank you. Our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yes, Thanks, just kind of building off at that last question, a little bit I mean, when you look at.
Hard disk drive gross margin at 27.2% new adjust looks like adjusted ex Cove. It looks like it's close to about 32.
I think it would be helpful. Just to kind of frame what the expectation is for coated impact in this quarter is that.
Probably not as high but are we still are we still carrying three percentage points plus of kind of headwind on gross margins just kind of any framework there and on top of that what are you seeing and pricing dynamics in in near line right now in the market.
So I'll take the second one Bob can talk a little bit more about first.
Yes there.
All the bids businesses track transacting in 14 de it's a very competitive point.
In the market Theres Theres no doubt about that were at the we're kind of at the tail end of one generation moving to the next one and Thats why.
Getting out the TNT ramp is so 18 16 ramp is so important for us.
And that will position us well and be able to drive accretive margins to the portfolio on that point, but.
We expect that as we get 18 out there and the conversations with customers to different DCIO proposition for our customers and that leads to more value for both of us. So we're heading to a better spot babula.
Characterize coven, a little bit in this quarter, Scott so little tough because it's so dynamic there yet it's not going to be a significant as last quarter and last quarter, we did offset to covert cost a bit by our pricing, but obviously did not fully offset and that's a big number.
As we look at Q1, we don't think we're going to have it kind of absorption variances that we had last quarter you may recall in the earnings call in April I said that we had some some challenges on volumes in April. So we already knew we had that headwind last quarter. We don't have that issue. This quarter. So I would say the cost will be down, but I don't want to be too.
Two specific we think we've got a covered in that guidance range that we articulated.
Okay, and then as a follow up I know, there's a lot of discussion around cloud digestion.
Kind of mixed data points out there relative to the 30% implied near line capacity ship growth. This last quarter. What is your current assessment of the demand from a capacity ship standpoint near line through the back half this calendar year any kind of views on that.
Yeah, we feel like we're definitely going into.
Suggestion phase if we look at and we're coming off a three really strong quarters of exabyte shipments.
And the demand signals, we're getting are going to be are little bit down for the next quarter to.
We think the long term trend is obviously still good we're using the cloud of more every day, but theres a bump in a lot of product shift in there in the last couple of quarters and what we're seeing for that from them is.
No they're all not the same right we have all of them. So they are all at different points, but when you add it all up.
You see.
The next quarter is a negative bias on demand there from what we what we see looking backwards.
So down sequential sorry.
Yes.
Okay. Thank you.
Yes.
Thank you. Our next question will come from Karl Ackerman with Cowen. Please go ahead.
Thank you gentlemen, I wanted to follow up to Aarons last question just on.
Exabyte growth you, obviously had a pretty strong quarter impressed by growth within data center in this quarter.
But it Doesnt sound like the outlook is is down sequentially as we just indicated.
Hoping if you could juxtapose, what you're seeing across both on premise private cloud environments versus public cloud.
As it relates to I guess, both your hard drive portfolio, but also your enterprise SSD portfolio. That's my first question and for my follow up I was hoping you could you avastin a little bit smaller player in the enterprise SSD market of late which has enabled us to a significant share gains and and quite frankly, you completely turned around Europe.
Technology portfolio within that enterprise SSD market.
Your expectation going forward for September.
You should outperform end market demand.
Hi.
Given some of the share gains you've seen.
Lately. Thank you.
So.
On the enterprise SSD.
We've done a lot of work the launch of new product and enter enterprise SSD. We've got a couple of new products. The first one is out in its targeted to the though the cloud providers.
The product targeted to the Oems is yet to ship so.
Happened.
In the next couple of quarters. So we really are in a big product transition there.
So it's hard for me to draw conclusion to your question about on Prem versus the cloud given enterprise SSD because were mainly focused on the cloud side right now working our way through Quals and all those kinds of things.
Given that the product is new given that we're going through a lot of qualifications.
Over a multi quarter timeframe.
I expect us to get better and better it's going to be a little lumpy as we move through that so if I look at a number of calls going on the organization is cross all technologies, we have twice as many calls going on as we had a year ago. This time. So that gives you an idea.
So how the portfolio is refreshing and we're driving that into the market.
On the hard drive side, I guess I can talk about the Oems in the in the private data center more just as it is a overall market I mean.
You know well, let me let me, let me say that response for different time, because it's more PC related but I don't know if I have a tremendous amount of insight Bob I don't know if you do on the hard drive side versus on Prem versus in the cloud if we can draw any strong conclusions for that.
I think we're seeing softness in both areas as we move forward into Q1.
Thank you gentlemen.
Thank you. Our next question will come from Mehdi Hosseini with Sig. Please go ahead.
Yes. Thank you for taking my question.
The first one from the hard disk drive one of your competitor had reference weaker demand trends, especially for client non compute hybrid China and Lynn.
When I just do a back to unload it does.
If that is what's happening in impacting your client noncompete seems to me that exabyte shipments for that particular segment may be down by more than 20% on the two in Q bases and I was wondering if you could.
Elaborate on it and how the formula.
Ill elaborate on the general market I don't know if I can follow the back year envelope that fast but.
Look I think the channel.
Let me talk about the channel in general as far as video as part of that that was a real slog. This past quarter I mean, the team worked really hard on it.
We thought we saw a tam shrinkage their significant Sam shrinkage of 100 million or so centers throughout the quarter. So.
Yes, it was.
We look at Todd Thats, a good indication of overall demand that's out there and it was it was tough and related to that and we see that going forward kind of a negative bias on that market. So.
Bob If you have any additional comments on the on smart video in particular, no I agree in the short term if we look over the longer time horizon that is going to be another area of growth in our drive business. So we really see the capacity enterprise business and the smart video.
Business growing as we look over multiple years I think this overall theme you're hearing from US which is as we look at I mean, as we look forward into the next quarter.
We see some challenges given co bid given the state of the economy given all the demand we've seen in the first half an inventory rationalizations in digestions that are going on.
But in all of those markets, we see very good long term trends.
And so it's a question of how fast that comes back.
But.
All of that I think the pandemic has shown us the amount that all of us are relying on technology and I think our portfolio rose as well positioned for that world as it has been in sometime.
Great. Thanks for detailed color and just the on my follow up question has to do with you.
Flies should you highlighted the fact that you see revenues were up 70% or so.
But but I heard that commentary suggests there is that.
On the variable mix shift into the September quarter, perhaps you could help us better understand dynamic too. If you were to elaborate on the mix of your Nan Hao is this the and smartphone application or trending.
It seems to me that maybe the game console is is happening later this year and if you could elaborate on it will be great.
Yes, I think there are a bunch of pieces in there Mary.
The game console definitely add growth area, and we're very fortunate to be participating in that and as you know we haven't been in the hard drive side of that business for quite awhile. So it's all upside from our perspective.
And then I would say overall, then maybe slight mix changes as we go quarter to quarter. We are seeing some some pressure in terms of price and thats factored into our guidance as Rob.
Maybe this is Peter also don't forget we do have a little bit of the step up in the K one cost as you go Q to Q that will be another pressure on the flash gross margin.
Okay, but in terms of end market mix as it relates to pledge. There is you should assume the significant change.
I think the biggest change is the one I mentioned on game complement to become a more significant but otherwise it will be up and down here and there, but I don't think it'll be bad material.
Got it thank you.
Thank you. Our next question will come from CJ Muse with Evercore. Please go ahead.
Good afternoon. Thank you for taking my question I guess first question.
As it relates to your overall revenue guide for September of down 11% sequentially should we be thinking that each business is down similar to that rate is one.
Doing better than the other could you shed a little light on that please.
Sure I mean, I think we're seeing.
We're seeing retail.
Last quarter, we started off in the retail business.
Which is roughly 20% of the business as.
Is really challenged and it got better is the quarter went on and in June was was good it wasn't quite all the way back to normal but it was it was strong and we've seen that continue through July and we're expecting that business too.
To be positive in the quarter going forward and if you look at all the other businesses. The cloud again, we talked about that we see a digestion phase there.
CD Oems kind of really watching inventory and managing that tighter.
And then I talked about the channels. So as we said long term, we see we see good things where the portfolio is going but in the near term that's how we see the the four major.
Businesses.
And so if I just read between the lines given the commentary on retail that would suggest NAND might be a little bit better than HDD.
I wouldn't draw specific thing.
If I go into that level of detail.
Okay.
And I guess a question on the on the flash side into follow up on Betty's question.
For the June quarter, I guess, I was a little bit surprised by the you know.
Lower ASP uplift.
Higher bit growth.
I guess can you comment on on what drove.
What drove that and I.
I guess just two to two follow up you know should we be assuming similar mix as the June quarter, coupled with an uplift in gaming.
Too as we build out to our our ASP kind of assumptions.
Yes, so I'll make a few comments I am sure Bob will make a few comments I mean part of the ASP looking back was retail where asps were for flash for more challenged.
So that that's that's a big piece of that number.
I think going forward, you shouldn't expect a tremendously different mix.
Minus what you said gaming was it now is good to see gaming start to ramp up we expect that to continue to ramp through.
The second half of the year and and take up low double digit percentage of our supplies. So that's a that's a good story.
Yeah, I don't have a lot data management transactional businesses, we've definitely seen more pricing pressure than we've seen from the Oems. Although overall, we think prices will be down this quarter.
Thank you.
Thank you. Our next question will come from Joe Moore with Morgan Stanley. Please go ahead.
Great. Thank you what have you could talk about in the NAND business. Just how comfortable you are I mean last year you when things got kind of weak you guys took under utilization at the kind of clean up inventory, you're not doing that now that suggest supply demand going I hope you're playing so just anything you can kind of tell us about hey, guys.
Your inventory customer inventory.
And your plan there.
Yeah, I'll make a few comments and Bob make few comments.
Yes, I think we feel good about the amount the industry keeping supply demand imbalance I mean, clearly we've got.
A.
A recession we have.
Drop in demand.
So we're seeing some pricing implications of that but we feel like the.
You know kind of where supply demand is fairly balanced going forward.
We're certainly watching our capex investments very closely and managing more tightly with our partner.
The five you want to something about inventory or yeah, I mean, I joined the company right in the middle of the last trough and and I can tell you the supply demand imbalances nothing.
Like it was then today so I think it I think everybody is behaving pretty rationally, we still see the industry growing bits and then they bid still supply and demand the neighborhood of 25% to 30% and that's our intention as well [noise].
Okay, and then my follow up it sounds like you're pretty comfortable on the adjusted EBITDA Covenant calculations for September.
But obviously memory can be uncertain beyond that can you talk about your comfort level overall on the covenants and is anything any actions. We can take if things got worse sort of make sure you don't have any issues there.
Hi, I'm very comfortable in fact, if you go back to the trough I was just talking about we never really got back close to breaching the covenant on on the adjusted basis. So I really don't think there's much of a risk there.
He will also just to put a little bit more transparency into the the credit agreement metrics. Please make sure you take a look at the slide deck Thats on our website, we've got a lot more detail on that metric in there.
Okay. Thank you very much.
Okay. Thank you. Thank you. Our next question will come from my mom that Davila with loop capital. Please go ahead.
Hi, Good afternoon I appreciate you guys taking the question.
I guess the first one for me is.
With regards to the gross margin guidance can you give us a sense.
Which part of the business you had stack.
The contract more the hard drives versus the.
Versus flash it sounds like hot flashes slight next and our retail.
Bob as to your remarks slight pricing pressure I do not them OEM contract, yet and then it sounds like on the hard you had businesses problem mix related.
Is there anything in addition to that and then could you give us a sense a magnitude for each of these businesses and then as a quick follow up thanks.
Yes, I mean I'll touch on it again I don't want to get into too. Many specifics as you know we only guide gross margin for the company overall, but we're definitely seeing pressures on both sides. Both on the hard drive down on the flash like we said before we've got significant product transition going on on the hard drive side yield curve that we're working our way up and.
We've got to covert 19.
Pressures that.
They won't be as bad this coming quarter to quarter in now as they were last quarter, but we have we definitely pressures on the hard drive side and I would say on the flash side, we're seeing pressures primarily on price and a little bit of mix.
And then they may one costs that we talked about its way right became on cost.
Hey, guys any you mentioned about going through team suggestion.
Clal that that dovetails with.
You talked competitors your March and also with the remarks or the Hyperscalers any any context, you can provide around.
Yes sort of you think that means the cycle is the rail avoid digest since you guys really just need like appears digestion and thank you know we can get back to some semblance of growth again in the near future.
Yeah, I mean look I mean, we see we it's a long term growth market I mean, we see 30, 35% CAGR exabyte growth in that market for years to calm we're coming off of a couple of quarters of significantly above that it's not surprising we would go through a little bit of time, where all of that taposh.
So he gets deployed.
But I think you know just look at the world around us anymore, all using the cloud more everyday.
I think the last five months of accelerated the amount of transformation that was going to happen in using of.
Cloud technology significantly so.
I don't I'm not exactly how we would both define a cycle, but I see a really good long term trend in this.
And I see us well positioned as well that's why this coming quarter is important for us to get the 18 16 platform ramped.
Gets a million units produced get is get those ships.
To put a put ourselves in a good position for that continued growth.
Okay activity.
And just the one thing I would add I, just think theres been a lot of supply chain disruption this year.
Both in terms of our own production our customers trying to make sure they get supply now our customers working off inventory levels. So I just think between the pandemic and the recession and concerns on supply it's been a very challenging year.
Thank you. Our next question will come from Mitch Steves with RBC capital markets. Please go ahead.
Hey, Thanks, taking my question I, just wanted to follow up a bit on the gross margin side can you talk about covert 19 issue kind of being a little bit better than you guys saw are better than last quarter of how do we think about the bigger drivers for your gross margins going back to 30% it really going to be.
And improvement on pricing or are they going to be a lot of supply chain issues, you're trying to get an understanding of.
What's really moving the margin sort of dramatically on a quarterly basis.
Yeah, I'll I'll I'll, maybe paying a big picture that about wants to go into a little bit of detail. So I mean as far as important on both sides and one is on flash first of all continue to drive X five.
As far as a great node for us, giving us a cost reductions and performance we need the VIX five transition I think the team is really really sound choices on going to that technology as we talked about.
The yields have been impressive we're kind of ahead of it ahead of internal plans on on that node, so continuing to drive that technology.
Roadmap that gives us a cost advantages is the first part of it.
And then secondly.
Optimizing the portfolio on top of it for the markets. We play in for optimizing gross margin. That's you see us moving more to enterprise SSD.
Things that we think are going to drive higher margins. So that that's a that's a big part of it on a on flash and of course that you've got pricing on top of that which is a market concern.
On the hard drive side.
Again, it's it's a gross margin to me is led by innovation. So we ramped the 18 16 terabyte platform, that's a better tcl for our customers.
Thats, a better value proposition for down that's higher gross margins for us. So that's why we're so focused on getting that.
Getting up the production ramp on that and why we feel good about that platform. So those are the main drivers from my perspective, but yes, I don't think add much to add I mean I.
I think it's it's clear we've got room to improve in both the hard drive Ariane in the flash area and we've got the products to make it happen.
Got it I mean, just one other small into some of the smartphone cycle I mean, it's a very clear that.
So a bigger product got pushed out right certainly they're going to ramp up more in Q4 into Q3, two maybe give us understand how that impacts you. What are you guys think about.
Push out as it relates to flash business.
Hey, if I can start.
I missed the question what was on mobile Okay. I'll start so your as you know weve been underway mobile for quite a while we continue to be underweight in terms of mobile now is that business is lower than was anticipated our competitors need to find home for those bets. So we're not completely insulated from the challenges.
On the mobile side because.
They do need to to move into other markets in order to move the bits, but I think in terms of our strategy of focusing on it on the other areas I think it's worked out pretty well.
Thank you, ladies and gentlemen, and the interest of time, we would like to ask that you. Please limit yourself to one question. Our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.
Great. Thanks for taking my question on the name side at this site.
I know you probably don't want to comment on how much do you think named prices going to come down, but hypothetically if prices start to decline more rapidly than you cost improvement over the next few quarters say 10, 15, 20% of quarter.
How would you respond to that kind of pricing environment in terms of inventory utilization capex and so in summary, so for thanks.
Yeah, I guess I can start I mean, and first of all our view on cost reduction is still around 15% of year. So we don't we don't see that changing we think that's what you're going to see in a three d. era, because it's so much more capital intensive and what we think youre going to see is a competitive marketplace where people.
You are behaving rationally I mean, that's a lot of.
The reports that we've seen over the last couple of weeks. It seems like everybody is trying to make sure. We don't end up in an oversupply situation and we're going to be cautious as I said in terms of how we investing our capital.
Some of the Capex were funding right now is related to equipment, we put in place last fiscal year. So we'll keep a very qualify in terms of what's going on in terms with the balance of supply and demand.
Yes, I mean, I don't like to feel too much in hypotheticals, but we've got a lot of conviction in that market. If you just look at gaming really coming on in the second half of this year as you said the fiveg cycle may move around a little bit, but it's still out there.
So there's a lot of demand drivers and we believe in that 30% CAGR in that market demand the demand side.
Thank you. Our next question will come from Shannon Cross with Cross Research. Please go ahead.
Thank you very much I was just wondering if you could take a step back when you were coming up with your guidance a sort of from a higher level how much of it is coming from the lack of visibility versus maybe specific conversations with your customers and then if you're looking at you know where there might be an opportunity for upside where would that be thank you.
Yes, I would say in general we look at a wide range of data points I mean, some of the businesses are like a retail business, what's the trend that's going on there and what do we see.
And what may be disruptions for example in the period ahead, we typically see a back to school cycle, it's unclear what thats going to look like so that that put some.
That put some variability in the forecast, but yeah, we talked to are causing our teams are very very close to our customers. So we're talking to them on a near daily basis.
And getting a very you know a sense of what how they're thinking about their end markets and what the signals theyre, giving us for demand and we're factoring all that in.
To kind of what they're telling us in what we see as the bias.
And then we're wrapping and new product calls I mean, we talked about it in our prepared remarks, we're going through a bunch of very substantial product transitions now we feel really good about that.
But we got to get through others, there's risk in those so we make a risk adjusted view of which of those are going to hit which of them or not which ones may move around for various reasons.
I think I said earlier, we have twice as many calls going right now as we did last year.
The number is over 450, so there's a lot of activity across the portfolio a big ones. There's probably you know 234 doesn't really big ones. So we factor that in as well and we understand when they're going ahead and put some judgment around that we wrap.
It all up into a into the guide.
So some of those quals move around they could be in the positive or negative there's enough of them that hopefully that balances out.
But no we Oh, we put we put together our best view of what what we think is going to happen over the next quarter.
Okay.
Thank you. Our next question will come from Patrick Ho with Stifel. Please go ahead.
Thank you very much a day, maybe just following up some of the NAND questions you talked about the strong demand you're seeing for the big spy product.
Given some of the market dynamics that are going on right. Now you mentioned, some price erosion and maybe a little bit of inventory that's been built at some digestion.
How do you see that potentially affecting the ramp of the big spy product does that push it out somewhat or are we going to see maybe potentially steeper picks for decline as picks five ramps up.
Yeah, I want to be carefully I I don't think I talked about six five demand in the sense of fix I don't fit our customers just look for the NAND products and it's up to us to build the right technology for that and as we drive the roadmap forward. We we can get more advantageous cost for us and what we're saying Ondecks five is.
Element of the technology is going well and the yields are going well.
We've got the product in the in the.
Retail channel already.
And we are working on all the engineering work to put it into the whole product portfolio. So we will look to.
Accelerate that work.
As much as we can to get as many things on that note as possible, but there's a lot of work to do there right before we really picks for is a great node for us, it's providing us the performance and cost advantages that we need as I said I think 60% of our bits. This quarter were beyond thanks for your going to see us fix for will be our are made.
Your node for for several quarters to calm as we work on the transition in the portfolio to fix five which will then carry us for another several years.
Thank you. Our next question will come from Srini Pajjuri with SMBC Nikko. Please go ahead.
Thank you I have a question about the cost on the man side Bob.
Can you talk about as as big five ramps.
Previously you said your.
Cost decline expectation is about mid teens are so annual as as big five ramp to do you still expect that and then also on the K one.
Costs, you said 80 million this quarter is the peak and demand continues to remain weak.
How should we think about that 80 million coming down over the next few quarters. Thank you.
Yeah. So I guess a couple of questions in there first of all we still believe over a number of quarters, we're going to average 15% year over year cost declines and we think thats pretty sustainable we've been able to achieve that with big four we think we'll be able to achieve that with fixed five and we'll continue to work through the transition as Dave.
I was just saying it's going to take several quarters to ramp up on VIX five it's not going to be overnight. We throw switching were on Vic five and big floors worked out really well a big four will be an even bigger percentage of a total next quarter than it is this quarter. So.
We still have a ways to go on VIX for.
And then in terms of the K one costs. We do believe this is the peak hour Theres a lot of equipment getting installed as you know long cycle time, So we've got to get products through the cycle and then we'll be able to capitalize or inventory more of those costs and bring down the period expenses as we move forward. So I think were.
We're getting into point, where volumes are getting getting up there where are the period expenses will start to go away.
Okay.
Thank you My next question will come from the China cash with Mizuho. Please go ahead.
Hi, guys just.
Two questions I was wondering on the odd to stay side on 18 Terabyte I know you mentioned.
It's a it's a big block for you will you be shipping and you said more than a million units here. So.
You expect that to them to couple million December quarter, how does that and also.
On the non side looks like that 80 million cost for Q1 startup in September is almost like dips upper gross margin headwinds so is that.
Okay 10, 50% gross margin headwind just next is that the majority of the most wasn't had been done NAND is pricing a big effect there. Thanks.
Maybe to start yeah. Okay. One yeah, let me start on K, one so we've been averaging around 60 million a quarter. The last four quarters in terms of period expenses for the K, one fab and and then as we said in the September quarter, we're going to go up to 80 million. So incrementally it's about 20 million on the flash revenue.
Someone neighborhood of an incremental point and as I just finish commenting on as we start to ramp volumes and we are a will start to absorb those costs and I think we'll definitely see that number coming down in a couple of quarters. Following the September quarter, So think where we're in good shape there.
And then in terms of volumes on the hard drive side, I mean, where we definitely have plans to produce over a million units of 18, and 16 terabyte product and we'll get as many of those out the door as we can this quarter.
We're not we're not putting a number out there for the December quarter, but I think as we said we want to get ourselves in a position where.
We're up the yield curves and we've got the manufacturing capacity to really.
Step on the gas on that note, we're doing that now we're working so this quarter.
The important number is to get the production up.
So that we can we can get up that curve.
Of course will will shift as many of them as we can.
Thank you, ladies and gentlemen, I'm, showing where at the bottom of the hour in trying to close I would now like to turn the call back to management for any further remarks.
Okay well. Thank you. Thank you everybody for taking the time to listen to Western digital today, we look forward to talking to throughout the quarter going in and thanks, everyone. Thanks folks.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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